Private tax collectors acting on the Internal Revenue Service’s behalf have collected tax payments from more than 5,000 poor people in the past year, payments that an in-house IRS watchdog says should have been avoided.
Nina E. Olson, head of the Office of the Taxpayer Advocate, says a private debt collections program is not doing enough to spare people struggling to pay for food and shelter from additional drains on their income. She has also urged the IRS to stop referring to the private companies cases of individuals whose incomes put them below 250 percent of the poverty line.
“These private collectors are not screening out people who are so low-income they literally cannot afford to pay their basic living expenses,” Olson said in an interview. “These accounts should not be going out to the debt collectors.”
The IRS says these low-income taxpayers probably would have been targeted by the IRS if their cases were not being turned over to the private firms. The agency also says it is required by law to turn the cases over.
The private debt collectors have also fiercely criticized Olson’s assessment of the program, calling it “absolutely false” to suggest they target the poor.
In 2017, the IRS started a program to outsource tax collection to private firms, which keep some of the payments for themselves. Congress created the initiative to help address budget shortfalls and recoup some of the $138 billion the agency was owed. The IRS turned over 304,000 cases to private firms in the past year overall and is expected to turn over as many as 800,000 more this year.
The House unanimously passed legislation in April that would forbid the IRS from turning over cases of low-income Americans to private firms. A bipartisan Senate IRS bill introduced this month does not change the rules for private debt collections, according to a spokeswoman for Senate Finance Committee Chairman Orrin G. Hatch (R-Utah).
“Chairman Hatch supports the use of innovative debt collection practices that also protect taxpayer rights,” Julia Lawless, a spokeswoman for the senator, said in an email.
The IRS does sometimes collect taxes from the poor, but if taxpayers say they cannot afford to make payments, the IRS can grant them a reprieve, tax experts say. The private debt collectors — companies such as Pioneer, CBE and Performant Recovery — also return these kinds of cases to the IRS if the taxpayers say they are unable to make payment. But because a high percentage of cases being turned over to collections agencies are of those who are poor, the program is disproportionately leading to payments from low-income Americans, Olson says.
In a statement, the private debt collectors noted that they do not receive financial information to go along with the cases, leaving it to the taxpayer to report their own inability to pay.
“The contractors do not receive any information about a taxpayer’s level of income and rely solely on voluntary participation by the taxpayer. Taxpayers who cite financial hardship are immediately referred back to the IRS and removed from the [private collection] program,” said Kristin Walter, spokeswoman for the Partnership for Tax Compliance, an advocacy group for the companies. “Olson has consistently made false and misleading claims about the IRS and its Private Debt Collection program to advance her own political agenda.”
The report from the Taxpayer Advocate, an independent organization within the IRS that represents taxpayers, says that about one-third of the dollars collected by private firms since last year came from Americans living below 250 percent of the federal poverty line, which the IRS uses to identify families facing “economic hardship.”
The tax cases of about 12,000 recipients of Social Security Disability Insurance (SSDI) were also outsourced to the private firms between October 2017 to March 2018, the report says. More than 300 people on disability have made payments, including 128 SSDI recipients in poverty who had an average annual income of $7,344, according to the report.
Default rates under the private collections program were higher, too. About 28 percent of installment agreements reached with private collectors ended up in default, compared with 16 percent of those handled traditionally by the IRS, Olson says.
The private collectors pocket up to a quarter of all the tax payments made to the government.
The IRS has dismissed criticism of its use of private debt collectors. In a written response to the watchdog, IRS officials maintained they had no choice.
“The law does not exclude taxpayers whose income is below 250 percent of the federal poverty level” from the private debt collections program, Mary Beth Murphy, an IRS official, told the watchdog agency in a letter. “The IRS does not have the legal authority to expand on or change the law.”
The IRS did not respond to a request for comment, but some tax experts agree that the agency’s hands are tied. The law says some accounts have to be outsourced to private firms if the IRS does not have the resources to pursue them, according to Andy Grewal, a law professor at the University of Iowa.
“The law is very clear,” Grewal said. “As a practical matter they have to do this.”
Olson, the taxpayer advocate, disagrees. “The IRS could exercise its discretion to exclude taxpayers whose incomes are less than 250 percent of the federal poverty level from the [private debt collectors] and focus the program on those who can afford to pay,” she said in her report.
Other tax experts agree, saying the program runs afoul of another federal law, which tells the IRS to provide “adequate means to provide for basic living expenses” when resolving taxpayers’ outstanding debts.
“The private firms appear, at least in some cases, to be ignoring this constraint,” said Matt Gardner, an analyst at the left-leaning Institute on Taxation and Economic Policy. “When they farm this out to private debt collectors, those debt collectors are not legally bound by the same standards. It’s utterly inconsistent.”