Collectors Cost IRS More Than They Raise

By Lyndsey Layton and Christopher Lee
Washington Post Staff Writers
Tuesday, April 15, 2008

The Internal Revenue Service expects to lose more than $37 million by using private debt collectors to pursue tax scofflaws through a program that has outraged consumers and led to charges on Capitol Hill that the agency is wasting money for work that IRS agents could do more effectively.

Since 2006, the agency has used three companies to go after a $1 billion slice of the nation's unpaid taxes. Despite aggressive collection tactics, the companies have rounded up only $49 million, little more than half of what it has cost the IRS to implement the program. The debt collectors have pocketed commissions of up to 24 percent.

Now, as Americans file their 2007 taxes, Democratic leaders want to end the effort.

"This program is the hood ornament for incompetence," said Sen. Byron L. Dorgan (D-N.D.), a leading critic who has introduced a bill to stop the program. The measure has 23 co-sponsors, all but one of them Democrats. "It makes no sense at all to be turning over these tax accounts to private tax collectors that end up costing the taxpayers money."

Defenders say the program adds muscle to IRS efforts to close the gulf between what taxpayers owe and how much the IRS collects. In 2001, the "tax gap" was an estimated $345 billion.

"The real choice is whether we use private collection agencies or let these tax debts go uncollected," said Rep. Jim Ramstad (Minn.), the ranking Republican on the Ways and Means oversight subcommittee. "I hope we don't take an enormous step backward in our efforts to close the tax gap by eliminating a program that's working."

After years of lobbying by the private collection industry, the Republican-controlled Congress created the program in 2004. The goal was to use collection agencies to close the relatively easy cases the IRS said it did not have the staff to handle: instances in which the taxpayer is not disputing the debt and in which the amount owed is relatively modest. Supporters hoped that the program would eventually be expanded to take over more of the agency's debt-collection duties, and the IRS predicts that the program will break even by 2010.

Three firms were awarded contracts: Pioneer Credit Recovery, based in the western New York district represented by Rep. Thomas M. Reynolds (R), who supported the program and recently announced his retirement; the CBE Group of Waterloo, Iowa, the home state of Sen. Charles E. Grassley (R), who helped create the program; and Linebarger Goggan Blair and Sampson, a law firm based in Texas, home to President Bush.

Pioneer Credit employees have given congressional candidates and political action committees $117,450 since 1995, including $16,250 to Reynolds. CBE Group employees have given $9,372 during that period, including $2,500 to Grassley.

Linebarger Goggan, one of the nation's largest collection agencies, has extensive government ties. The firm, its employees and their spouses have given PACs and federal candidates in both parties $423,260 since 1995.

The Austin-based firm was dropped from the program last year for reasons that the IRS declined to make public. Its workload was doled out to the two other companies. Mike Vallandingham, a partner at the firm, said Linebarger Goggan met IRS expectations for collection results and "received high marks for regulatory and procedural accuracy, timeliness and professionalism."

The firm had been under scrutiny since 2002 because of some of its municipal contracts. A partner went to prison in 2002 for conspiring to bribe two San Antonio City Council members. Last year, the city of Mansfield, Tex., ended its contract with Linebarger Goggan after the firm made a $2,000 donation to the mayor a month after he was elected.

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