Bill Would Allow IRS to Use Private Debt Collectors

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With more than 40 states now using private collection firms to collect unpaid taxes, the federal tax agency could get the authority to contract out a portion of its collections, if a bill pending in the U.S. House of Representatives is approved.

The House bill, introduced last month by Rep. Amo Houghton (R-N.Y.), would give the overtaxed tax agency the authority to farm out about $13 billion in tax collections to private agencies. The contractors would receive about a quarter of what they recover.

Proponents, including many in Congress, see this as a way to bring in outstanding funds to the federal coffers while opponents fear abuse of taxpayer rights and more costs than benefits. That was the case in 1996, when a similar program was tried and deemed a failure when an audit showed it cost more than it recovered. The difference this time is that collectors would be authorized to actually collect the overdue taxes and not just remind the taxpayer that the money is due.

New IRS Commissioner Mark Everson testified last month in favor of the proposal before a House subcommittee examining the issue. He said that contracting with private debt collectors to go after the easier cases of unpaid taxes would free up IRS resources to focus on the more difficult cases. Everson assured the subcommittee that appropriate steps would be taken to make sure collectors do not violate taxpayers' rights.

"A taxpayer contacted by a [private firm] would enjoy the same rights and protection as a taxpayer contacted by an IRS employee," Everson said. Even though Sen. Byron Dorgan (D-N.D.), a former state tax commissioner, came out strongly opposed to the plan, calling it a "terrible idea," Republicans think the bill has a good chance of approval this year. Houghton said the idea makes perfect sense and is the best way to collect outstanding taxes without devoting more money to the effort.

"If we handle this with care, using private debt-collection companies could give the IRS much-needed resources to collect billions in unpaid taxes," Houghton said.

Concerns about abuse are not without merit. In fact, sweeping reforms were made to the IRS collection process in 1998 after taxpayer complaints became too numerous to ignore.

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