In 2017, the IRS hired and paid private tax collection agencies $20 million, but these firms only collected $6.7 million, meaning the IRS lost over $13 million in the process. Besides losing the government money, the program has arguably been a failure in countless other ways.
Expectations for the IRS Private Tax Collection Program
According to USA Today, taxpayers owe the IRS $400 billion in delinquent taxes, but the New York Times puts that number at just $138 billion. In either case, the program wasn’t expected to collect even close to these sums. The Treasury Department and the Joint Committee on Taxation estimated that the program could bring in $2.4 billion over ten years. In the program’s first year, they placed about $920 million worth of delinquent tax accounts with these agencies.
Undeterred by the fact that collectors reclaimed only 0.7 percent of the assigned amounts, the agency wants to press on. In spite of recent controversies, the IRS still claims to be comfortable with the program. Quoted in the New York Times, spokeswoman Cecilia Barreda says the agency “is committed to running a balanced program that respects taxpayer rights while collecting the taxes owed as intended under the law.” However, that doesn’t seem to be happening.
Targeting Taxpayers Who Can’t Afford to Pay
Private tax collectors collected a disproportionate amount of money from people with low incomes. In fact, 19 percent of people who made payments earn below the federal poverty line, with median incomes of only $6,386 per year. An additional 25 percent of people had median incomes of $23,096 per year. In total, 44 percent of the people who made payments to these collectors earn under 250 percent of the federal poverty level or less than $30,000 per year for an individual. Many of these people are living off Social Security benefits.
At first glance, this may not seem problematic. The IRS wants its money, and these people owe the agency money. However, pushing people to their financial limit is not healthy for the government in the long term. If you can’t afford food, shelter, and clothing because of unaffordable tax payments, you may ultimately seek more government services.
Case in point, you can see this happening in states with increased cigarette taxes. As these sales taxes take effect, states tend to see an uptick in applications for food stamps and similar programs.
If these low-income taxpayers were working directly with an IRS agent, they would likely get hardship status. That means their accounts would be declared currently not collectible (CNC). In other words, they would be shielded from collection activity until their financial situation changes.
Providing Poor Advice to Taxpayers
Of the $20 million paid to collection agencies, approximately $1 million was the commission for collectors. Individual collectors can earn up to 25 percent of the amounts they collect as a commission.
When senators looked at the script collectors used at Pioneer Credit Recovery, they found that the company told taxpayers to withdraw money from their 401ks, take out second mortgages, use credit cards, or borrow money from their bosses to pay off taxes. When these tactics failed, the collectors urged the taxpayers to turn to their friends and family for the funds.
The senators wrote that “no other...collector makes these demands” However, that assertion is suspect as these are tried-and-true collection strategies used by private tax collection agencies when collecting consumer liabilities.
On top of that, collectors are setting up taxpayers on seven-year installment plans, when their contract with the IRS instructs them not to set up arrangements lasting more than five years. Additionally, collectors are telling taxpayers to send in one-time payments, even though their agreement with the agency says to only accept full payments or installment agreements.
A History of Failure With Private Tax Collection
Ultimately, the program is not looking positive for taxpayers or the government. The IRS tried similar approaches to tax collection in 1996 and 2006. Both times the programs ended due to losing money. This program may likely go the same direction.
In fact, the year this decision was snuck into a $305 billion highway funding bill, Navient spent $2.4 million lobbying the government. As an important side note, the Consumer Financial Protection Bureau is currently suing Navient for fraudulent tactics used in collecting student loans, and it is the parent company of the aforementioned Pioneer Credit Recovery.
What to Do If Third-Party Tax Collectors Are Harassing You
If a private tax collector is harassing you about back taxes, remember you have rights. Under the FDCPA, tax collectors cannot threaten collection activity without moving forward with it. Regardless, these companies cannot garnish your wages, levy your assets, and or place a lien on your credit report. If they threaten you with any of the former actions, report them to your state Attorney General and the IRS. Note, however, that the IRS can take enforced collection actions, but usually only if owe over $10,000. The agency also has to notify you in writing first, before taking any of those actions.
When a private tax collector calls you, you don’t have to take their advice. Remember, you have the right to hang up the phone. Instead, contact the IRS directly or reach out to a licensed tax professional.