Buried under a crushing workload and strapped by a small fraction of the resources they once had, the IRS is turning in a familiar direction to help chase delinquent tax payers: private debt collectors.
Last year, with little fanfare, Congress authorized the IRS to use outsourced debt collectors to track down Americans with overdue bills. This month, those who have outstanding balances with the Treasury are sure to notice, as four different agencies will be empowered to start making contact with Americans who are past due on their taxes. According to Slate, the Treasury hopes to assign up to 1,000 delinquent accounts per month to each of four different companies, and those companies will keep 25 percent of what they collect.
If this sounds familiar, you're right. The IRS has twice before used private collection agencies, without much success. I recent spoke with Adam Chodorow, Associate Dean for Strategic Planning, the Willard H. Pedrick Distinguished Research Scholar, and a Professor of Law at Arizona State University. He offered some historical perspective on the IRS' track record with private debt collectors.
"The first time the government tried this was in '96/'97, when the Republicans had taken over both branches of Congress, and it was pretty much a failure. It lasted about 12 months, and the government lost around $7 million," he said. "Fast forward to 2006 and they tried it again. The IRS handed about $1.8 billion worth of bills to these private collectors, and the collectors - over a two year period - collected only $86.2 million. That second experiment cost the government $4.5 million.
"But what's interesting is that after '06, the IRS took those accounts back," Chodorow continued. "Essentially, the debt collectors got these cases, collected the low-hanging fruit, and handed the outstanding cases back to the IRS. The IRS was then working with even older accounts, which are always harder to collect, and still they were able to work it for two years and collect $139 million: 62 percent better than the private collectors. So the evidence is pretty clear that the IRS does a better job than these collectors."
If the government is better at collecting these debts, why use private collectors? Chodorow points to a belief held by some politicians that the private sector is just more efficient and cheaper than the government.
"It's really wonderful to outsource with the idea that outside firms can do it better and cheaper, but the reality is that it makes monitoring that work very difficult. The IRS can easily monitor its employees and discipline those who violate the rules. It can also modify the rules as issues arise, so the agency can make nuanced decisions. But when using private collectors, unless you have someone with subject matter expertise and a real knowledge of the proper business practices, it's very difficult to do that, because the flow of information to the government overseers is coming from the people who are supposed to be overseen."
But the real risk, according to Chodorow, is not so much the reduced collections and administrative inefficiency, it's the increased likelihood of fraud.
"The IRS has been very active telling people you will never get called by an IRS agent, so if someone calls you, it's a fraudulent call," he said. "But now that's going to change, as these private collectors will be calling legitimately to collect a debt. So a scammer can just pretend to be a private collector and use pressure tactics to get people to pay up, something they're really good at. That's one of my grave concerns about this is it makes IRS-related fraud easier."
It's a risk that even the National Taxpayer Advocate at the IRS, Nina Olson, has flagged to Congress in an attempt to discourage the legislation. She wrote in a letter to lawmakers:
"There has been a huge spike in the number of scam callers seeking immediate 'tax payments' from unsuspecting taxpayers in the last couple of years. The IRS has responded by emphasizing it doesn't make outbound calls of that kind. As this program stands up, there is a risk calls from private debt collectors will muddy that message. There is also a risk scammers will study the dynamics of the private collection agency calls and try to mimic them to fool taxpayers. As the IRS develops the program's procedures, it will have to take steps to minimize the risk of taxpayer confusion."
For its part, the IRS has published a number of documents explaining how the process will work and giving taxpayers the basic information they need to differentiate from a real collector and a scammer. Among their tips, the IRS explains that cases that are farmed out to private collection firms will first get a notification via mail from the IRS, including the name of the collections firm and its contact information. Anyone getting a collections call seemingly out-of-the-blue is likely a fraud. Other red flags for fraudulent collections calls include anyone calling and demanding immediate payment by prepaid debit card, gift card or wire transfer.
Whether or not history will repeat itself and these collection agencies will have similar troubles remains to be seen, but it seems as though the best agency for this job may be the IRS itself. Adam Chodorow believes that it may be time to beef up their resources as it may just pay for itself.