The Internal Revenue Service is preparing to use private debt collectors to go after people who have not paid their taxes.
Don’t blame the IRS. Congress decided it should outsource the work, even though the agency expressed serious concerns about using private bill collectors. The tax collection provision was included in the new highway funding bill that took effect in December.
“These are taxes that are owed and not in dispute,” said Sen. Chuck Grassley, R-Iowa, a longtime supporter of hiring private companies to collect unpaid taxes. In a statement following passage of the bill he said, Congress gave the IRS “a tool to pursue these unpaid taxes while respecting taxpayer privacy and rights.”
Critics are not persuaded, noting among other things that the IRS has tried using private debt collectors twice before with limited success.
“It was an awful idea and it’s unfortunate that it passed,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a nonpartisan research and policy institute. “Tax collection is a basic function of government and should be carried out by government employees.”
Others believe the change is a big mistake for another reason: It could make it easier for scammers – posing as IRS collectors – to steal more money from more victims.
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The new law allows companies collecting a debt owed or guaranteed by the federal government to make “robocalls” or “robotexts” without getting prior permission from that person.
Senator Bob Menendez, D-N.J., is among those who considers that a big mistake. He is co-sponsoring a bill, the Help Americans Never Get Unwanted Phone calls Act (HANGUP), that would repeal the robocall and robotext provisions.
“With more and more family time being interrupted by nuisance phone calls and predatory scams, we should be strengthening consumer protections, not carving out more exceptions,” Menendez said in a statement. “Encouraging federal agencies to robocall individuals only creates confusion that scammers will inevitably exploit to rip people off.”
An open door for scammers?
Tax scams are a serious and growing problem – No. 1 on the Better Business Bureau’s list of Top Scams for 2015. A whopping 24 percent of the scam reports processed by the BBB last year dealt with imposters pretending to be either the Internal Revenue Service or the Canadian Revenue Agency. There were more complaints about tax imposter scams than the next three categories combined.
The Treasury Inspector General for Tax Administration reported in October that during a two-year period it had received more than 730,000 complaints about imposters claiming to be calling from the IRS. The inspectors office said it knew of 4,550 victims who had paid the scammers more than $23 million in that two year time period. In a news release, Inspector General J. Russell George urged taxpayers “to continue to be on high alert.”
Until now, consumer advocates and government fraud fighters had a simple and straightforward warning: The IRS does not initiate contact with taxpayers by phone. In fact, on its website the IRS still says it will “never call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.”
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Nina Olson, the National Taxpayer Advocate at the IRS, urged Congress not to pass this legislation because it could help fraudsters. In a statement released a few weeks ago, Olson wrote:
“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.”
Grassley, a former member of the Senate Finance Committee, believes private companies can help the IRS collect some of billions of dollars owed to Uncle Sam -- $380 billion as of July 2015, according to the General Accountability Office. And he is confident the collection program will be designed so that it does not confuse taxpayers.
“Before anyone would receive a call from a private debt collector, the person will have received a letter notifying them of the outstanding debt and that it has been turned over to a debt collection company,” Jill Kozeny, the senator’s chief of staff, told NBC News in an email. “Second, private debt collectors will not accept payment directly over the phone, so (they) will not request bank account or credit card numbers. All payments are required to be processed by the IRS.”
The new law requires the IRS to enter into contracts with qualified tax collectors by early March.
NBC News contacted the IRS to find out more about the new collection program. The agency emailed this statement: “The IRS is reviewing the legislation and taking steps to begin implementation of the program as soon as feasible.”
Consumer advocates concerned
Adam Levin, founder and chairman of Identity Theft 911 and author of the book "Swiped," describes the action by Congress “as nothing short of disturbing.” He, too, worries that it will make it easier for IRS imposters to con people.
“Scammers persistently and mercilessly prey upon unsuspecting, trusting and terrified consumers masquerading as representatives of the IRS or state taxing authorities, demanding that they be paid immediately (by credit card or wire) lest the taxpayer be subject to immediate arrest,” Levin said. “Now, with the full support of the U.S. government, actual debt collectors will call taxpayers identifying themselves as collecting a debt on behalf of the IRS. This will potentially expose hundreds of thousands of taxpayers to the possibility of being scammed into providing money or sensitive personal information to fraudsters.”
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Linda Sherry, director of national priorities at the advocacy group Consumer-Action noted that the IRS already had the option to use third party private firms for debt collection, but the new law makes it mandatory in cases where the statute of limitations is running out or the IRS itself hasn’t been able to collect.
“Third party debt collectors can be aggressive because they are paid by what they can recoup. They trigger more consumer complaints than other industries,” Sherry said. “We are in no way saying people shouldn’t pay their taxes, but there must be a way for individuals who cannot pay to get help from the IRS. The thought of people who might already be desperate in terms of money, with no income or assets to satisfy their debts, to be hounded by private debt collectors is disturbing.”
Tried and failed, twice
The IRS has tried to outsource tax collection twice before, in 1996-1997 and 2006-2009. “Twice the experiment has ended in failure,” Olson, the IRS’ national taxpayer advocate, pointed out in a letter to Congress in May 2014.
The Taxpayer Advocate Service of the IRS analyzed the use of collection agencies between 2006 and 2009. It concluded that Internal Revenue agents were “significantly more effective” than private collectors in all but the first six months of the program. In fact, the IRS collected about twice as much as the private firms. The report noted that the private collection agencies “had little success after working the easy cases.”
Grassley, however, believes the IRS ended the previous collection program prematurely in 2009. And he points to the report from the nonpartisan congressional Joint Committee on Taxation that estimates the use of private collectors would bring in $2.4 billion by 2025.
This is not a partisan issue. Sen. Charles Schumer, D-N.Y., proposed using private companies to collect unpaid taxes two years ago. At the time, Schumer said his bill would create jobs in New York state and increase tax collections, while correcting past mistakes.
“In the past these private companies were sort of given free rein,'' Schumer told WGRZ.com in Buffalo at the time. “This time it's much more limited. We ran the traps on this. Look, I want to create jobs, but only with a good program, and I think we've done both.''
But Marr, of the Center on Budget and Policy Priorities, said Congress itself has hampered the IRS’ ability to collect overdue taxes.
“This is wrong on so many levels,” he said. “Congress has been defunding the IRS and undermining its ability to collect tax revenue and now they claim the IRS has a problem and let’s outsource the job to private debt collectors.”
Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.