Private collection agencies are now being assigned to collect selected delinquent accounts for the IRS. These agencies have placed some taxpayers in such stressful positions that it is hard for them to meet their living expenses.
In 2015, Congress enacted the Fixing America’s Surface Transportation Act (FAST Act), which, among other things, required the IRS to use a limited number of private collection agencies (PCAs) to collect liabilities from older, inactive accounts that have been uncollectible. The program went into effect in April 2017 in the face of strong opposition from Nina Olson, the National Taxpayer Advocate. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that protects taxpayer rights.
The IRS categorizes accounts as inactive when the IRS removes the account from their active case list because they don’t have the resources to pursue it wholeheartedly. For example, they can’t locate the taxpayer or over a year has gone by without interaction. However, “inactive” accounts are not completely dormant, and the IRS still pursues some collection activity. Once the IRS assigns a taxpayer’s account to a private collection agency, the agency will first try to get full payment. If they can’t do that, they will offer an installment agreement.
All this sounds like it makes sense, right? But taxpayers must be very careful if their delinquent tax account is assigned to a private collection agency. Read on.
What Accounts the IRS Assigns to Private Collection Agencies
Protecting taxpayers’ rights in the face of using private collection agencies has been a concern, even though the agencies are required to respect taxpayers’ legal rights including the consumer protection provisions of the Fair Collection Practices Act. They are not supposed to be assigned to cases involving taxpayers who are
- Under the age of 18
- In designated combat zones
- Victims of tax-related identity theft
- Currently under examination, litigation, criminal investigation or levy
- Subject to pending or active offers in compromise
- Classified as innocent spouse cases
- Subject to an installment agreement
- Subject to a right of appeal
- In presidentially declared disaster areas and requesting relief from collection
Taxpayers with currently not collectible status for reasons of financial hardship are not on the above list of types of accounts that are barred from private collection agencies, but the IRS has not been assigning them to one of the four private tax collection agencies. However, the accounts of many taxpayers who would qualify for CNC status if they applied have been assigned to private collection agencies. This puts some of our most vulnerable taxpayers at risk because the goals of the IRS and private collection agencies are quite different.
The Conflicting Goals of the IRS and Private Collection Agencies
The IRS has two objectives:
- Collect all taxes that are due, while at the same time
- Not collecting taxes if doing so will leave taxpayers unable to pay their basic living expenses.
For example, under (IRC § 6343(a)(1)(D)), the IRS must release a levy if it creates an economic hardship. Under (IRC § 7122(d)), when determining whether to accept an offer in compromise, the law requires the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.”
These schedules that the IRS has developed and published are the Allowable Living Expense (ALE) standards. When the IRS analyzes a taxpayer’s financial circumstances, it will not require them to make payments that would leave them with less money provided under the ALE. Instead, the IRS will generally grant them Currently Not Collectible status.
Private Tax Collection Agency Objectives
Unlike the IRS, which is concerned that taxpayers be able to meet basic living expenses, private collection agencies are paid on commission and are purely profit-driven.
Private Collection Agencies Do Not Have the Same Oversight as the IRS
The Taxpayer Advocate Service helps taxpayers who have problems with the IRS and helps resolve system-wide issues. If an IRS agent oversteps their bounds and lies to a taxpayer or commits another offense, they can be fired. However, the TAS does not have this same power over private collection agencies. Clearly, private collection agencies have more leeway than IRS personnel. The FDCPA offers some protection to taxpayers, but statistics since the PCA program started, point to abuses.
Private Tax Collectors Push Taxpayers into Payment Plans They Cannot Afford
IRS data indicates that from the beginning of the PCA program in April 2017 through March 29, 2018, 43% who entered into installment agreements with private collection agencies had incomes less than their Allowable Living Expense. 24% had incomes below the federal poverty level. The private collection agencies can keep up to 25% of what they collect, and they are determined to collect all they can with little regard for the welfare of taxpayers.
According to National Taxpayer Advocate Nina Olsen, “A large portion of uncollected tax receivables that the IRS does not pursue are likely uncollectible – or should not be collected – because they are owed by taxpayers who can’t afford to pay.”
In the fiscal year 2017, the IRS collected close to $40 billion in delinquent taxes, prioritizing cases that produced the highest return on investment. The IRS generally assigns the cases leftover to private collection agencies. “ But the reality is that most of these cases involve taxpayers whom the IRS itself would not pursue. These taxpayers are overwhelmingly low income,” says Olsen.
The National Taxpayer Advocate’s FY 2019 Objectives Report to Congress, points out that in over a year of the private collection agency program, they showed a default rate of 28% for their installment agreements versus 16% for installment agreements made by IRS personnel. In other words, the default rate is 75% higher for installment agreements taxpayers make when dealing with private collection agencies because they “feel pressured into committing to payment plans they cannot afford and cannot maintain.” But while these taxpayers are being put through the wringer, the Private Collection Agency program is costing more than it brings in.
PCA Programs Did Not Work the Last Two Times Around
Many critics predicted much of the problems associated with private tax collectors. The federal government has tried this not once but twice before. Both attempts were failures. Both attempts were halted because the programs lost money.
- The first program August 1996 through June 1997. For this program, the private collection agencies assisted the IRS with locating delinquent taxpayers, informing them of their unpaid taxes and getting commitments to pay.
- The second program was from 2006 to 2009. During this time, legislators gave private collection agencies more power. Many predicted big revenue increases that never materialized.
Notification If the IRS Assigns Your Case to a Private Collection Agency
The IRS will not assign your overdue tax account to a private collection agency without warning. You will receive written notice from the IRS, and this will be followed by a letter from the agency. The IRS hired only four private collection agencies to collect:
P.O. Box 2217
Waterloo, IA 50704
P.O. Box 307
Fairport, NY 14450-0307
P.O. Box 9045
Pleasanton CA 94566-9045
PO Box 500
Horseheads, NY 14845
Beware of Scams
Now that private collection agencies are collecting for the IRS, it is important to be more vigilant than ever to scams. The IRS did not make high-pressure calls, but the same may not necessarily be said about private collection agencies. This makes it more difficult to detect scammers. Here are some things to keep in mind.
- You will get several collection notices before you ever receive a phone call even from a private collection agency. If you get a phone call out of the blue, it’s probably a scam.
- The IRS will mail you a notice that informs you when the IRS has assigned your account over to a private collection agency.
- Neither IRS personnel nor private collection agencies will ask for payment by debit cards. They will, however, tell you how to send checks or may electronic payments to the IRS.
What to Do if You Are Being Abused by a Private Collection Agency
The good news is, if your account has been assigned to a private collection agency that is causing you problems, you can have your account transferred away from that agency by submitting a written request to them.
To report misconduct by a private collection agency, call the Treasury Inspector General for Tax Administration (TIGTA) Hotline at 1-800-366-4484 or visit http://www.tigta.gov or write to:
Treasury Inspector General for Tax Administration
Post Office Box 589
Ben Franklin Station
Washington, DC 20044-0589
For particularly egregious behavior such as threats or assaults, contact the TIGTA Office of Investigations with responsibility for your geographic area.