Federal Report: IRS Farm-Out A Sure Loser;
Fees to Private Firms Will Devour Profits From Collections

By GINGER ADAMS OTIS

An Internal Revenue Service plan to send delinquent tax cases to private companies for debt collection has raised concern in the U.S. Government Accountability Office.

COLLEEN M. KELLEY: 'Outrageous giveaway.'

A report released by the GAO Oct. 31 said that the IRS has failed to adequately document the costs of the outsourcing program or set specific goals for its success.

Money-Losing Proposition

The study found that the IRS estimates the first phase of its outsourcing program will bring the government between $55 million and $92 million. It estimates costs for the program at approximately $62 million.

But the GAO said that the IRS figures failed to take into account the fees paid to the debt-collection companies on the tax payments they generated. The companies take as much as 24 percent for each tax dollar collected.

With the fees figured in, the projected revenue dropped to $44.1 million, well below the program's cost threshold.

The GAO report spurred renewed criticism of the privatization plan from the union leader who represents IRS employees.

Colleen M. Kelley, president of the National Treasury Employees' Union, called the outsourcing program "nothing more than an outrageous giveaway of taxpayer money to private companies."

'Contractors' Christmas'

She added that it was "appropriate that the GAO study [came out] Oct. 31, since it is so scary for taxpayers. But for the contractors, it reveals a program that is much more like Christmas than Halloween."

The GAO was also critical of the IRS's failure to develop criteria, even at this late stage with the program under way, to determine whether it will expand the program once this initial phase is completed. The IRS has said it plans to hire as many as 10 private companies to pursue tax debts over the next year or so. It has already started its program with three companies, over objections from the NTEU and a Congressional call to delay the proceedings.

The GAO study was done at the request of the Senate Finance Committee. Many of its members expressed fears that the program would result in increased identity theft, fraud, and predatory lending.

Prey for Debt-Collectors?

Taxpayer advocacy groups have also blasted the plan for potentially putting personal information at risk. Additionally, they are worried that people who experience tax debt because of a death in the family or an unexpected layoff could be hounded by collection agencies. An independent study by a watchdog group earlier this year found that the elderly could also be disproportionate targets for private tax collection.

The GAO stressed in its report that the agency can't wait to implement safeguards for taxpayers.

"[If the IRS] waits too long, [it] risks not having critical information in a timely and cost-effective manner in order to answer important questions about whether the PDC program is producing desired results at acceptable costs and whether the program should be expanded," the report noted.

The IRS has said it will implement procedures to protect taxpayers' rights when dealing with private debt-collectors, including training for collectors, extensive background investigations, and "taxpayer surveys" to get feedback on the performances of private debt collectors. Critics note, however, that the Federal tax agents the IRS currently employs already have the necessary training and security clearance for tax collection.

The GAO pointed out that the IRS did not offer specific information on how it would use feedback from the privatization program to decide whether or not to expand private debt collection. IRS Commissioner Mark Everson said in a statement that he agreed with many of the findings of the GAO report, and that the IRS would be implementing many of the recommendations.

Ms. Kelley said more questions were raised than answered by the GAO report, especially regarding the IRS's statement that it was considering ways to adequately protect taxpayer information.

"What does the IRS mean that it is 'considering' developing such criteria," she said. "Why weren't the criteria for success set at the beginning, rather than after the program starts?"

Done Better In-House

The NTEU has been leading the fight against the use of private collectors for IRS debt, pointing out - as Mr. Everson did during a recent Congressional hearing - that IRS employees can perform the work more efficiently and on a far more cost-effective basis.

Commissioner Everson has argued that Congress won't provide the resources the IRS needs to handle the work internally. But Ms. Kelley has contended that the Bush Administration "consistently has failed to make a case with Congress for adequate resources, preferring instead to turn this work over to the private sector."