Tax Analysts Blog

Would Private Debt Collectors Do a Better Job Than the IRS? Not Likely

Posted on Jul 28, 2015

If you’re a lawmaker who wants to punish the IRS and you’re tired of simply starving it of funding, what’s next? How about dismantling one of the agency’s core functions and outsourcing it to the private sector?

That’s what Senate Republicans have proposed (again), this time as part of legislation to extend the Highway Trust Fund. GOP leaders in the Senate want to pay for that extension, at least in part, by requiring the IRS to hire private collection agencies to do its dirty work. According to estimates from the Senate Finance Committee, privatizing the collection of certain tax debts would raise $2.38 billion over 10 years.

Not everyone believes the hype. “The use of PCAs [private collection agencies] to collect tax debts has repeatedly been shown to be a waste of taxpayer dollars,” complained the National Treasury Employees Union. “The Treasury Secretary currently has the authority, but has chosen not to enter into such contracts.”

The NTEU is not exactly a disinterested party, but others share its skepticism. “Collecting taxes is an inherently governmental function, something that the government is uniquely positioned to do, argued the Center for Effective Government. “Given the legacy of failure with past attempts to outsource/privatize IRS debt collections, we should expect similar abuses should this ineffective and wasteful legislation pass.”

Still, in light of the most recent filing season – a horror show, from the taxpayer’s perspective – it’s hard to make the case for IRS effectiveness, in collections or anywhere else. “The IRS just had one of the worst filing seasons for customer service on record,” complained Sen. Chuck Grassley, R-Iowa, a longtime champion of private collection. “The IRS hung up on callers because it couldn’t handle the calls. The private contractors would take on accounts involving taxes that are due and owed that are just sitting dormant right now.”

But who’s ultimately responsible for the failures? IRS managers, to be sure; many of the agency’s injuries have been self-inflicted. But Congress deserves a large share of the blame, too. In a misguided effort to punish the IRS, lawmakers have slashed the agency’s budget to unsustainable levels. And they want to keep going.

Democrats have been ramping up their criticism of those cuts. “The real scandal around the IRS is that they have been so poorly funded that they cannot go after these folks who are deliberately avoiding tax payments,” complained President Obama during a recent appearance on The Daily Show.

Nonpartisan observers tend to agree. “It is a challenge for any tax agency to properly administer a system such as the one we have,” observed National Taxpayer Advocate Nina Olson in her 2014 report to Congress. “But it is impossible for an underfunded tax agency to do so. The victims of this underfunding are not the IRS and its employees—the victims are U.S. taxpayers.”

Notably, Olson does not regard private tax collection as a solution for any of the IRS’s problems. As she wrote in a letter to Congress last year, the 2006-2009 experiment with private collection was unimpressive. “Based on what I saw, I concluded the program 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.”

Any in any case, the IRS scarcely needs help when it comes to collection. “The IRS is the most powerful creditor in the country, and most taxpayers do not want to get crosswise with it,” Olson noted. “In particular, the IRS may, without judicial approval, serve a levy against a taxpayer’s bank account, serve a levy against a taxpayer’s Social Security benefits, garnish a taxpayer’s wages, or file a notice of federal tax lien against a taxpayer’s property. In rare cases, it may even seize a taxpayer’s property, including a car, a boat, a residence, or business assets.”

That’s plenty of weaponry to bring to a tax fight. By comparison, private collectors have to rely more on intimidation and manipulation.

If Congress really wants to raise additional money without actually raising taxes or creating new ones, it should give the IRS more money, not less. Investments in the agency’s collection efforts will return additional revenue, especially if Congress keeps a close eye on how the money is spent.

Oversight is important, and sometimes it can even involve an element of budgetary pressure. But real oversight requires more than endless budget cuts. It requires hard work and careful attention – both in short supply these days.

Read Comments (4)

edmund dantesJul 28, 2015

If the IRS just stopped targeting conservatives and conservative organizations,
that move alone would free up enough resources to allow them to answer the
phones again.

And if they would stop stonewalling and lying about their political activities,
Congress might even increase the finding again. Though not until Koskinen is
gone, he's flat-out lied to Congress too many times to ever have any
credibility again.

I agree that private debt collectors are a terrible idea. I don't agree on the
funding--IRS is not cash starved, they are leadership starved. $10 billion is
plenty for them to work with if priorities are set properly. They should be
reaping enormous efficiencies from all the e-filing, their costs should be
going way down.

I think Rand Paul may be on to something. Start with a clean slate for the tax
code, and for the personnel running the tax collection agency.

david cay johnstonJul 28, 2015

Private collection, which failed miserably, costs at least seven to eight times
per dollar collected than having IRS revenue officers do the work and that may
well be a very conservative estimate.

Also, private collectors have an incentive to go after low-hanging fruit, not
the most recalcitrant.

My 2006 report is here.

emsig beobachterJul 29, 2015

You want efficient tax collection? I'm your guy.

Paulie Walnuts.

Frank AgostinoAug 3, 2015

Start with privatizing the assessment and collection of taxes owed by Americans
living overseas. The IRS does not appear to be pursuing this money; this may
be a first step in determining whether any IRS function could reasonably be
outsourced

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