Advocate Finds Debt Collection Farmout Woes

By GINGER ADAMS OTIS

In a report issued Jan. 8, the National Taxpayer Advocate urged Congress to halt a controversial program using private debt collectors instead of Federal employees to recoup lost taxes.

Advocate Nina E. Olson said the program was prone to abuse and inefficient.

'Not Worth the Risk'

"Our conclusion is that this initiative is fatally flawed, risking much for a small return on investment," she wrote.

Ms. Olson called upon Congress to expand the IRS budget so that more Federal employees could be hired to address the nation's growing tax gap - the difference between what is owed by the public and what is paid.

Under the current plan the Federal Government has "the privilege of paying up to 25 percent of any taxes collected to private collection agencies," Ms. Olson wrote, "even while estimates show that IRS employees could perform the work far more efficiently, with a return on investment of approximately 13:1. We ask, in this report, what business case exists for such an arrangement, and conclude that there is none."

The report was Ms. Olson's most extensive review of the private debt-collection program, which she has monitored since plans for it were announced in 2004. It officially began last September, with three private firms earning up to 25 cents on every dollar recouped. The IRS initially turned over 12,500 tax-debt cases, with the goal of processing a total of 446,000 cases in the next two years.

Sees Sleazy Tactics

The program mainly targets low-income taxpayers who have acknowledged their debt but are unable to make restitution. Ms. Olson noted that so far the private companies had collected just 8 percent of the arrears they'd been assigned - less than what some in-house IRS units had done under more difficult circumstances.

But she noted a disturbing trend in who was being dunned for payment, and she faulted certain "psychological techniques" used by the private companies.

According to her report, the IRS in 2006 sent out 36 percent more notices of levy to delinquent taxpayers than the year before. Approximately 84 percent of those notices went to elderly or disabled taxpayers. The number of levy demands placed on Social Security benefits rose by 143 percent last year, Ms. Olson charged.

An initial draft of her report cited sections of a collection script used by one of the private agencies. It contained several tricks to get taxpayers to commit to a payment. Only at the end of the conversation, Ms. Olson said, would the collection representative give a Fair Debt Collection Practices Warning.

Censored by IRS

The portions of her report quoting scripts had to be deleted, however, when the IRS protested that it was proprietary information belonging to the private collection companies.

When asked directly to supply information on collection tactics, Ms. Olson said, one agency complied, another released partial information and a third refused.

The IRS told the New York Times that it strives to have private employees follow the same guidelines and restrictions that Federal workers adhere to. It said it was working with the companies to provide more information on collection techniques.

Other examples of "hidden costs" cited by the report included "poor customer service to multilingual taxpayers," and the IRS's use of 65 IRS employees to monitor the work of 75 debt collector employees.

Union: Wasting Money

NTEU President Colleen Kelley said Ms. Olson's report should be heeded by Congress.

"Paying debt collectors a bounty of up to 25 percent of the money they collect is a waste of taxpayer dollars and exposes taxpayers to the risk of identity theft and overly aggressive collection tactics," she said.

Ten more private companies will start performing IRS tax-debt collection if the program expands as the IRS has planned.