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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.

IRS shouldn't outsource debt collection

  • By Michelle Singletary,
  • The Washington Post Writers Group
  • – 05/23/2014
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The federal government needs money. I get it.

The Internal Revenue Service has a significant number of overdue tax debts it needs to collect. More than 5 million taxpayers were delinquent near the end of April, according to the agency.

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But a proposal to allow the IRS to turn over those delinquent accounts to private debt collection agencies isn't the solution. It's a bad idea, used before — in the late 1990s and again in the last decade. Both times the outsourcing failed.

Many people are already scared of the IRS if they owe money. I see little upside to this already tenuous relationship if we return to having private collection agencies go after tax delinquents.

This is also what Nina E. Olson, the national taxpayer advocate, said in a 21-page letter to the chairmen and ranking members of the congressional tax-writing committees. Olson noted that she and the Office of the Taxpayer Advocate were involved in the private debt collection program between 2006 and 2009.

"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," Olson wrote. "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."

Olson is also concerned that collection efforts would put a "bull's-eye on the backs of low-income taxpayers," who make up an overwhelming majority of folks whose accounts would be turned over to debt collectors.

"I believe it would be unconscionable for Congress to create a government-sponsored debt collection program that, even if inadvertently, targets such a high percentage of low-income taxpayers," she wrote.

I fear, as Olson does, that private debt companies driven to collect as much revenue as possible will result in overly aggressive collection tactics, including pressuring people to agree to payments they can't possibly afford. If someone then defaults, it can cost more money to go back and establish a fairer payment plan.

"Low-income taxpayers often lack financial savvy and are terrified of what a debt collector might do to their lives," Olson wrote.

The Federal Trade Commission has been regularly going after and sanctioning debt collectors for bad and illegal behavior. Debt collection is among the top consumer complaints received by the FTC. Just recently, the FTC slammed a California operation, obtaining a $4 million settlement from the company over charges that it used deceptive and abusive tactics in collecting credit card debt. The money will be used to provide refunds to consumers. One tactic had collectors posing as process servers or law office employees who claimed they were trying to deliver legal papers related to a lawsuit.

Here's something else about the pending tax-collection legislation that should cause concern. It would require the IRS to send delinquent cases arising from Affordable Care Act to private debt collectors.

The collection agencies could get cases under two scenarios. With the ACA, people shopping on the health exchange may qualify for a tax credit to help pay for insurance. But consumers who receive too much of this subsidy must pay back the excess. Additionally, individuals and their dependents are required to have minimum essential health insurance unless they qualify for an exemption.

If it's determined they were in the financial position to pay for coverage and don't fall under an exemption, they face a penalty for being uninsured, which they have to pay when they file their federal income tax returns.

The IRS is responsible for collecting in both instances. The IRS can snatch refunds to satisfy the debt. However, the agency is prohibited from using its usual tough collection tools to collect payments.

"If debt collectors come to be seen as the public face of the ACA, I am concerned that could make the IRS's job more difficult as it tries to balance its twin missions of revenue collection and benefits administration," Olson noted.

The proposal was introduced by Sen. Charles E. Schumer (D-N.Y.) and has bipartisan support. But some congressmen and a consortium of 15 civil rights and consumer groups, who also penned a letter to senators, oppose the plan, as does the IRS Oversight Board, a nine-member independent body charged to oversee the IRS. The board also sent a letter to Senate and House leadership objecting to the proposal to use private debt collectors.

"The experiment has failed twice and there is nothing to lead us to believe it will not fail again," the board said.

What's the saying, fool me once, shame on you. But fool me twice, shame on me. Using private collection agencies for tax debt is a foolish, foolish idea.

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© 2014, Washington Post Writers Group
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