IRS tax collection takes in more than $2 trillion in federal taxes each year, with 84 percent voluntary compliance. Most taxpayers pay their share on time. But what about the $385 billion tax gap, the difference between what the IRS is owed and what actually receives? How will the IRS proceed with delinquent tax collection?
Sen. Charles E. Schumer (D-NY) believes he has a solution. Unfortunately, his solution is to repeat a tax collection program which has previously failed twice. Schumer’s bill would require the IRS to turn over delinquent accounts to private collection agencies.
It’s easy to miss the tax collection element in the tax extenders bill, but buried 60 pages into the document is the following:
“Notwithstanding any other provision of law, the Secretary shall enter into one or more qualified tax collection contracts for the collection of all outstanding inactive tax receivables.”
This is a great idea in theory, but in practice, not so much. The IRS tried using private tax collection 20 years ago. After one year and countless complaints about bullying tactics and harassment, it was ended. The IRS tried again under George W. Bush. This plan was also phased out amid a rash of complaints from taxpayers.
Sen. Schumer must believe in the old adage that ‘the third time is the charm’. Could his legislation possibly be related to the fact that two of the tax collection companies involved, ConServe, of Fairport, and Pioneer Credit Recovery, of Arcade, are located in upstate New York, in Schumer’s own district? Is this the new pork?
One would hope not, but with a slowly growing economy and funding hard to find, congress is constantly looking for new revenue streams. Some congressmen see delinquent tax collection as a pot of gold at the end of the rainbow. But collecting this pot will be a daunting task, to say the least, and likely result in more conflict and complaints from tax payers. It is not as simple as reaching out and taking the money.
There are cheaters and fraudsters, but there are also those who simply can’t pay their taxes now – and those that can’t pay, ever. Anyone who has ever been involved in the business world understands this to be true.
It’s not a question of the IRS failing to try to recoup delinquent taxes. The IRS has a massive department whose only job is to track and collect on unpaid taxes. And if you’ve ever run afoul of the IRS, you already understand what they can do via liens and levies, wage garnishments and seizures. The IRS tax collection department is not to be taken lightly.
The key difference between IRS tax collection and third-party tax collection agencies is largely a human one. The IRS understands financial hardship affect one’s ability to pay, and is willing to step back and either negotiate or delay collections. This is a huge break for taxpayers scrambling to make ends meet. This human element would be lost with private debt collectors.
National Tax Payer Advocate Nina E. Olson, an IRS employee, analyzes the problems taxpayers face and how the IRS can ameliorate those problems. Olson is not a fan. “Based on what I saw, I concluded the (previous) programs undermined effective tax administration, jeopardized taxpayer rights protections, and did not accomplish its intended objective of raising revenue. Indeed, despite projections by the Treasury Department and the Joint Committee on Taxation that the program would raise more than $1 billion in revenue, the program ended up losing money. We have no reason to believe the result would be any different this time.”
Another key concern is the access private tax collection agencies would have to your personal data. While the IRS has strict protections in place to protect taxpayer data, third party tax collection agencies do not. If you don’t completely trust the IRS, why would you trust collectors and marketers? By statute, the government must take steps to ensure that private data stays private, and keeping this data safe is expensive. From 2005 to 2009, private agencies collected about $98 million. But after subtracting $16.5 million in commissions and $86 million to ensure data safety, there was a net loss of almost $5 million.
And finally, who would be most impacted by this legislation? “Outsourcing the collection of federal tax debts is a bad idea,” Olson wrote. “It disproportionately impacts low-income and other vulnerable taxpayers, and despite two attempts at making it work, the program has lost money both times, undermining the sole rationale for its existence.”
There is a general misconception that there is money out there that no one is bothering to try to collect, but the IRS is doing a good job on the money that they can collect. “We are getting money from these accounts through the refunds.” Olson went on to say. “But there are also a large number of accounts that are just not collectible; the taxpayer cannot afford to pay the tax. I think it’s just very hard for people to accept that there may be some part of our receivables that cannot be collected.”
While Sen. Schumer believes he is on to something, history would suggest that outsourced tax collection simply does not work.
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