In its first year in operation, a new IRS program that was meant to outsource federal tax debt collection efforts ultimately cost U.S. taxpayers three times more than it actually recovered.
The findings were published in a Jan. 10 report by the National Taxpayer Advocate (NTA), an independent consumer advocacy arm of the IRS.
In 2015, federal lawmakers enacted legislation that required the IRS to outsource its tax debt collection efforts to private collection agencies. The agency hired four agencies to do the job and spent a total of $20 million to cover program operations. The agencies were charged with collecting $920 million in unpaid debt but, ultimately, they managed to recoup a mere fraction of that amount — $6.7 million in recovered tax debts, according to the report.
After its first year, the current attempt has resulted in a net loss of $13.3 million with less than 1 percent of unpaid tax debt collected.
Consumer advocacy groups like the National Consumer Law Center (NCLC) were quick to cry foul, saying the report’s findings show that the program needlessly wasted money and abused taxpayer rights.
“The IRS private debt collector program is the epitome of waste and abuse in government programs,” said Chi Chi Wu, a staff attorney at the NCLC in a statement.
It’s not the first time the U.S. government has outsourced debt collection efforts to private firms. The NCLC notes that an effort in the mid-1990s lost $17 million and was cut after a year. Another attempt to outsource debt collection in 2006 lasted three years and lost $4.5 million.
Who is the program hurting?
Among the taxpayers who were most impacted by this latest private collection program are families hovering just above the poverty line, those beneath it, and retirees who are on Social Security or receive disability benefits.
The report found:
● 4,905 taxpayers were assigned to private collection firms, and of those, 4,141 filed recent returns by Sept. 28, 2017.
● 44 percent of those taxpayers had incomes below 250 percent of the federal poverty line ($24,600 for a family of four).
● 28 percent had an annual income of less than $20,000
● 19 percent had a median annual income of $6,386
● 5 percent received Social Security or disability and had a median income of $14,365
When you owe a tax debt to the IRS, the IRS typically calculates payment plans so that a family can keep up necessary living expenses like housing, transportation, utilities, food, and out-of-pocket health care after making their tax debt payment. However, NTA states that the data shows that these taxpayers were still pressured by the private collection firms hired by the IRS to enter into payment plans they couldn’t afford.
“Forcing the IRS to use private debt collectors to put the squeeze on vulnerable low-income families simply lines the pockets of these private collectors while jeopardizing the economic well-being of families,” said Wu.
Further insight into the problem is difficult to obtain, the NTA says, because the IRS refuses to let representatives of the organization listen to calls between private debt collectors and taxpayers.
Where do the recovered tax debts go?
Under this program, the IRS would send a 10-day notice to taxpayers letting them know a private debt collector will be assigned to them. Of the $6.7 million collected by PCA’s in 2017, $1.2 million, or 18 percent, was recovered as a result of those letters.
Private firms are not supposed to receive a commission off of collected debts. But the NTA study states that the private debt collectors are receiving commission for work done by the IRS and the agency “has no plans to change its procedures to attempt to identify payments that were clearly not attributable to PCA action.”
The IRS is authorized to keep 25 percent of the amount collected by the private agencies and the agencies themselves receive 20 percent in commission. Of the unpaid taxes collected by PCAs, $3 million is the minimum amount left that goes to the Treasury.
What do I do if debt collectors call?
If you’re called by a debt collector, there are several things to know. First, that you have rights, and second, that you need to know more.
The Consumer Financial Protection Bureau (CFPB) states certain laws related to debt collection are put in place to protect taxpayers’ privacy and security. For example, they can’t call before 8 a.m. or after 9 p.m. and they can’t harass or threaten you. In addition, if you have an attorney, the debt collector will need to contact them instead of you.
You also should check with your state attorney general's office to see if it offers any additional protection or help for dealing with debt collectors.
Keeping track of your documents is also important. Any communication between you and the debt collector, including letters you may have sent, should be kept in a file that starts when the collector calls, the CFPB suggests.
Identifying the debt collector can save you from taking on a debt that isn't yours or entering into a less-than ideal payment plan. The CFPB suggests that you don’t give any information, personal or financial, until you’ve verified the collector’s name, address, phone number, and all information about the debt, such as whether it’s yours or not, any dates associated with it, and the total amount including any fees.
What happens if I owe a tax debt?
If you owe a tax debt, you should act sooner rather than later. Unpaid tax debts can not only result in extensive penalties and fees but it could result in:
● Reduced Social Security benefits
● Garnished wages
● Seized property
● Passport revocation
Interest is compounded daily on past due taxes (the rate fluctuates, but is 3% more than the federal short-term rate) and late payment penalties are charged separately and can go as high as 25% of the owed amount.
If you owe a tax debt, you still have to file your taxes on time.
If you can’t pay, the worst thing to do is ignore the bill. Contact the IRS and ask them to set up some kind of payment plan that you can afford.
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