Tax Collection Debate Is a Product of Budget Battles

Olson sees the IRS as a revenue generator. (Bob Brown - Photo By Bob Brown/richmond Time)

There always seems to be a disagreement over the numbers in government reports these days. Take the latest dispute over how many Internal Revenue Service employees it takes to monitor private tax collection efforts:

According to the national taxpayer advocate's annual report sent to Congress yesterday, the IRS has 65 employees overseeing 75 contract workers hired to collect unpaid tax bills.

Not exactly, the IRS said in comments elsewhere in the report. There are 65 IRS employees who work "as needed," but the time they are putting in is only equivalent to 31 full-time workers, the IRS said.

That jousting is a small part of a big debate over whether tax collection can be outsourced efficiently and in a way that protects the confidentiality of taxpayer records.

Nina E. Olson, the taxpayer advocate, clearly thinks the risks are too great. "It is difficult to fathom how 75 employees can achieve what the IRS cannot with its thousands of collection employees," she wrote.

She warned against "the hidden costs of using private collectors, notably potential erosion of customer service, lack of transparency of private collection operations, potential failure to provide consistent treatment for all taxpayers, and potential erosion of tax compliance."

Olson runs an independent office inside the IRS that hears from taxpayers who think they have been treated unfairly or who think the tax system is broken. The advocate's office sends Congress a report each year listing the most serious problems confronting taxpayers. [See story, Page D3.]

The idea of using private-sector debt collection companies to get small-time tax delinquents to pay up has been controversial since Congress gave the green light to the program in 2004. Some members of Congress have questioned whether the program will prove effective, and the National Treasury Employees Union, which represents IRS workers, is lobbying on Capitol Hill to ban such outsourcing.

Under the program, the debt-collection companies get a commission of up to 25 cents for every dollar they collect. The IRS has estimated that the outsourcing program will bring in about $1.4 billion, less costs, over 10 years and should free up revenue agents to focus on more complex cases and big-time tax cheats.

The outsourcing program, to a large degree, grew out of the pull-and-push over annual IRS budgets. The congressional appropriations process each year has kept the agency from getting a little extra money that could bring in a lot more tax revenue, Olson contended in her report.

If the government were a business, the IRS could be considered the "accounts receivable department" that generates revenue, Olson said. But Congress treats the IRS budget the way it treats other agency budgets, and that means the IRS in recent years has been pitted against housing, transportation and other programs for money and resources.

The budget process "makes little sense," Olson said, because the IRS has said that its employees collect unpaid taxes more cheaply than contractors do. She noted that an IRS study in 2002 calculated the agency received enough money to work only 40 percent of its overdue tax accounts.

In her report, Olson recommended that Congress consider revising its budget rules in a way that lets the IRS receive funding aimed at maximizing tax compliance each year. Olson also recommended that Congress increase IRS personnel funding by 2 to 3 percent each year to allow the agency to increase staffing.

Colleen M. Kelley, president of the Treasury union, recently called for IRS staffing to be restored to 1998 levels to improve tax collection. Since 1998, she said, the number of revenue officers, who collect delinquent taxes, has declined by about 40 percent while the ranks of revenue agents, who audit tax returns, have dropped by about 30 percent.

"If the administration is serious about closing the tax gap," Kelley said, "it needs to ask Congress for more people."