Home Legislative Action Congressional Testimony IRS Private Tax Collection Program

IRS Private Tax Collection Program

5/23/2007

House Committee on Ways and Means

---

Chairman Rangel, Ranking Member McCrery, and distinguished members of the committee, I would like to thank you for allowing me to provide comments on IRS’ private tax collection program. As President of the National Treasury Employees Union (NTEU), I have the honor of representing over 150,000 federal workers in 31 agencies, including the men and women at the IRS.

Mr. Chairman, NTEU strongly opposes the Administration’s private tax collection program, as authorized by Congress in 2004 in the “American Jobs Creation Act of 2004.” NTEU believes this misguided proposal is a waste of taxpayer dollars, invites overly aggressive collection techniques, jeopardizes the financial privacy of American taxpayers and may ultimately serve to undermine IRS enforcement and compliance efforts. NTEU believes the collection of taxes is an inherently governmental function that should be restricted to properly trained and proficient IRS personnel. When supported with the tools and resources they need to do their jobs, there is no one who is more reliable and who can do the work of the IRS better than IRS employees.

COST

There has been much debate over whether using contract employees is more costly than using trained and professional IRS employees. But in testimony before Congress, former IRS Commissioner Mark Everson repeatedly acknowledged that using private collection companies to collect federal taxes is more expensive than having IRS do the work itself.

"..... we could do this work as cheaply or more cheaply than the private sector. As you know, we do the President's Competitive Sourcing Initiative and we look at different things all the time, different projects, and more often than not, the Government wins because it doesn't have to make a profit. So, I believe you could do this more cheaply internally." (House Ways and Means Subcommittee on Oversight hearing on April 6, 2006)

“The nation’s chief tax collector said Wednesday that using private agencies to collect debts under a new program will cost more than hiring additional agents to do the job. . . “I admit it. I freely admit it,” Everson said. (Associated Press, March 29, 2006. Quoting Everson at a House Appropriations Subcommittee).

“I have freely acknowledged it is more costly (to use private collection agencies) than it would be were the IRS to do it.” (Senate Homeland Security and Governmental Affairs subcommittee hearing, September 26, 2006).

Supporters of the private tax collection program have frequently mentioned the importance of return on investment in the collections arena. I agree and a look at the numbers confirms once again that IRS employees can collect unpaid tax debts much more efficiently than private collectors. This fact was made clear by the Government Accountability Office (GAO) in testimony last year on the tax gap when it noted that as part of the IRS' effort to make the best use of its enforcement resources, it had developed rough measures of return on investment (ROI) in terms of tax revenue that it assesses from uncovering non-compliance. GAO noted that IRS estimated the ratio of estimated tax revenue gains to additional spending for pursuing known individual tax debts through phone calls is 13 to 1. (Senate Finance Subcommittee on Taxation and IRS Oversight hearing on July 26, 2006). But according to recent IRS figures, under even the most optimistic scenario, the ROI for the private collection companies is expected to reach just 4 to 1 in FY '08.

The high commission payments to the private contractors for work on the easiest to collect cases is unjustified and unnecessary. As you may know, under current contracts, private collection firms are eligible to retain 21% to 24% of what they collect, depending on the size of the case. Regrettably, the commission rates that contractors are being paid for their services were never put up for competition. Before the initial bid solicitations first went out, the IRS set commission rates at 21 to 24 percent of the revenue collected by contractors, denying bidders an opportunity to make offers on terms that would have resulted in the IRS getting a greater share of the collected revenue. Consequently, one of the companies that lost its bid for the contract filed a protest with GAO and noted in its bid protest that “offerors were given no credit for proposing lower fees than the 'target' percentages and fee recommended by the IRS.”

TAXPAYER FAIRNESS

In addition to being fiscally unsound, the idea of allowing private collection agencies to collect tax debt on a commission basis also flies in the face of the tenets of the IRS Restructuring and Reform Act of 1998 (RRA 98). Section 1204 of the law specifically prevents employees or supervisors at the IRS from being evaluated on the amount of collections they bring in. But now, the IRS has agreed to pay private collection agencies out of their tax collection proceeds, which will clearly encourage overly aggressive tax collection techniques, the exact dynamic the 1998 law sought to avoid. Furthermore, the IRS is turning over tax collection responsibilities to an industry that has a long record of abuse. For example, in 2006, the Federal Trade Commission (FTC) received 69,204 consumer complaints about debt collection agencies – giving debt collectors the impressive title of the FTC’s most complained-about industry (FTC Annual Report 2007: Fair Debt Collection Practices Act). Despite this track record, or maybe because of it, Congress waived all federal government liability for actions of these contractors when it authorized their use in the 2004 Jobs Act.

Mr. Chairman, the fear that allowing private collectors to collect tax debt on a commission basis would lead to contractor abuse was realized when the IRS recently confirmed that the agency had received more than five dozen taxpayer complaints against the three private collection companies, including an instance where a collector attempted to collect in a state in which it was not licensed to operate even though being licensed in all 50 states was a requirement of the bid request. A private collector also repeatedly called a taxpayer's previous address of record between 1 and 7 times a day for 27 days after establishing the taxpayer no longer resided at that location, a clear violation of the Fair Debt Collection Practices Act. It is hard to understand how these kinds of violations were allowed to occur when the IRS repeatedly told Congress and the public that it would maintain extremely close oversight of this controversial program.

TRAINING & PROFESSIONALISM

Another important area which we believe separates IRS employees from private collectors is the rigorous and comprehensive mandatory training that IRS employees receive. For example, new hires in the Automated Collection System (ACS), which the IRS itself has analogized to the use of private collectors, generally must complete an eight-week training course in a classroom setting which is complimented by three weeks of on the job training. In addition, these employees undergo mandatory annual training on topics such as confidentiality and privacy of taxpayer information, ethics awareness, taxpayer rights and computer security (ACS Basic Modules A-1Training Course 6719-102).

In contrast, it has been reported that some private collection personnel receive as little as two weeks of training before being allowed to handle taxpayer accounts. That National Taxpayer Advocate has previously cited concerns over the lack of training given to private collection employees in her recent annual report to congress noting that IRS plans to start assigning cases to the private collectors with the types of complexities that they were never intended to work on (pg. 51, National Taxpayer Advocate Annual Report to Congress).

Olson went on to say that some of these cases will require the exercise of judgment and discretion and that such authority cannot be delegated to a non-governmental employee. IRS employees on the other hand have a wide range of tools at their discretion. They are able analyze financial statement information, research assets, enter into installment agreements, make currently not collectible determinations, and can take lien and/or levy enforcement actions.

In addition, while IRS policies, procedures and training guidelines are geared towards providing quality customer service and are open to the public, the operational plans of the private collectors emphasize the importance of collection results rather than customer service and have been designated proprietary information, and thus have not been made public. This fact was highlighted recently by the National Taxpayer Advocate in her annual report to Congress in which she noted that while the IRS requires its telephone representatives to seek full payment, they cannot employ trickery or any device to manipulate taxpayers. And while "the training given to IRS ACS collection representatives includes an emphasis on fairness, accuracy, and taxpayer rights, we are concerned that the private collectors are using trickery, device, and belated Fair Debt Collection Practices Act warnings to take advantage of taxpayers.” (pg. 50)

Olson's report also cited concerns about the ability of the private collection companies to meet the needs of a diverse American taxpaying public saying that “…the three private collection agencies have taken next to no steps to address taxpayers with limited English proficiency.” (pg. 48). In contrast, the IRS is able to ensure that persons with limited English proficiency are able to understand and meet their tax responsibilities through its Multilingual Initiative (MLI). This service wide initiative provides written and oral assistance to Limited English Proficient (LEP) taxpayers in Spanish, Chinese, Vietnamese, Korean and Russian.

As noted previously, while the operational plans and calling scripts of the private collectors are not open to public scrutiny, the procedures and guidelines telling IRS employees how to serve taxpayers in administering the nation's tax laws, as contained in the Internal Revenue Manual (IRM), are open to public examination and review and in fact, are available on the IRS website.

IRS employees are trained to "assist taxpayers in resolving their balance due accounts." (IRS Manual 5.19.1.1) When an IRS employee calls a taxpayer, the employee has access to all of the taxpayer’s information and can answer questions and offer advice. For example, they can see whether a taxpayer has not filed a return and explain that the sooner the taxpayer makes arrangements to address filing and balance due issues the less penalty and interest they will owe. They can look at the taxpayer’s records and answer questions about why they owe a balance and what they can do about it. They can also tell the taxpayer that they are not having enough taxes withheld by their employer and need to address that or that if an ex-spouse is claiming a child as a dependent they will not also be able to receive an exemption. If a simple mistake, like a math error, has occurred, they can fix it. They can provide an extension of the time period for payment. They can make a determination that the taxpayer meets the currently not collectible requirements. They can determine whether the taxpayer may be eligible for an Offer in Compromise in which part of the balance due is foregone, or they can send the case on where a lien or levy can be imposed. The IRS employee’s interest is in helping the taxpayer become compliant and they have access to the information as well as the enforcement tools, both carrots and sticks, to do that.

In contrast, private collectors’ interest is to collect from a taxpayer the balance due amount they have been provided. They have no interest in whether the taxpayer owes other taxes or may not have filed required returns, nor do they have access to any other taxpayer records, so they are unable to answer any questions, provide any advice or use any enforcement tools, such as extensions, offers in compromise or liens or levies. Their only goal is collect the money and their only tool is the telephone. That may explain why concerns have been raised about the use of deceptive tactics when dealing with taxpayers "including use of the 'psychological pause' (the next person who speaks loses)" and "instructions to 'close the sale' which seem closer to boiler room techniques than efforts to bring taxpayers into compliance." (Nina Olson, House Appropriations Subcommittee on Financial Services and General Government hearing March 5, 2007)

With the proliferation of tax scams and identity theft in recent years, the simple issue of providing the taxpayer with adequate identification has apparently been a problem for the private collection companies. IRS employees are assigned identification numbers, which they must provide to the taxpayer at the beginning of the call before they can confirm any of the taxpayer’s personal information. This is critical to ensure that scam artists trying to impersonate IRS employees are unable to obtain personal or financial information for purposes of stealing confidential information or taxpayer assets.

In order to give you an idea of the extent of taxpayer protections and variety of services that IRS employees provide to a taxpayer when discussing their delinquent account, I have attached a sample calling script at the end of my testimony.

History of Failure

Mr. Chairman, as you know this is not the first time the IRS has tried to outsource the collection of federal taxes. Two pilot projects were authorized by Congress to test private collection of tax debt for 1996 and 1997. The 1996 pilot was so unsuccessful it was cancelled after 12 months, despite the fact it was authorized and scheduled to operate for two years. A subsequent review by the IRS Office of Inspector General found that contractors participating in the pilot programs regularly violated the Fair Debt Collection Practices Act, did not adequately protect the security of personal taxpayer information, and even failed to bring in a net increase in revenue. In fact, a 1997 GAO report found that private companies did not bring in anywhere near the dollars projected, and the pilot caused a $17 million net loss.

Despite IRS assurances that it has learned from its past mistakes, two recent reports indicate otherwise. A March 2007 report by the Treasury Inspector General for Tax Administration on IRS' implementation of the private tax collection program raises a number of questions about the security of taxpayer information being stored on contractors' computer systems. The report is rife with alarming examples of data security lapses, including transmitting data over an unsecured channel, storing taxpayer data on a server used for four other contractor clients and failing to load antivirus and encryption software. The report notes that "these factors, as well as other computer and physical security issues, increase the risk that Federal tax information may be inadvertently disclosed, lost, stolen, or corrupted" (TIGTA Audit # 2007-30-066). These security breaches illustrate not only the risks associated with collecting and disseminating large amounts of electronic personal information, but the risk of harm or injury to consumers from identity theft crimes.

In addition, a September 2006 examination of the IRS private collection program by the Government Accountability Office (GAO) reveals that like the 1996 pilot, the program may actually lose money by the scheduled conclusion of the program’s initial phase in December 2007. The report cited preliminary IRS data showing that the agency expects to collect as little as $56 million through the end of 2007, while initial program costs are expected to surpass $61 million. What’s more, these projected costs do not even include the 21-24 percent commission fees paid to the collection agencies directly from the taxes they collect.

Negative Effect on Tax Administration

Mr. Chairman, while the direct cost of the private tax collection program is clear, I am also worried about the potential negative effect that the private tax collection program will have on our tax administration system and taxpayer compliance. In her recent report to Congress, the National Taxpayer Advocate voiced similar concern about the unintended consequences of privatizing tax collection. Ms. Olson cited a number of “hidden costs” that private tax collection has on the tax system including reduced transparency of IRS tax collection operations, inconsistent treatment for similarly situated taxpayers, and reduced tax compliance. In addition, this concern has been voiced by members of both parties including President Reagan’s Administration which said this about such a proposal:

"The Department strongly opposes contracting out the collection of taxes because it is likely to result in considerable adverse public reaction. The public must be assured at all times that the person collecting taxes derives no personal benefits from that activity and that the integrity of the tax system will not be compromised." (Treasury Dept. Statement to House Judiciary Comm. 8/8/86)

Clearly the negative effects of contracting out tax collection to private collectors hampers the agency’s ability to improve taxpayer compliance and will only serve to undermine future efforts to close the tax gap.

Opposition Widespread and Growing

NTEU is not alone in its opposition to the IRS’ private collection program. Opposition to the program has been voiced by a growing number of members of Congress, major public interest groups, tax experts, as well as the Taxpayer Advocacy Panel, a volunteer federal advisory group—whose members are appointed by the IRS and the Treasury Department. In addition, the National Taxpayer Advocate, an independent official within the IRS recently identified the IRS private tax collection initiative as one of the most serious problems facing taxpayers and called on Congress to immediately repeal the IRS’ authority to outsource tax collection work to private debt collectors (National Taxpayer Advocate 2006 Report to Congress). In addition, dozens of newspapers across the country, including the San Francisco Chronicle, Providence Journal, Tennessean, Indianapolis Star, and Arizona Republic have editorialized against the use of private collection agencies.

We are also supported by Representatives Chris Van Hollen, Steve Rothman and Russ Carnahan who have introduced H.R. 695, the "Taxpayer Abuse and Harassment Prevention Act of 2007." This critical bipartisan legislation would repeal the IRS’s authority to enter into contracts with private sector debt collectors and ensure that tax collection is kept in the professional and accountable hands of federal employees. This bill currently has 126 bipartisan cosponsors.

Instead of rushing to privatize tax collection functions which jeopardizes taxpayer information, reduces potential revenue for the federal government and undermines efforts to close the tax gap, NTEU strongly believes the IRS should increase compliance staffing levels to ensure that the collection of taxes is restricted to properly trained and proficient IRS personnel.

NTEU Staffing Proposal

Mr. Chairman, history has shown that the IRS has the expertise to improve taxpayer compliance but lacks the necessary personnel and resources. The President’s fiscal 2008 budget proposal trumpets the increased tax collections produced by IRS’s own employees and cites the increased collections of delinquent tax debt from $34 billion in 2002 to $49 billion in 2006, an increase of 44 percent. Unfortunately, instead of providing additional resources to hire more enforcement staff, IRS personnel resources have been slashed in recent years resulting in an overall 36% decline in combined collection and examination function enforcement staff between 1996 and 2003. In addition, these staffing cuts have come at a time when the IRS workload has dramatically increased.

According to IRS’s own annual reports and data, taxpayers filed 114.6 million returns in 1995. After a steady annual climb, eleven years later, the Service saw more than 132 million returns filed. Yet, between 1995 and 2005, total numbers of IRS employees shrunk from 114,000 to 94,000. Even more alarming is that during that period, revenue officers and revenue agents – two groups critical to IRS enforcement and compliance efforts – shrunk by 32 and 23 percent respectively. Revenue officers who collect large delinquent accounts went from 8,139 to 5,462 and revenue agents who do audits fell from 16,078 to 12,355. Unfortunately, instead of reversing this trend, the IRS has continued efforts to reduce its workforce and has moved forward with downsizing in several different areas which have targeted some of the service’s most productive employees.

While moving forward with drastic reductions to its enforcement and compliance staff, the IRS has at the same time cited a lack of manpower as one of the primary justifications for outsourcing cases to private collection companies. But a recent GAO report noted that as of March 1, there were only 75 total employees among the three collection companies actually working the cases. At the same time, the report notes that the IRS had allocated 65 of its own employees to monitor the program, thus the IRS is using almost as many employees to monitor the program than are actually working the cases.(GAO-06-1065 September 2006)

NTEU believes instead of expending significant resources on monitoring outside collectors that are allowed to keep up to a quarter of what they collect, the IRS should strongly consider retraining IRS employees scheduled to be laid off to do the work that is being outsourced to private collection companies. The Taxpayer Advocate has noted that there currently ongoing reductions in force of low-graded IRS employees that are capable of being trained to do the work that is being given to private collectors. One possibility might be to look at the thousands of IRS employees that are scheduled to be laid off at a number of paper processing sites over the next several years. A number of these sites already have the infrastructure and technological capabilities to work the type of cases being turned over to the private companies. In addition, these employees have already undergone extensive background checks and have been trained on the importance of protecting the privacy of all taxpayers. Retraining these employees would allow the IRS to collect outstanding taxes more efficiently without putting taxpayers’ financial privacy at risk.

While we believe retraining IRS employees soon to lose their jobs is a sensible and fiscally sound approach to the private tax collection issue, we strongly believe the IRS must also look to address the overall staffing crisis at the service. In order to reverse this downward trend in staffing, NTEU supports a two percent annual net increase in staffing (roughly 1,885 positions per year) over a five-year period to gradually rebuild the depleted IRS workforce to pre-1998 levels. A similar idea was proposed by former IRS Commissioner Charles Rossotti in a 2002 report to the IRS Oversight Board. In the report, Rossotti quantified the workload gap in non-compliance, that is, the number of cases that should have been, but could not be acted upon because of resource limitations. Rossotti pointed out that in the area of known tax debts, assigning additional employees to collection work could bring in roughly $30 for every $1 spent. The Rossotti report recognized the importance of increased IRS staffing noting that due to the continued growth in IRS’ workload (averaging about 1.5 to 2.0 percent per year) and the large accumulated increase in work that should be done but could not be, even aggressive productivity growth could not possibly close the compliance gap. Rossotti also recognized that for this approach to work, the budget must provide for a net increase in staffing on a sustained yearly basis and not take a “one time approach.”

Although this would require a substantial financial commitment, the potential for increasing revenues, enhancing compliance and shrinking the tax gap makes it very sound budget policy. One option for funding a new staffing initiative would be to allow the IRS to hire personnel off-budget, or outside of the ordinary budget process. This is not unprecedented. In fact, Congress took exactly the same approach to funding in 1994 when Congress provided funding for the Administration’s IRS Tax Compliance Initiative which sought the addition of 5,000 compliance positions for the IRS. The initiative was expected to generate in excess of $9 billion in new revenue over five years while spending only about $2 billion during the same period. Because of the initiative’s potential to dramatically increase federal revenue, spending for the positions was not considered in calculating appropriations that must come within annual caps.

A second option for providing funding to hire additional IRS personnel outside the ordinary budget process could be to allow IRS to retain a small portion of the revenue it collects. The statute that gives the IRS the authority to use private collection companies to collect taxes allows 25 percent of collected revenue to be returned to the companies as payment, thereby circumventing the appropriations process altogether. Clearly, there is nothing magical about revenues collected by private collection companies. If those revenues can be dedicated directly to contract payments, there is no reason some small portion of other revenues collected by the IRS could not be dedicated to funding additional staff positions to strengthen enforcement.

Mr. Chairman, in order to continue to make improvements in taxpayer services while simultaneously processing a growing number of tax returns and stabilizing collections and examinations of cases, it is imperative to reverse the severe cuts in IRS staffing levels and begin providing adequate resources to meet these challenges. With the future workload expected to continue to rise, the IRS will be under a great deal of pressure to improve customer service standards while simultaneously enforcing the nation’s tax laws. NTEU believes that frontline IRS employees are the best defense against an increasing U.S. tax gap. Unfortunately, the Administration has not requested the funding necessary to close the tax gap. Congress must, therefore, act to provide IRS with the necessary staffing and a dedicated funding stream to support those additional workers.

IRS Budget

Mr. Chairman, the final issue that I would like to discuss is the Administration’s FY ’08 budget request for the IRS. As you know, the IRS budget forms the foundation for what the IRS can provide to taxpayers in terms of customer service and how the agency can best fulfill its tax enforcement mission. Without an adequate budget, the IRS cannot expect continued improvement in customer service performance ratings and will be hampered in its effort to enhance taxpayer compliance. I would like to applaud the Administration for acknowledging in its FY ‘08 Budget in Brief (page 65) that “assisting the public to understand their tax reporting and payment obligations is the cornerstone of taxpayer compliance and is vital for maintaining public confidence in the tax system.” However, I was disappointed in the Administration for failing to request a budget for FY ’08 that meets the needs of the Agency to fulfill its customer service and enforcement challenges. In fact, the President’s budget anticipates a “savings” equal to nearly 1,200 full-time equivalent positions, including 1,147 in enforcement and taxpayer service programs.

Although it’s widely recognized that additional funding for enforcement provides a great return on the investment, the Administration seems reluctant to request an adequate budget for the IRS. In addition, as noted previously, despite citing a lack of resources as the primary rationale for contracting out a number of inherently governmental activities, such as the collection of taxes, the former Commissioner of the IRS told Congress that the IRS does not need any additional funding above the President’ budget request.

NTEU believes that Congress must provide the IRS with a budget that will allow the Service to replenish the depleted workforce, particularly with respect to enforcement personnel.

Thank you again for allowing me to provide these comments on this important issue. I would be happy to answer any questions you might have.

SAMPLE IRS EMPLOYEE CALL SCRIPT

Hello, may I speak with Jack Smith?

Hi Mr. Smith, My name is Ms. Jones, I am calling from the Internal Revenue Service, my ID # is xx-xxxxx

In order to proceed with this conversation, I need to verify some information to ensure that I am speaking with the correct taxpayer and not disclosing your information to the wrong party.

May I have your Social Security Number?

May I have your complete name as it appears on your last tax return?

What is your current mailing address?

I have reached you at your home number, can you please give me your work number?

Do you have a cell phone number?

Where are you currently employed?

And finally, where do you do your banking?

I am calling to discuss your outstanding balance (or overdue tax return). Then I proceed with the conversation - asking if they know why they owe. Are they able to full pay or borrow - if they say no, I ask why.

During the remainder of the call, I will use the ACS Quick Reference Guide to resolve all aspects of a taxpayer’s account and ensure that the taxpayer receives the best possible service.

For example, I may ask:

What can I do to help you not owe again?

This is done to ensure that the taxpayer understands why he/she owes.

I also may state certain things to taxpayer as well, such as

• Explaining that an additional balance would default their Installment Agreement, and the consequences of default on the Agreement.

• If a taxpayer has not filed taxes for a certain year, I advise them that, under the law the IRS can file for them. This could result in the taxpayer incurring additional liability. I explain this to them to help the taxpayer avoid such a circumstance.

• In order to assist the taxpayer in filing returns, I can also send them their income information. In some instances the returns must be filed before an Installment Agreement can be set up.