What’s the old line about “fool me once?” When it comes to privatizing debt collections for the IRS, Congress has now tried to fool American taxpayers for the third time. According to a new report by the agency’s Taxpayer Advocate Service, the outcome is roughly the same as the last two episodes—the agency is spending far more on the program than the firms are collecting and remitting to the Treasury. This time, according to the TAS, the agency spent $20 million in fiscal years 2016-2017 on a program that generated $6.7 million in payments through last October.
Just as troubling, the reports finds the debt collectors were mostly targeting lower-income taxpayers, some of whom are receiving Social Security Disability Insurance (SSDI)--a group that was supposed to be excluded from the program. Of the 4,100 taxpayers who made payments after their debts were assigned to private collectors, 1,100, or 28 percent, had incomes below $20,000. About 5 percent were receiving SSDI or Social Security retirement benefits. They had a median income of $14,365.
The TAS reports that about 1,700 taxpayers were placed in installment payment programs even though their incomes are so low that they are unlikely to make the payments. The debt collection firms earned commissions on these agreements, however.
Overall, the IRS paid about $1 million in commissions to the debt collectors, about $10 million in start-up costs, and about $9 million for oversight and administrative expenses. Some of those costs may decline in future years. Still, the Taxpayer Advocate report raises questions about the value of the program.
The agency assigned to the private firms $920 million in back taxes that it deemed uncollectible. The firms collected less than 1 percent. Of the $6.7 million that was collected, about $1.2 million was paid after taxpayers received a letter warning them that their back taxes would be turned over to private debt firms, but before they were actually contacted by the companies. The TAS said is “not surprised that a simple letter from the IRS can induce compliance.” And it suggested that quarterly, rather than annual letters, reminding people of their tax debts might be more cost-effective than the private collections program.
To be clear, the IRS did not volunteer to reestablish the private collections program. It was imposed on the agency by Congress that continues to believe, against all evidence, that private firms can do a better job collecting back taxes than the IRS staff.
Maybe this program eventually will pay for itself. But, so far, the evidence suggests it’s a much better deal for the debt collectors than for the rest of us.
