Correction: A previous version of this story erroneously identified the IRS as the agency responsible for calculating the value of the tax credits people are eligible to receive under the Affordable Care Act. The story has been corrected.
The Internal Revenue Service would be required to turn over millions of unpaid tax bills to private debt collectors under a measure before the Senate, reviving a program that has previously led to complaints of harassment and has not saved taxpayers money.
The provision was tucked into a larger bill, aimed at renewing an array of expired tax breaks, at the request of Sen. Charles E. Schumer (D-N.Y.), whose state is home to two of the four private collection agencies that stand to benefit from the proposal.
It requires all “inactive tax receivables” to be assigned to private debt collectors if the IRS cannot locate the person who owes the money or if IRS agents are unable to make contact within a year.
Some taxpayers would be spared the barrage of notices and phone calls, including innocent spouses, military members deployed to combat zones and people “identified as being deceased.”
But bereaved relatives could find themselves under siege for unpaid estate taxes under the proposal. So could people who incur a tax debt under the new Affordable Care Act — either because they owe a penalty for not buying health insurance or because the government was too generous in estimating the size of their health-care tax subsidy.
As the measure arrived on the Senate floor this week, Nina E. Olson, the nation’s taxpayer advocate, wrote a long letter to lawmakers, urging them to withdraw the proposal.
“Outsourcing the collection of federal tax debts is a bad idea,” she wrote. “It disproportionately impacts low-income and other vulnerable taxpayers, and despite two attempts [in the past] at making it work, the program has lost money both times, undermining the sole rationale for its existence.”
Moreover, “if debt collectors come to be seen as the public face” of President Obama’s health-care program, Olson wrote, “I am concerned that could make the IRS’s job” of administering the new health-insurance program “more difficult.”
Schumer proposed the provision, which has bipartisan support, last month during a meeting of the Senate Finance Committee. The panel agreed to add it to the broader tax measure, which is expected to win Senate approval next week. It is unlikely to reach Obama’s desk quickly, however, because of a continuing dispute with the House over reviving the expired tax breaks.
In a statement provided to The Washington Post, Schumer defended the proposal, saying it would correct problems that arose when the IRS employed private debt collectors for about a year in the late 1990s and again during the George W. Bush administration.
Aides to Schumer noted that congressional tax analysts predict the new program would haul in a substantial bounty of delinquent taxes over the next decade — $4.8 billion — of which half would be used to cover the cost of expanding a popular tax break for research and development for startup businesses.
Of the other half, $1.2 billion would be used to hire new IRS agents and beef up enforcement. And $1.2 billion would be paid to the private debt collectors, potentially showering fresh cash on two companies based in Upstate New York: ConServe, of Fairport, and Pioneer Credit Recovery, of Arcade.
The companies are among only four private agencies the Treasury Department has approved to collect debts for federal agencies other than the IRS. The other firms are the CBE Group of Cedar Falls, Iowa, and Performant Financial Corp. of Livermore, Calif.
According to OpenSecrets.org, only Performant contributes heavily to congressional campaigns, and records show that the firm favors Republicans.
“This program would create hundreds of jobs in two of the poorest areas in New York, all while increasing federal revenues and not costing a single government job,” Schumer said. “We have crafted a plan that has the safeguards necessary to protect taxpayers, the infrastructure to make it work effectively, and the resources it needs to succeed. Both on the merits of the program itself and for jobs in New York, it makes eminent sense.”
Schumer spokesman Matt House added that the senator is open to clarifying the measure to ensure that tax debts resulting solely from the Affordable Care Act would be exempted.
Schumer has long supported the use of private debt collectors by the IRS, which maintains large stores of delinquent accounts. At the end of April, more than 5 million taxpayers had delinquent tax bills.
Although the IRS aggressively pursues those judged able to pay, Olson, an IRS employee who serves as the taxpayers’ voice in the agency and before Congress, said the agency takes a more flexible approach to those who are struggling financially. In many cases, she said, the IRS simply waits for the taxpayer to amass a refund and uses that money to bring the account current.
“Why am I paying the private collection agencies 25 percent when just for the cost of the machine running we get the money anyway?” she said.
More to the point, Olson said, private debt collection has not worked well in the past. During the most recent attempt, from 2005 to 2009, IRS information shows that private agencies collected about $98 million. But they were paid $16.5 million in commissions. And it cost the IRS an additional $86 million to administer the program, including money spent to make sure the contractors did not use sensitive IRS data to benefit their private customers, such as credit card companies.
Last week, in testimony before the House Ways and Means Committee, IRS Director John Koskinen also urged lawmakers to reject the idea, citing past experience. “We ended up losing money,” he said.
Meanwhile, Olson said her office received thousands of complaints from taxpayers bombarded with calls from private debt collectors at all hours of the day and night. She said the program was hampered by private collectors’ inability to negotiate flexible payment plans, waive penalties and make other judgments reserved for IRS agents.
“There’s this myth that there’s this pool of accounts that nobody’s doing anything about and that we would be able to get a ton of money from. And if that were true, you could make a case for private collection agencies. But it’s just not true,” Olson said.
“We are getting money from these accounts through the refunds. And there are also a larger number of accounts that are just not collectible, the taxpayer cannot afford to pay the tax.
“I think it’s just very hard for people to accept that there may be some part of our receivables that cannot be collected.”