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PRIVATE TAX COLLECTION: A MENACE?

July 22, 2007

Some corners of the tax blogosphere are thrilled with the efforts to shut down the private tax debt collection program. Kay Bell of Don't Mess With Taxes quotes with approval a leading opponent of the program:

"The private debt collection program is an insult to the American taxpayer and our Federal tax system," said Oversight Subcommittee Chairman John Lewis. "The collection of taxes is a core government function. It is the Internal Revenue Service’s (IRS) mission.

"We found that, in addition to taxpayer harassment, this program wastes tax dollars by paying a bounty up to 24 percent to the debt collectors. We were told by the IRS Commissioner that IRS employees could do the job more efficiently for less money. Enough is enough, we must stand up for taxpayers and we must stand up for IRS employees by ending this program."

The Tax Girl also approves of the efforts to shut down the program.

Ms. Bell, who also is a member of the Taxpayer Advocacy Panel, says testimony on collection activities before a congressional committee show that private collectors are mean:

In connection with questions about whether such private bill collectors diligently follow federal law that prohibits harassment of owing individuals, Lewis played a tape recording (you can read the transcript) of a CBE agent giving a taxpayer a hard time.

According to the material presented at that hearing, the collection company employee refused to fully identify herself but nonetheless continued to demand that the taxpayer provide a Social Security number and mailing address.

I discussed that testimony here. While views can differ, I can't see where the private caller was "giving the taxpayer a hard time." The problem for both the caller and the taxpayer was restrictions written into the private collection rules. The strict privacy rules that apply to the private collectors require them to verify social security numbers before they can even say they are calling regarding taxes. That's something people wisely are reluctant to do over the phone. This isn't a problem with private collection operations; it's a problem with making private collectors operate under restrictions that don't apply to IRS personnel.

Ms. Bell adds:

When the taxpayer finally asked for the calls to stop, the collection agency representative replied, "I'm not sure what we can necessarily do to stop that."

So if the caller was an authentic IRS employee, she would have agreed to stop calling? That doesn't sound like any collections agents I've encounterd.

The most compelling argument that opponents of private collection raise is that the IRS is more efficient. For example, Tax Girl says the private debt collection program is:

...allowing private debt collectors to pursue the collection of taxes even though it is more expensive and is expected to collect fewer tax dollars. Government at its finest, no?

That's not so clear. Senator Grassley says the marginal cost for each dollar collected by IRS collection personnel is around 26 cents - which is higher than what the private agencies charge. It's hard to believe that whan the fully loaded costs of an IRS employee are considered - including an aggressive union, generous pension, civil service protection, and full benefits package - that public is cheaper than private.

It's also hard to believe that privacy and service concerns make private debt collection impossible. We all entrust private concerns with critical confidential information every day when we use an ATM, buy with a credit card, take out a loan, or go to the doctor.

Critics of private collection seem to consider the IRS as the gold standard for confidentiality and customer service. Anybody with much experience with IRS collections folks can tell you that they aren't necessarily customer-friendly or unfailingly polite. In fact, the private collectors score much higher on customer satisfaction surveys (94%) than real IRS agents (63%). Considering that the agency has misplaced hundreds of computers with taxpayer information, they have their own problems with keeping information under wraps.

The profound reason for the opposition to private collection is seldom mentioned, but seems obvious. The private collectors are non-union, and the National Treasury Employee Union sees them as a dangerous threat. It's no coincidence that the NTEU is leading the charge against private collection. As public employee unions are major political donors, they can summon powerful Congressmen to their aid.

Most IRS employees are certainly dedicated and effective professionals. It's no slur on them to explore whether private collection of some tax debts might make sense. Given the size of the tax gap, and the unending demands on IRS resources by Congress, it only makes sense to see if the private sector can take some of the load. It would be a shame if the private collection program were killed before we have an opportunity to see if it can work.

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