House votes to halt debt collection outsourcing at IRS

The House voted Wednesday to block a controversial program that allows private sector collection agencies to help the Internal Revenue Service recoup some outstanding tax debts.

After a fierce debate on the floor, members passed the Tax Collection Responsibility Act (H.R. 3056) by a vote of 232-173, which fell primarily along party lines. Two previous legislative attempts by House Democrats to quash the program failed.

Rep. Earl Pomeroy, D-N.D., a co-sponsor of the bill, said the program has failed to live up to financial expectations. He compared it to a now infamous Defense Department procurement. "This bill reminds me of the $600 toilet seat," Pomeroy said. "This is a matter of dollars and cents, and the dollars just don't make sense."

The legislation would effectively end the IRS' Private Debt Collection Program, which, after much delay, took effect in September 2006. Three private debt collectors originally won contracts to chase down delinquent taxpayers, but only two of the contracts were renewed earlier this year.

Thus far, the companies have closed 9,000 cases, collecting more than $30 million in outstanding debt. To replace the revenue immediately lost through the elimination of the program, the bill would revise tax rules of expatriation, repeal the suspension of certain penalties and interest, and create temporary increases in tax requirements for some large corporations.

Although the prohibition on private debt collectors would take effect immediately, the IRS would be allowed to use the two companies -- Waterloo, Iowa-based CBE Group Inc. and Arcade, N.Y.-based Pioneer Credit Recovery Inc. -- until their contracts expire in March.

The bill has been the source of intense lobbying campaigns by the union representing IRS workers and an advocacy group representing private collection agencies, both of which proffered decidedly different figures to support their cases.

The National Treasury Employees Union, the most vocal critic, has argued that IRS employees can perform the same work as private debt collectors, but at far less cost to taxpayers. The contractors are paid a fee of between 21 percent and 24 percent per case, depending on the size of the tax debt recovered.

NTEU said that if the $71 million in costs to start up and operate the program were devoted to the IRS' Automated Collection System, the agency could hire 942 new workers.

On Tuesday, NTEU President Colleen Kelley said that approval of the bill "would be a major step forward in stopping this misguided program."

But former IRS Commissioner Mark Everson told a Senate panel in February that even with additional staff, the agency still would not be able to address the individual debt cases that the private collectors are handing.

The industry group -- the Tax Fairness Coalition -- suggested that the elimination of the program would allow millions of delinquent tax dollars to go uncollected and would let the $345 billion national tax gap between funds owed and those collected grow unabated. The IRS estimated that the program could recoup between $1.4 billion and $2.2 billion over the next decade.

In a separate line of argument, the union contended that the private debt collectors have used aggressive and abusive tactics, prompting dozens of complaints to the IRS. The Tax Fairness Coalition said the complaints reflect less than 1 percent of those taxpayers contacted by the private collection agencies.

The bill now heads to the Senate, where most agree that support is thinner. Dan Drummond, spokesman for the Tax Fairness Coalition, said "the bill as written is DOA in the Senate because of revenue raisers and repeal of the program."

Language limiting the scope of the pilot program was passed as part of the Senate's fiscal 2008 Financial Services and General Government appropriations bill (H.R. 2829).

But a stand-alone bill (S. 335) to eliminate the program, sponsored by Sen. Byron Dorgan, D-N.D., has not made it out of the Senate Finance Committee. The committee's chairman, Sen. Max Baucus, D-Mont., has been relatively silent on the measure, while ranking member Sen. Charles Grassley, R-Iowa, has voiced his opposition.

The Bush administration, meanwhile, announced its formal opposition to the House bill Wednesday, contending that the measure did not provide a balanced approach toward improving taxpayer compliance and collecting outstanding tax liabilities. Senior advisers have recommended that the president veto the bill if it reaches his desk.

"Terminating this program would result in a loss of significant revenue over the next ten years," the administration said in a statement. "These are tax dollars that are legally owed to the government and that are otherwise not likely to be collected by the IRS. It is a disservice to all taxpayers who properly pay their taxes to terminate this program that is efficiently recovering a portion of the extra burden they shoulder from ... those who do not pay their taxes."

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