Hold That Back-Tax Chase

Two years ago, Congress authorized the Internal Revenue Service to hire private debt collectors to find individual taxpayers who acknowledge that they owe taxes but have not paid up.

The agency estimated the debt collectors could pull in about $1.4 billion over 10 years and free up revenue agents to focus on more complex cases and big-time tax cheats. The IRS selected three firms to track down the tax delinquents, but the project has been slowed somewhat by a bid protest and hasn't gotten underway.

Then, last week, the debt-collection project took a surprise hit. By two votes, the House Appropriations Committee approved an amendment to a fiscal 2007 spending bill that would prohibit the IRS from setting up the program. When the bill came to the House floor this week, Republican leaders did not challenge the amendment, allowing it to stand.

To some degree, the IRS setback reflects the unease created by the security breach at the Department of Veterans Affairs, in which at least 26.5 million veterans and military personnel were put at risk of identity theft when a laptop was stolen from a VA employee's home.

Rep. Steven R. Rothman (D-N.J.), who wrote the amendment, argued to the committee that it makes no sense to turn over taxpayer data to private debt-collection companies when identity theft seems to be on the rise.

Yesterday, Rothman teamed with Colleen M. Kelley , president of the National Treasury Employees Union, to press his case against what he called "the outrageous proposal."

Under the IRS plan, companies would be paid commissions on a sliding scale -- from 21 cents to 24 cents for each dollar collected. If one of the companies determined that a targeted taxpayer is bankrupt or dead, it would receive a $100 "administrative resolution fee."

In addition to his privacy concerns, Rothman contends the contracts are a waste because it costs the government only 3 cents for each dollar collected by an IRS employee. He also objects to the project's cost -- about $50 million in the first three years.

The project's initial phase would focus on more than 10,000 people who owe taxes, an IRS spokesman said. Over a two-year period, the debt-collection companies would be asked to track down about 100,000 who are in arrears. Starting in 2008, the IRS intends to hire up to 10 firms to provide collection services.

IRS Commissioner Mark W. Everson has promised "tough safeguards" to protect taxpayer rights and privacy. Employees of the private firms would undergo background checks and mandatory training, the agency said. The fees that would be paid to the firms would be in line with industry standards, according to the agency.

Yesterday, Everson said he was disappointed by funding provided the agency in the House spending bill. The measure falls $104.5 million short of what the Bush administration requested and "would result in personnel reductions within the IRS." He noted that "using private collection agencies would bring in extra money and help reduce the deficit."

Kelley, however, said a similar IRS project failed about a decade ago and pointed to the irony of the government linking contract fees to the amount of tax dollars collected, a performance measurement that Congress has prohibited IRS managers from using when evaluating their employees.

Rothman's amendment must clear the Senate and subsequent negotiations between the House and Senate later this year -- a tough climb in the face of Bush administration opposition. But, Kelley said, "the House action is an indication that things are turning a bit in our favor."

Citing the VA loss of veterans' names, Social Security numbers and other personal information, she suggested that concern about privacy rights might help the union's effort to kill the IRS project. "Closer and closer to election time, everyone understands that this proposal is very unpopular with the public," she said.

Stephen Barr's e-mail address isbarrs@washpost.com.