updated 8/22/2006 5:28:57 PM ET 2006-08-22T21:28:57

As the Internal Revenue Service prepares to implement a new program that sends private debt collection agencies after delinquent taxpayers, critics — including several lawmakers and the employee union at the Treasury Department — are gearing up to protest it.

Opponents say that the IRS will pay private debt collectors more to do what government-paid employees could do and that the agency is not doing enough to let the public know about the new program, set to launch in early September.

“I think taxpayers will be very offended and appalled that their tax information is being handed over to” non-IRS tax agents, said National Treasury Employees Union President Colleen Kelley, adding that she has “no confidence at all” in the agency’s ability to make sure the private firms are not overstepping their bounds.

The IRS acknowledges the plan will cost more than hiring additional agents to do the same work, but it points out that Congress authorized the use of such firms back in 2004. The plan is being implemented now because the IRS has funds allocated for such a program and doesn’t believe it can get budget authorization to hire additional agents at a time when Congress is cutting government spending to help reduce the federal budget deficit. The agency also says strict security policies are in place with the new program.

“It is a sound, balanced program that respects taxpayers’ rights and taxpayer privacy,” said IRS spokesman Terry Lemons.

The agency chose three companies in March — CBE Group Inc., in Waterloo, Iowa, Linebarger Goggan Blair & Sampson LLP in Austin, Texas, and Pioneer Credit Recovery Inc., in Arcade, N.Y., — from 33 bidders. Pioneer Credit is a subsidiary of SLM Corp., commonly known as Sallie Mae. The IRS plans to expand the program to as many as 10 companies in 2008 with a goal of collecting $1.4 billion over 10 years, Lemons said.

The private agencies will get 22 to 24 percent of the tax money they collect, although Lemons said he didn’t have an estimate for how much they might collect the first year.

Taxpayers in the program first will receive a letter from the IRS that includes the name of the private company that will be contacting them about the debt. The private firm will then send another letter to begin the collection process.

“If you’re part of the program, you’re going to know it,” Lemons said.

Critics say that’s not good enough. “These companies will be paid based on the money collected, which invites inappropriate and aggressive tactics” that IRS agents had been accused of the in past, Kelly said. She added that consumers filed more complaints at the Federal Trade Commission against the debt collection industry than any other in 2005.

Employees at the three companies chosen for this program are subject to background investigations. Disclosing taxpayer information illegally is a felony, punishable with fines and imprisonment. And contractors cannot use any information gleaned during a tax collection to pursue other unpaid debts.

“We will exceed the requirements of the contract, and we expect to surpass all previous privacy standards,” said Sallie Mae spokeswoman Martha Holler.

Many states, cities and federal agencies that already use private debt collectors were met with initial resistance and negative publicity. Linebarger Goggan Blair & Sampson currently serves about 1,800 government clients and expects to collect about $1 billion for them this year. But a partner at the firm pleaded guilty to federal charges in 2004 in connection with a bribery scheme to win a collection contract in San Antonio.

Mike Vallandingham, a partner at Linebarger Goggan Blair & Sampson, admitted that was a difficult time for the firm but said the attorney acted alone, and that Linebarger Goggan Blair & Sampson withdrew from that contract voluntarily. He said the firm never considered pulling out of an IRS deal.

At least one lawmaker still hopes to prevent the program from launching. The House has approved an amendment sponsored by Rep. Steven Rothman, D-N.J., that prevents the IRS from spending $54 million to start the system. But a similar amendment would have to be approved in the Senate soon.

Tom Penaluna, president and CEO of CBE Group, said his firm has endured a three-month review of its security and privacy policies. He, too, has been surprised by the negative reaction to the program from some consumer groups and lawmakers.

“There are a lot of people not paying their taxes who should,” Penaluna said. “This is a great start to assist the IRS and U.S. government to lower the tax gap.” The three companies will help “work out the bugs” for the full implementation planned for 2008, Penaluna said.

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