The Internal Revenue Service could pay collection companies to collect unpaid taxes under legislation introduced last Friday by Rep. William Thomas, R-Calif., chairman of the House Ways and Means Committee.
The proposal, which was included in Thomas' corporate tax cut bill, H.R. 2896, would let collection firms keep up to 25 percent of the delinquent taxes they collect from individual taxpayers. Congress dropped a similar provision from President Bush's tax cut bill earlier this year, during the House-Senate conference on that legislation. The proposal originated in the Bush administration's fiscal 2004 budget.
Bush officials have said using tax collectors would beef up IRS enforcement and let the agency put its own employees on more complicated enforcement cases. Under the proposal, the collectors would not replace IRS workers.
"The department felt that the resources of the very time and energy and effort of these very talented IRS agents could better be used on the more complex cases," said Treasury Secretary John Snow at a May 20 hearing of the Senate Appropriations Subcommittee on Transportation, Treasury and General Government. "The collection people will focus on . . . the so-called low-hanging fruit of the system."
In its fiscal 2004 budget, the Bush administration noted that other agencies, including Treasury's Financial Management Service, have successfully used collection firms to recoup federal revenue.
But the IRS proposal has come under fire from the National Treasury Employees Union, a union that represents IRS employees, and some members of Congress, including Sen. Robert Byrd, D-W.Va., and Rep. Chris Van Hollen, D-Md.
"Because the IRS does not have the federal employees to handle the work, and they are unwilling to hire more staff, they have come up with this budget gimmick that says we'll hire contractors, let them keep 25 percent of what they collect, and then it never goes through the appropriations process," said NTEU President Colleen Kelley last month in an interview with GovExec.com.
On Tuesday, Kelley criticized the inclusion of the proposal in Thomas' bill, saying it was "the latest, and probably most inappropriate, hiding place," for the measure.
Sen. Arlen Specter, R-Pa., has raised additional concerns that collection firms could abuse taxpayers' privacy. Thomas' provision would hold contractors to the same conduct rules that govern IRS employees, including rules laid out in the 1998 IRS Reform and Restructuring Act, which were designed to protect taxpayers against overzealous enforcement staff.
At the May 20 hearing, Byrd questioned why the IRS did not simply hire additional staff to address its enforcement backlog. He cited a September 2002 study performed under former IRS Commissioner Charles Rossotti that found the IRS could collect an additional $9.5 billion in unpaid taxes by spending $296 million to hire new compliance staff.
"That's $32 for every taxpayer dollar spent," said Byrd.
At the hearing, Teresa Ressel, Treasury's deputy assistant secretary for management and budget, said collection companies would only be used for "low-end" tax collection activities that would not merit the attention of IRS employees even if the agency had a larger compliance workforce.
The IRS compliance corps has dwindled from 29,730 employees in fiscal 1992 to 21,421 workers in fiscal 2002, according to the report conducted under Rossotti's leadership.
"The IRS is simply outnumbered when it comes to dealing with compliance risks," the report stated. "Even after we refocus on the most egregious noncompliance cases, we can only handle a small fraction of them."