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The IRS's national taxpayer advocate Tuesday issued a stinging rebuke of the agency's program to use private agencies to collect delinquent tax debts, saying the initiative is "fatally flawed" and urging Congress to terminate it "once and for all."

The recommendation came in Taxpayer Advocate Nina Olson's 2006 annual report to Congress, in which she listed the private debt collection initiative among the most serious problems facing the agency.

Under authority granted by Congress in 2004, the IRS began assigning certain taxpayer accounts to three private collection firms in September 2006. The agency planned to turn over 40,000 cases, although fewer than that ultimately were assigned due to various complications in administering the program. The IRS plans to turn over 446,000 cases over two and a half years.

The problem, Olson reported, is that under the program, "the government (aka taxpayers) has the 'privilege' of paying up to 25 percent of any taxes collected to private collection agencies, even while estimates show that IRS employees could perform the work far more efficiently, with a return on investment of approximately 13:1."

The law establishing the debt collection program does not allow for true cost-benefit comparisons between the use of private collectors and the IRS's own workers, Olson said.

In October, the Government Accountability Office reported that IRS projections showed that debt collection program might not pay off in its initial phase.

Rep. Steve Rothman, D-N.J., who sponsored legislation last year to end the initiative, applauded Olson's recommendation to kill it. "This outsourcing program is estimated to cost tens of millions of dollars a year," he said, "and has already allowed the most complained-about industry in America to get hold of tax returns, which include taxpayers' Social Security numbers."

Colleen M. Kelley, president of the National Treasury Employees Union, which represents IRS workers, said Congress should move "immediately" to implement Olson's recommendation.

In a response to Olson's report, the IRS said the private collection program has "started off well." During the first 10 weeks, the agency reported, the IRS referred nearly $90 million in outstanding accounts to the firms and collected $8.43 million. That, officials said, "exceeds the conservative target of 6 percent set for this initial year and is on target for achieving the business-case assumption of 10 to 15 percent annually, depending on case type."

The Tax Fairness Coalition, which represents the private collection companies, issued a statement saying that Olson's report "fails to recognize the value of the program, the success it has seen so far, and the complementary way in which private collection agencies are working with the IRS to help recover billions of dollars in unpaid taxes, thereby helping to close the ever-widening tax gap." The group noted that the IRS has yet to find any instances of fraud or misuse of taxpayer information in the initiative.

COMMENTS

• Let’s see, the government is collecting 15 cents on the dollar on tax debt. IRS solution; get to the taxpayers sooner through a combination of in-house and contract resources and technologies before the debt and penalties get out of hand and collection becomes more difficult/complex and legalistic/negotiable. Our IRS Taxpayer Advocate's solution - after evaluating the first 10 weeks of the start-up project - is to terminate the program and hire more federal employees. Ms. Olsen's report does not discuss the full cost of in-house versus private collection so much as her concern for "transparency, customer service and consistent treatment." Again, note that neither the IRS or the Taxpayer Advocate have compared the full cost of in-house versus private tax collection for the same kinds of work - though the Taxpayer Advocate used sunk project start up costs in her review vice the incremental costs of tax collection over the long term. Nor does the report find any inappropriate behavior by the private collection contractors. There is clearly something else going on here. Other important issues that have been raised by the report have been ignored while the call for more federal employees has been emphasized. As noted by the IRS, more than 40 states already have successful private debt collection arrangements, as do other federal agencies. It is clearly a commercial function. Congress needs to look at the barriers to expanded and more effective private debt collection, not to the elimination of this program. GovExec.com reader Posted January 11, 2007 11:32 AM
• “Just say no.” To what? No to outsourcing private IRS information to commercial companies that will, I believe, naturally overcharge the government for their services. Since we already have trained federal employees in the IRS to do this job, how can outsourcing be cheaper? Also, let's not forget information theft, and the fact that companies do go out of business from time to time. Case closed. GovExec.com reader Posted January 10, 2007 7:24 AM
• I can't believe that anyone still really thinks this is a good idea. Collecting $8 million out of $90 million is a good start? The folks down at the IRS could have done that and kept the change in the national coffers. I have no confidence that a private company will uphold a taxpayer's privacy rights or won't dun widow/ers and/or divorced spouses to the point of ruin. That's one of the reasons the IRS was in trouble with Congress to begin with, which in turn made them create the more taxpayer "friendly" agency that hasn't been as "effective" in collecting taxes, which led to the outsourcing of tax collections, etc. Michelle Posted January 10, 2007 10:34 AM