IRS outsourcing of debt collectors a failure
In her annual report to Congress, National Taxpayer Advocate Nina Olson said that the Internal Revenue Service's private tax debt collection program (PDC) is falling way short of projected goals. And, according to Olson, the IRS knows it.
In May, the IRS estimated that the program using private collection agencies (PCAs) to pursue delinquent tax debts would raise gross revenue of between $1.5 billion and $2.2 billion over the next 10 years. It was estimated that yearly collections would reach a midpoint average of about $185 million.
The IRS now acknowledges that the program won't hit these targets, Olson said in a statement. Instead of $185 million a year in collections, the IRS estimates the private debt collectors reported gross revenue of $31 million for Fiscal Year 2007.
"The collection of federal tax debt is a core governmental function," Olson wrote in her annual report. "The PDC initiative is failing in most respects. It is not meeting revenue projections. It is not more successful than the IRS at finding hard-to-locate taxpayers. It is significantly less successful than IRS employees at fully resolving taxpayer past due accounts. Most significantly, the IRS has placed the interests of the PDC's above the interests of taxpayers and tax administration." 
In 2004, the American Jobs Creation Act, signed by the President in October of that year, created section 6306 of the Internal Revenue Code permitting private sector debt collection companies to collect Federal tax depts. As a result, the IRS established the PDC initiative, which was implemented in two stages; the first a limited implementation in Fiscal Year 2006, the second a full implementation in Fiscal Year 2008.
Private collectors began work in September 2006. Iowa-based CBE Group and New York-based Pioneer Credit Recovery Inc., a unit of SLM Corp., are two firms collecting tax debts, using letters and telephone call centers.
Since 2004, the PDC initiative has been subject to heavy criticism. Democrats object to the program, saying IRS workers can do the job at less expense and with greater protection of taxpayer privacy.
Beyond financial considerations, Olson took aim at the IRS' failure to require the private companies to disclose training materials, scripts, letters, and operational plans relating to taxpayer contacts - materials that the IRS itself must disclose about its own collection operations.
"The IRS substantially undermines the concept of a level playing field by allowing the telephone calling scripts and related information about how PCAs deal with taxpayers to be concealed from public view and scrutiny."
In both 2006 and 2007, Olson called on Congress to repeal the private tax debt collection project.
President Colleen M. Kelley of the National Treasury Employees Union, who has been leading the fight against the use of private debt collectors, said, "The Taxpayer Advocate's report is the most damning evidence yet of the incredible failure of this misguided program."
The financial returns in the first year of the program are particularly telling. According to Olson's report, while the IRS projected that the initial stages of the program would cost $71 million and bring in approximately $134 million, the facts are that between October 2006 and September 2007, the work of the private companies resulted in net collections of only $20 million.
The private companies are paid up to 24 percent of the money they collect. "If the IRS had allocated that $71 million in start-up costs toward the use of its own employees, the agency would have been able to bring in as much as $1.4 billion," Olson said.
In response to criticism and after auditing the program, the IRS has revised sharply downward its projection of gross revenue to be collected by the private companies for Fiscal Year 2008. It now stands at between $23 million and $30 million - far less than the agency's original estimate of $88 million for the fiscal year.
"The initiative has failed to demonstrate that it makes good business sense," said Olson. "As measured by the IRS's performance, the PCA's performance is lackluster, at best."
Jeffery Trinca, a lobbyist for Van Scoyoc Associates Inc. who represents SLM Corp., contends that the revenue projections fell short because the IRS out a third collection agency out of the project in 2007. In addition, the IRS delayed the second phase to expand the project amid congressional criticism.
"It is not a failure of the program as such," Trinca said to the Associate Press. "It's the agency being careful. And that's what you want. You want the agency to be extremely careful."
Kelley has long questioned the financial viability of the program. "The costs of this program, both in taxpayer dollars and taxpayer rights, are clearly spelled out in this report. Congress should act quickly to repeal this wasteful program."