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The Internal Revenue Service would be blocked from allocating funds to outsource collection of tax debts under a provision in a spending bill passed by the House Wednesday.

The language in the fiscal 2007 Transportation-Treasury appropriations bill would bar the IRS from entering into or administering contracts for tax collection, taking a swipe at an IRS initiative to hire collection companies to handle some uncontested debts.

The agency announced the award of three contracts in March for the first phase of the initiative, and has plans to expand the program to 10 companies in 2008. But unsuccessful bidders have lodged protests of the initial contract awards, delaying work; a decision on those protests is due in the next two weeks.

The language before the House would not hinder work on the contracts this year, but would prevent the agency from spending on the initiative after September. The administration had requested $54 million to finance the program, according to a statement by Rep. Steven Rothman, D.-N.J., who introduced the language as an amendment last week when the House Appropriations Committee was considering the bill.

The panel approved the provision, and the full House passed the spending bill (H.R. 5576) late Wednesday afternoon.

The $54 million in out-of-pocket spending on the initiative is minimal because the companies are to be compensated through fees of 21 percent to 24 percent of each successful collection. Critics have argued that the program is a waste of money because IRS employees can perform the same work at a small fraction of the cost. The National Treasury Employees Union has said it costs about one half a percent of total collections to do the work.

In a March appropriations subcommittee hearing, IRS Commissioner Mark Everson conceded that employees could perform the work at far less cost. He said vagaries of the budget process mean the agency does not have funds to hire more employees for the purpose, even though such hiring would be less expensive than paying contractors.

"This got everybody screaming, with its audacity, with its wastefulness, with its arrogance, with its inexplicability," Rothman told reporters in a call on Wednesday. "It appears that there will be no challenge to this provision when the House passes the [appropriations] bill," he said, though he indicated his office has not yet laid the groundwork for Senate support of the provision.

In a statement, Everson reiterated opposition to Rothman's provision. "Using private collection agencies would bring in extra money and help reduce the deficit," Everson said.

NTEU President Colleen Kelley has highlighted the potential for abuse of taxpayer information as a result of outsourcing. She described the plan as "not just costly and foolish, but dangerous, in light of the growing high-visibility incidences of data loss, both by private employers and the government -- including the IRS -- and the resulting likelihood of increased identity theft."

She also argued that taxpayers could be subject to inappropriate collections practices, such as nighttime phone calls and harassment, from unscrupulous debt collectors.

In a statement of administration policy issued Wednesday, the Office of Management and Budget objected to the funding block, saying the program is anticipated to net $54 million in 2007.

"Similar measures instituted by various states have met with success, allowing for more efficient collections while safeguarding the privacy rights of individual taxpayers," the statement said.

The IRS has published a list of strict guidelines that contractors will be required to follow in handling taxpayer data, including extensive security requirements and working only from domestic facilities. Collection agents are to be trained on data practices and interfacing with taxpayers, among other subjects, and taxpayer information cannot be channeled for secondary uses, according to the guidelines.

IRS spokesman Bruce Friedland said the agency plans to give about 10,000 cases to the three selected contractors once the bid protest is resolved. Kelley had indicated that number to be much higher, putting it around 75,000.