The IRS Will Now Sic Debt Collectors on Delinquent Taxpayers

By Markets Fool.com


Image source: Getty Images.

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Outsourcing has grown increasingly popular over the past few decades, with many companies letting third parties manage their payrolls, assemble products, handle customer service, and much more. This allows companies to save money and focus on doing what they do best.

However, there are certain functions that companies should keep in house, lest they lose control over the quality of their service and the happiness of their customers. And our National Taxpayer Advocate has recently pointed out a fine example: The IRS is outsourcing delinquent tax collections, with potentially serious consequences for taxpayers.

Privatized collections

Unbeknownst to many Americans, we have a National Taxpayer Advocate, Nina Olson, who is charged with being a watchdog on taxpayers' behalf. Olson looks for ways that we're being underserved and regularly notifies Congress of problems and recommends improvements. She recently issued her mid-year report, highlighting privatized collections as a particularly worrisome new practice.

The IRS allowed private collection agencies (PCAs) to collect delinquent taxes from 2006 to 2009, when the practice was discontinued. However, legislation passed in late 2015revived private tax-collection. Congress now requiresthe IRS to hand over the pursuit of any delinquent taxes that it's not pursuing to private debt-collection agencies. That might sound reasonable enough, but it's problematic in several ways.

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Some debt collectors make harassing phone calls. Image source: Pixabay.

What's wrong with private collections

For starters, this will increase the aggressiveness of tax collection, and PCAs will go after some taxpayers who are in no position to pay. As Olson noted:

Under statutory and administrative rules, the IRS itself generally must refrain from seeking to collect money from taxpayers who are experiencing economic hardship. Yet the new law does not explicitly require, or even allow, the IRS to withhold economic hardship cases from assignment to PCAs. Thus, PCAs may end up pursuing taxpayers in financial hardship for tax debts the IRS itself could not collect.

The IRS goes after debts that it can collect, but it's willing to be flexible with delinquent taxpayers. If taxpayers are dealing with economic hardships, then the IRS can, and often does, work with them to find a viable solution, such as negotiating their debt downward or allowing them to make scheduled payments over time. It may evenremove some debts from active collection entirely.

If all debts that the IRS does not or cannot pursue are handed over to private collectors, then delinquent taxpayers who have fallen on hard times are not likely to benefit from that sort of flexibility and understanding.

This new practice is also worrisome because private debt-collection agencies don't have the best reputations. Many have been cited for egregiously aggressive and even unlawful practices, such as harassing debtors with frequent phone calls, contacting debtors' employers or neighbors, using threatening language and profanity, and falsely claiming that debtors could be arrested. There have been so many problems with private collections agencies that the Consumer Financial Protection Bureauand the Federal Trade Commission have both issued advice on dealing with them.

To combat the possibility of bad behavior on the part of private collectors, Olson is strongly recommending that the IRS "require the PCAs to disclose the portions of their operational plans, calling scripts, and training materials that affect taxpayers so the National Taxpayer Advocate, Congress and the public can evaluate whether their collection tactics are reasonable."

Image source: Pixabay.

The real problem behind it all: Congress

Part of the reason Congress is calling on the IRS to privatize tax collection is that Congress itself has left the IRS understaffed and less able to collect all taxes due.

Congress has repeatedly cut the budget of the IRS. Since 2010, the IRS budget has been slashed by an inflation-adjusted 19%. That has led to a smaller employee base and significantly less money to train staffers. This is troubling for a number of reasons, but let's start with the most pragmatic reason of all: the IRS' incredible return on investment.

Consider this mind-blowing stat from the Taxpayer Advocate Service: "In FY 2013, the IRS collected $255 for each $1 it received in appropriated funds from the federal government."

If Congress gave the IRS more money instead of less, then the IRS could afford more staffers to pursue tax delinquency and fraud, and far more money would flow into the government's coffers. This would likely make the involvement of PCAs unnecessary -- all while allowing the IRS to work with hard-up Americans who are struggling to pay their taxes.

If you don't approve of this IRS practice and the legislation that requires it, thencontact your representatives in Congress and let them know.

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Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.