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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.

In February, the city of Chicago fired the firm after officials learned that it had paid for a vacation for a contract officer.

Since the federal program began, the National Taxpayer Advocate, an ombudsman's office within the IRS, has logged more than 1,500 complaints related to it. Taxpayers have accused private collectors of bombarding them with phone calls, or repeatedly calling the wrong taxpayer or sending notification to the wrong address. Critics say the program has subjected taxpayers -- some of whom owe the IRS nothing -- to harassment.

A common complaint is that contractors do not explain the nature of their calls until they confirm a taxpayer's identity. They try to do that by asking for a Social Security number, something many people are reluctant to disclose.

Jeff Trinca, a lawyer for the Tax Fairness Coalition, which represents Pioneer Credit and the CBE Group, said the phone calls come after taxpayers have been sent written notice of their debt. "That layer of potential confusion is there to protect the taxpayer," he said.

In testimony on Capitol Hill, IRS officials acknowledged that agency employees are able to pull in about eight times as much as the private collectors because they have the authority to place liens, garnish wages and use other enforcement tools not available to private collectors.

But IRS officials also say that if private collection ended, it is unlikely that the IRS would redirect resources to the kinds of cases the private firms handle.

"Our own collection resources wouldn't get down to this level, not that we wouldn't have made an attempt," said David Alito, director of collection at the IRS.

But Dorgan and others say that tax collection is a central responsibility of government and that IRS employees could perform the work at a much lower cost.

"This is a waste of taxpayers' money, and it could be much better spent if it were given to the IRS to hire more employees," said Colleen M. Kelley, president of the National Treasury Employees Union, which represents 85,000 employees at the IRS. The union's PAC has given federal candidates and officeholders more than $2.8 million since 1995.

Rep. Chris Van Hollen (D-Md.), whose district is home to thousands of federal workers, is pushing legislation approved in the House Ways and Means Committee last week that would repeal the program.

Both sides of the debate have been dueling with statistics.

Said Grassley: "The intense effort to game the numbers and kill this program in the cradle is noteworthy even by Washington standards. IRS officials have testified that the private debt-collection program has taught the IRS new, more effective techniques."

Ending the program would send a message to delinquent taxpayers with relatively small debts that the government will not pursue them, Trinca said. "There is a misconception that somehow or another if you just added another body to do exactly what the agency does currently, that you would collect all this debt. That's just not the case."

Staff researcher Madonna Lebling contributed to this report.

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