With tax season behind us, most Americans probably hope not to spare another thought for the Internal Revenue Service until next spring. But for an unlucky group, the IRS is about to get a lot harder to ignore.
This month, the IRS will begin private collection of certain overdue tax debts. The Service has selected four agencies to pursue longstanding debts that the IRS itself is no longer actively working to collect. The IRS has emphasized that certain accounts, including those currently under examination or litigation, will not be handed off to private companies.
We have Congress to thank for the new program. The Fixing America’s Surface Transportation (FAST) Act mainly provided long-term funding for transportation projects, but the new regulations about private debt collectors tagged along for the ride. The FAST Act, which President Obama signed into law in late 2015, not only permits the IRS to use private debt collectors – it requires that the Service do so to recover “inactive tax receivables.”
This approach is deeply misguided, to say the least. As Larry Elkin observed when the bill was before Congress, the FAST Act does not represent the first time the IRS has used private collection agencies. The IRS tried this approach twice before; both times, the government suffered a net loss. Based on analysis conducted by the IRS Taxpayer Advocate, it would be both cheaper and more effective to give the IRS the resources to pursue outstanding debts using its own agents. Congress, however, had political as well as fiscal motivations for slashing the IRS’ budget during the Obama administration. But regardless of the logic behind the change, lawmakers have created a situation that is inarguably worse for taxpayers.
First and foremost, IRS agents – at least in theory – are not concerned with collecting the maximum amount possible. Their job is to calculate and collect the accurate amount of tax. Yet the IRS is staffed by human beings, and mistakes happen. The IRS frequently sends notices with bills that are wrong. (It happens to tax professionals, too.) This is why taxpayers who have filed in good faith should not assume that a notice of tax owed is correct without double-checking the facts. When a taxpayer faces a particularly zealous IRS collections agent, exchanges can get heated and complex. But in the end, taxpayers and their representatives can reach out to an agent’s supervisor or to the Taxpayer Advocate Service if necessary.
When dealing with a third-party debt collection service, however, taxpayers will face the reality that debt collectors have no reason to care whether the tax is correct. Their job is to make sure taxpayers send their payment in to the Treasury. While the IRS has emphasized that it “will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities,” anyone who has dealt with a debt collection agency knows that their targets are in for an extended headache at best. The Federal Trade Commission receives more complaints about debt collectors than any other industry, according to Forbes, and not without reason.
Another major concern is that this new practice may make life easier for scammers. The IRS has repeatedly emphasized that the Service does not cold call taxpayers without repeated prior contact by regular or certified mail. The volume of IRS phone scams, however, remains significant. And private debt collection agencies will almost certainly be calling the taxpayers whose cases were handed over to them, meaning some real calls to taxpayers will now crop up among the many fake ones.
There are, at least, some safeguards in place. The IRS will provide written notice to taxpayers before their accounts are handed over to one of the four authorized debt collectors, and the collection company will send a separate letter confirming the transfer before calls begin. The debt collectors are also subject to the Fair Debt Collection Practices Act, which means, for example, that the companies should not contact taxpayers at work after being told not to do so. They also cannot threaten to arrest a taxpayer for nonpayment, a common fraudster tactic.
Even so, this represents a change to longstanding practice, and it is hard to believe it won’t represent an inadvertent gift to criminals hoping to profit from intimidating their targets by invoking the IRS’ name – or, potentially, the name of one of the four debt collection companies the IRS will use.
If history is any indication, the practice of using private debt collectors is destined to return to the scrap heap where it belongs. The sooner the better. In the meantime, taxpayers should be sure to understand their rights and remain wary of those claiming to speak on the IRS’ behalf.
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