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The IRS and debt collectors: A bad marriage

There's only one thing worse than sitting down to pay your taxes every year -- the thought that many other people aren't paying their fair share, and they're getting away with it.

Millions of tax cheaters and deadbeats don’t pay billions of dollars they owe the government, raising the tax debt for those who pay honestly. In many cases, the cheaters get away with it because the Internal Revenue Service simply doesn't have the time to make a few phone calls and send a few letters to collect the money. And it's a lot of money. Estimates vary, but the IRS recently guessed that in 2001, taxes paid were more than $300 billion less than taxes owed.  That's enough to pay for many major federal programs.

While much of that money might be in dispute, a lot of it isn't.  In millions of cases, taxpayers concede they owe the IRS but just haven't gotten around to paying the bill.  There's about $90 billion of these "collectible" IRS IOUs lying around, just waiting for someone to send a bill.

Well, finally, someone is doing something about it.  But this is one situation where the cure may very well be worse than the disease.

Starting this year, the IRS will contract with private companies to collect wayward tax payments.  The agency will turn over the debts of 150,000 Americans to three firms and expects to gather up payments of about $100 million during the next 24 months. The program will be expanded to a dozen companies in the coming years, with $1.4 billion in extra revenue collected during the next decade, the IRS hopes.

If you are frustrated by freeloaders who raise your tax load, perhaps you might see this as a good idea. But you may come to regret that someday.

Complaints of harassment

The debt collection industry needs no introduction. It's the most complained-about industry in the country, according to the Federal Trade Commission. 

Despite very clear rules laid out by the Fair Debt Collection Practices Act, collection agencies have a reputation for calling late at night and early in the morning, for harassing and menacing consumers during those calls, for bothering relatives and for making exaggerated threats. 

Here’s an example of how mean-spirited the companies can be: According to Federal Trade Commission complaints obtained by in a 2004 Freedom of Information Act request, one debt collector took retribution against a consumer who didn’t pay a $1,000 hospital bill by breaking the bill into dozens of smaller delinquent payments of $25-$100. That way, instead of one default entry on the consumer’s credit report, there were dozens of black marks, ruining the consumer’s credit score.

And now, very soon, the federal government is set to join forces with this industry.  Tax collectors and debt collectors, a match made in heaven.

Of course, not all debt collectors engage in harassing or illegal behavior.  And not all debtors are innocent victims.  Many deserve more than a nice letter asking for them to pay up.  Part of the sentiment behind this effort -- the desire to make everyone pay their fair share -- is valid.

IRS says it will monitor collectors

IRS officials say there are several factors that make partnering with private collectors safe and productive. 

They will monitor companies involved closely.  They will require background checks on all employees. The information shared with outside firms will be limited to name, amount owed and contact information.

“We're not going to turn over cases to them and just leave them be,” said John Lipold, an IRS spokesman. “There will be significant IRS involvement and oversight throughout the entire project. And taxpayers whose accounts are assigned to these agencies will receive written notice … that it’s happening.”

Most important, private companies will not make any decisions on the amount taxpayers owe, and they won't be doing any audits.  Only the simplest cases -- situations where taxpayers don't dispute they owe taxes.   With that in mind, supporters of the plan believe hiring an outside firm to do the paperwork and split the recovery makes sense.  After all, 75 percent of something is far more than 100 percent of nothing.

That is, of course, crazy talk.

A gift to the collection industry

If the cases are so simple, the federal government can collect the money. It can hire a few more people to send out a few more bills. If the bureaucracy at the IRS can't get it right, fix that. Doing so would cost a fraction of pennies on the dollar, not the quarter on the dollar the IRS is prepared to forfeit.

As currently constituted, this plan is a huge gift by Congress to the debt collection industry. In the next 24 months, the IRS expects close to $100 million to be collected, with about $25 million of that going to the three chosen collection firms. 

Perhaps Congress was in the gifting mood because debt collectors are themselves excellent gift-givers. The industry is among the most avid political donors.  According to the publication Tax Notes, some individual collection agencies have donated well over six figures to congressional candidates, with Diversified Collection Services Inc. topping the list at $480,000.

At least once in the past, a debt collector firm has been too eager to give money to politicians to help gain government collection contracts.  In 2004, two San Antonio city councilmen admitted to taking bribes from debt collectors in exchange for votes to support bids on the city’s private contract to collect unpaid fines and fees. The bribes were paid in part by a man named Juan Pena, at the time a partner in the law firm of Heard, Linebarger, Goggan, Blair, Pena and Sampson, based in Texas. 

One of the three collection agencies that won the IRS contracts is Linebarger Goggan Blair and Sampson.  Pena is now long gone, and there is no reason to believe anyone currently at the firm engaged in illegal political contributions. The IRS has issued statements saying the firm handled the incident appropriately.

But it’s clear the debt collection industry can be a very messy business. As a nation, we need to think long and hard before we authorize our federal government to get in bed with such an industry, and even harder before we authorize them to call us and ask for tax money. 

Drive to privatize

Of course, what's behind the move, which was originally authorized in 2004 by the American Jobs Creation Act, is the current administration's slavish allegiance to the concept of privatizing all government functions.  There are places where private, profit-driven companies can do a better job performing services than government employees.  But tax collecting is a primary duty of any government, and our government shouldn't shirk that responsibility. Particularly not at the risk of millions of dollars and at the risk of citizens' rights.

There is good news.  Complaints by debt collectors who weren't selected in the first round by the IRS have put a temporary hold on the entire IRS privatization project.  That will give us all time to pause and ponder this unwise plan.  But the delay is only 100 days long, so those who are worried about a marriage between the IRS and debt collectors have one last, short window to speak up. 

As you’re signing this year’s tax return, now would be a good time to make your feelings known.