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An IRS program using private debt collectors to handle delinquent tax bills is improperly demanding payment from hurricane victims and squeezing some of the poorest Americans—all the while turning a profit far below industry standards.
Since April 2017, four debt collection companies have been assigned half a million delinquent taxpayers to contact. So far, they’ve brought in less than 1% of what Congress hopes the program will ultimately generate. Meanwhile, tax experts and the IRS’ own oversight board fear that the targeted taxpayers are being pressured to empty out their savings and take on unnecessary financial risk. The National Taxpayer Advocate, an independent office within the IRS that ensures “every taxpayer is treated fairly,” calls the program ”a serious threat to taxpayer rights.”
Two US senators pushed the IRS to outsource its debt collection to private companies through this program: Chuck Grassley, a Republican from Iowa, and Chuck Schumer, a Democrat from New York who has hailed the initiative for bringing jobs to one of the poorest parts of his state. As if by coincidence, three of the four debt-collecting companies contracted by the IRS are based in Iowa and New York. They declined to comment on the program.
The IRS normally brings in $4 for every $1 put into its budget. But the private collectors don’t appear to be as effective as their government counterparts. From Oct. 2017 to Sept. 2018, the program’s most profitable 12 months, collection companies Pioneer Credit Recovery, ConServe Debt Recovery, Performant Recovery, and CBE Group collected just $2.64 for every $1 the government spent on the program.
The program hasn’t even met the private debt-collection industry’s own financial standards. By June 2018, the companies had recovered just 1% of the of the $4.1 billion in receivables assigned to them, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). The industry average collection rate is 9.9%.
And of the total $88.8 million in revenue that the companies did manage to collect, the IRS only received $22.3 million. That’s because the scheme has cost the US government $66.5 million, between startup costs and commission fees of up to 25%. To reach the Congressional Joint Committee on Taxation’s target of $2.4 billion in total additional revenue by 2025, annual collections need to rise to around 15 times what’s been collected so far, for the next seven years.
The odds are against the hired collectors. After three years, a debt is considered statistically uncollectible—and the accounts the IRS assigned to the private collectors were an average of 3.97 years old, TIGTA reports.
Congress, which forced the scheme upon the IRS, doesn’t seem to have learned much from past failures with private debt collectors. A 1996 pilot program resulted in a net loss of $17 million and was canceled after a year. Another attempt in 2006 led to a net loss of almost $30 million. The most recent available IRS data says the agency is owed more than $131 billion in delinquent payments on 14 million accounts.
Many, though not all, of the accounts the IRS has assigned to private debt collectors involve America’s most vulnerable taxpayers: poor people, and survivors of natural disasters. ...
Tax experts say it would be safer and more efficient to direct the entire program budget to the IRS itself. Unlike private collectors, the agency has to abide by stringent checks on taxpayer financial well-being, and it has consistently driven an excellent return on its budget.
“The IRS wouldn’t be hiring collection personnel using scraps salvaged from private profiteering businesses if Congress would do its job and properly fund our most essential government functions, including that of tax collection,” said Mandi Matlock, a tax attorney who does work for the National Consumer Law Center. “Congress created this problem so its friends in private industry could come along and fix it, at a high price to taxpayers.”
