Why the Private Tax Debt Collection Rule Failed
About a decade ago, the IRS, as a pilot program, enlisted the help of private debit collectors to collect taxes owed by taxpayers who had fallen off the radar. Shortly into this experiment, the agency disbanded this practice. In 2017, Congress took up the issue and mandated outside collection agencies to collect tax debt.
Two years later, in a report to Congress by the National Taxpayer Advocate, the TAS stated that in the time Congress implemented private collection agencies:
The IRS implemented the current Private Debt Collection (PDC) initiative more than a year ago .2 When the program had been in place for about six months, IRS data showed that of taxpayers who made payments while their debts were assigned to private collection agencies (PCAs):
44 percent had incomes below 250 percent of the federal poverty level, a measure the IRS sometimes uses as a proxy for economic hardship; and 45 percent who entered into an installment agreement (IA) had incomes less than their allowable living expenses (ALEs), meaning they did not have enough income to pay for their basic living expenses.
In 2018, Congress appropriated $20 million to these private collections firms. These not only targeted taxpayers below the poverty line, but they only collected $6.7 million in back taxes, which makes up for 1 percent of all outstanding debt. Further, these private debt companies charged 25 percent to collect 1 percent of the debt. These private debt collectors stated that they would collect $138 billion over ten years. To go further, Congress has stated that they will fund private collection companies and give an additional $495 million to help them achieve their goals.
The program works like this: If a delinquent taxpayer’s case is outsourced to a private debt collection agency (PCA), that taxpayer will receive a letter from the IRS with the name of the collection agency assigned to the debt and the amount that is owed. (The letter should also remind the taxpayer that he or she may request to deal directly with the IRS.) Some time after that, a second letter will arrive from the PCA, and it will include debt information, a payment coupon and contact information for learning about payment options.
PCAs can only be used in uncomplicated cases—easy ones where the taxpayer has not yet made a payment but somehow acknowledges that the money is owed. Anything more complicated is automatically handled internally by the IRS. Debt collection agencies can be given the right to:
- Track down and contact delinquent taxpayers identified by the IRS
- Obtain taxpayer financial information specified by the IRS
- Request full payment of the taxes owed
- Offer an installment payment option (over no more than five years) for the full amount of the debt
The TIGTA released a report revealing the unfair practices of these collections companies. Furthermore, they concluded they they were a waste on money compared to the commissions they paid, the initial allocation of funds and the results, not to mention their practice of targeting individuals below the poverty line.
In short, this effort has been a total failure.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...