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Private Firms to Chase Delinquent Taxpayers

By Dan Morgan and Albert B. Crenshaw
Washington Post Staff Writers
Sunday, December 5, 2004; Page A06

When Reps. Shelley Moore Capito (R-W.Va.) and Chris Van Hollen (D-Md.) teamed up in September to get the House to pass an amendment blocking the use of private companies to collect back taxes from delinquent taxpayers, it seemed the Bush administration plan might be doomed for at least a year.

But in the final hours of drafting a 3,300-page spending bill last month, House and Senate negotiators eliminated Capito's and Van Hollen's handiwork, clearing the way for the Internal Revenue Service to hire commercial debt collectors. These private agents could keep as much as 25 percent of the amounts they recovered.

While the Bush administration has strongly supported the initiative as a way to increase revenue collections amid growing deficits, critics contend it could lead to harassment of taxpayers and breaches of privacy. Labor groups representing federal workers also oppose the change. But it has the backing of the debt-collection industry, which has contributed heavily to GOP organizations and causes since Bush became president.

One company that lobbied for the change is California-based Diversified Collection Services Inc., one of eight companies indicted in September by a Texas grand jury, along with three Republican fundraisers for House Majority Leader Tom DeLay (R-Tex.), on charges of alleged money laundering and illegal corporate campaign contributions.

A DeLay spokesman said last week that neither DeLay nor anyone in his office has had any contact with Diversified Collection representatives for several years.

The company has contributed about $435,000 to Republican Party organizations since 1999, Federal Election Commission records show.

James Tracey, Diversified's chief executive, has contributed thousands of dollars to GOP causes and candidates. This year, he gave $3,000 to the campaign of Rep. Pete Sessions (R-Tex.), a member of the Rules Committee and a key supporter of legislation allowing the IRS to use private collectors.

Sessions's chief of staff, O.L. Guy Harrison IV, said the congressman had been "interested in this for four to six years as a good government issue." Tracey, he said, had raised "a little bit" of money for Sessions. A company official said last week no one was available to comment.

The action by House-Senate conferees drafting the omnibus spending package is one of dozens that have come to light as the public gives more scrutiny to the huge government-wide spending bill passed Nov. 20.

The removal of the restriction on private tax collectors leaves in force legislation enacted as part of this year's corporate tax bill, allowing the IRS to contract with private companies.

Under the legislation, contractors will not have access to tax return information, other than the amount owed, and will have no role in determining the amount that is owed, officials said. They will be given names, addresses, phone numbers and other identifying information about delinquent payers.

Private collectors will have authority to set up installment payment agreements, and gather financial information about those targeted, presumably to assess their ability to pay or to locate assets that might be attached.

People on both sides of the issue say they believe IRS workers can collect unpaid taxes more cheaply and effectively than contract collectors. But because of chronic staff shortages and other resource constraints, IRS workers often are unable to follow up until years later.

"We do view this as an important step forward in strengthening tax administration," IRS Commissioner Mark W. Everson said last week. "It parallels what is already being done in over 40 states. It will be done with full protection of taxpayer rights, and . . . it's absolutely necessary, particularly in an environment where Congress has cut back on funding for the IRS."

But Capito, whose district includes an IRS installation employing 1,000, said she was concerned contractors whose pay was determined by the amounts collected would be inclined to use aggressive tactics and harassment. "There are a lot of unanswered questions," she said.

"It could result in a loss of objectivity. It could cloud your judgment," said Van Hollen, who noted that IRS rules expressly forbid rewarding service employees based on how much they collect.

The amendment to prohibit the administration from moving ahead with the plan passed on a voice vote in September during House consideration of the spending bill funding the IRS in 2005. During a brief debate that revealed divisions on the question within both parties, some Democrats supported the idea of private collections while several Republicans expressed concerns.

The use of private collectors has been debated for many years. In 1996, the General Accounting Office (now the Government Accountability Office) suggested that "there may be a role for private debt collectors in collecting federal tax debt."

In 1996 and 1997, Congress directed the IRS to test the idea, but the experiment was called off early after it turned out that the program was costing more than it was bringing in.

But that program was significantly different from the one approved this year. The previous program did not allow commission-style payments to the private collectors, who were paid a flat fee. Private agents were used only to locate and contact delinquent taxpayers. Collection was left to IRS employees.


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