Privatizing Tax Collection

5/13/2003

Committee on Ways and Means Subcommittee on Oversight

Chairman Houghton, Ranking Member Pomeroy, and other distinguished Members of this subcommittee, my name is Colleen Kelley and I am the National President of the National Treasury Employees Union (NTEU). NTEU represents l50, 000 federal employees in 28 federal agencies and departments, including the men and women who work at the Internal Revenue Service (IRS). I appreciate you giving me the opportunity to share the views of frontline IRS employees on turning over IRS tax collection responsibilities to private debt collectors.

Let me be very clear: NTEU strongly opposes hiring private tax collection agencies on a commission basis to collect tax debt. This proposal will cost the taxpayers more money than having this work done by IRS employees, and will jeopardize the rights and privacy of thousands of taxpayers by putting millions of taxpayer files in the hands of private companies. There are also serious questions regarding the government’s liability and taxpayer remedies should such information be misused and whether the IRS has the needed technology to select appropriate cases. This scheme is costly, risky, and would lead to a gross invasion of the privacy of American taxpayers. I urge this subcommittee to reject it.

Spending Taxpayer Dollars Wisely

Even the IRS will acknowledge that if given the appropriate resources, IRS employees could collect outstanding tax debt at significantly less cost than contractors and avoid subjecting taxpayers to the unknown impact of providing their confidential tax information to private collection companies. In a report submitted to the IRS Oversight Board last September, titled “Assessment of the IRS and the Tax System,” former Commissioner Charles Rossotti made clear that with more resources to increase IRS staffing, the IRS will be able to close the compliance gap. Commissioner Rossotti stated that “the IRS is simply out-numbered when it comes to dealing with the compliance risks.”

The Rossotti report found that while workload had increased 16% the number of full time employees dropped from 115,205 in FY 1992 to 95,511 in FY 2001. A disproportionate reduction occurred in Field Compliance personnel, falling 28% from 29,730 in FY 1992 to 21,421 in FY 2002. From 1997 through 2002 the IRS has lost an additional 2,952 employees.

The Rossotti report quantified the workload gap, noting “the majority of the workload gap is in compliance.” (See attached charts.) It found that if Congress were to appropriate an additional $296 million to hire more IRS compliance employees to focus on Field and Phone Accounts Receivable, the IRS could collect an additional $9.47 billion in known tax debts per year. This would be a $31 dollar return for every dollar spent. Compare that to the Administration’s 25% commission scheme – $3.25 billion to collect $13 billion or a $3 dollar return for every dollar spent. According to the Joint Committee on Taxation, the Administration’s tax collection privatization proposal would bring in less than $1 billion over ten years. The IRS could bring in that amount in one year with just over $30 million in additional in-house enforcement resources.

Plain and simple, we can avoid putting taxpayer information in the hands of private collectors by steadily increasing compliance staffing levels at the IRS and, in the process, give the taxpayers a return on their tax dollar that is ten times better than the privatization initiative being proposed. Yes, I am a certified public accountant, but this is math my six year old nephew understands.

Privatization of Tax Collection Was Tried and It Failed

Tax collection has historically been defined as an inherently governmental function, and therefore private contractors have been prevented from bidding for this work. As a result, legislation is necessary to allow contractors to perform this inherently governmental function. Two pilot projects were authorized by Congress to test private collection of tax debt for 1996 and 1997. The 1996 pilot was so unsuccessful that the 1997 project was cancelled. Contractors violated the Fair Debt Collection Practices Act (FDCPA) and did not protect the security of sensitive taxpayer information and the IRS officials charged with oversight of the contracts were ill-informed of the law and lax in their duties, failing to cancel the contracts of those in violation even though they had the authority to do so.

An IRS Internal Audit Report (Reference No. 080805, 12/19/97) found that reviews of only a small number (18 to 40 days) of telephone records for three contractors found 294 instances of completed calls placed before 8 a.m. or after 9 p.m., the times prohibited by the act. Calls were placed as early as 4:19 a.m. (p. 15). The audit found that IRS “Collection officials were unaware that phone calls to third parties to locate debtor taxpayers were subject to the time frames of the FDCPA.” (p. 15). It found that required weekly reviews of contractor telephone reports were not being done. (p. 16). And the audit found that contractors did not adequately protect sensitive taxpayer information. “System security at some contractor sites did not meet contractual requirements or did not provide adequate protection over sensitive taxpayer data.” (p. 20)

In addition to using prohibited collection techniques and not safeguarding confidential taxpayer information, the contractors did not bring in anywhere near the dollars they projected, and millions were spent by the IRS to train the contractors and millions were not collected by IRS employees because they were training the contractors instead of doing their jobs. (See GAO/GGD-97-129R and IRS Private Debt Collection Pilot Project, Final Report, Oct. 1997)

Some supporters of private tax collection say the pilot was flawed due to the kind of cases given to the contractors. But technology to do the kind of analysis of what kind of cases might be successful, as both the GAO and the Taxpayer Advocate have said would be necessary, is not in place and, in fact, such proposals were dropped from the President’s FY ’04 budget submission.

The Inability of the IRS to Manage its Contractors

The IRS has said that it has learned from the 1996 project and can now address the problems raised. However, even very recent evidence is to the contrary. As this subcommittee is well aware, the contractor-led IRS Business System Modernization continues to have cost overruns and delivery delays. For example, A Treasury Inspector General for Tax Administration (TIGTA) report issued in September 2002 (Ref. # 2002-20-189) criticized the PRIME contractor, stating, “progress has been slower and more costly than expected. Project dates were delayed from 4 to 9 months, while cost increases ranged from nearly $700,000 to over $13 million from original estimates.”

Another example of poor IRS management of contractors came to light recently when an IRS contractor who provided bomb detection dogs and services to patrol the perimeters at the IRS Service Center in Fresno was indicted on 28 charges after he lied about the qualifications of his dogs, then faked the dogs' certifications to keep his business with the IRS and other federal agencies.

And members of this subcommittee may be familiar with the troubling case of Mellon Bank, a contractor hired by the IRS as part of its “lockbox program.” Mellon Bank lost 78,000 taxpayer checks worth more than $1.2 billion in revenues for the U.S. Treasury. In response to the Mellon Bank contracting fiasco, GAO issued a report in January 2003 on the IRS lockbox program titled, “IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed” (GAO-03-299). The report highlighted a number of deficiencies of the lockbox program that are very relevant to the proposal to privatize tax collection. Here is a sampling of some of the report’s findings:

(1)

“Oversight of lockbox banks was not fully effective for fiscal year 2002 to ensure that taxpayer data and receipts were adequately safeguarded and properly processed. The weaknesses in oversight resulted largely from key oversight functions not being performed” (p.3)

(2)

“Tax receipts and data were unnecessarily exposed to an increased risk of theft.” (p. 21)

(3)

There were “deficiencies in processing controls designed to account for or protect tax data and receipts.” (p. 27)

(4)

Contract “employees were given access to taxpayer data and receipts before bank management received results of their FBI fingerprint checks.” (p.29)

The IRS will likely testify that lessons have been learned from cleaning up after the Mellon contracting mess, and that contracts with tax collection contractors will be written in a way to protect the taxpayers. Yet even though the GAO found all of these flaws in the poor oversight and management of the lockbox contracts, GAO “found nothing inherent in the new 2002 lockbox bank contractual agreements or the prior agreements that would necessarily contribute to mishandling of taxpayer receipts”(p.12). So in other words, thousands of privacy and security provisions designed to protect the taxpayers can be written into each and every one of these contracts with private collection agencies, but the bottom line is that the IRS cannot and will not be able to ensure taxpayers are protected. The IRS simply does not have the staffing or systems in place to monitor the work of contractors.

Failure to Safeguard Confidential Taxpayer Information From Criminals

Another problem that continues to threaten taxpayer confidentiality and will pose an even greater threat under this privatization proposal is the inability of the IRS to conduct background checks on contractors. A February 2003 report from the Treasury Inspector General for Taxpayer Administration (TIGTA) found that the IRS failed to conduct background checks on its contract employees. The report found that the IRS did not perform required background checks on more than 2,100 contract employees working in IRS offices in New Carrolton, Maryland who have access to sensitive taxpayer information.

Additionally, background checks that have been conducted on IRS contract employees are incomplete at best. Employees who work for the IRS must be U.S. citizens. However, there is no such requirement that government contractors hire only U.S. citizens, even if they will be reviewing sensitive private taxpayer information. While the IRS has indicated all employees working for the tax collection contractors will undergo background checks, GAO’s January report on the lockbox program found criminal investigation controls to be inadequate. “This hiring practice may pose unnecessary risks to IRS materials because the FBI fingerprint check, which is national in scope, may have very little information to disclose if these individuals lived in this country for only a short period of time.” GAO raised concerns that lockbox contractors could hire “individuals with criminal histories which, in turn, increases the risk of theft of receipts or misuse of tax data.” How much can even the FBI learn about an individual who has only lived in the U.S. for less than two years? The arrangement for the tax collection privatization initiative is even more suspect than the lockbox initiative, especially since some of the companies bidding for the work are not even based here in the United States.

Incentives for Private Debt Collectors to Harass Taxpayers

Allowing private collection agencies to collect tax debt on a commission basis flies in the face of the tenets of the IRS Restructuring and Reform Act of 1998 (RRA 98). Section 1204 of RRA 98 specifically prevents employees or supervisors at the IRS from being evaluated on the amount of collections they bring in. Yet despite RRA 98’s clear mandate to ensure fair enforcement of the tax laws, the Administration is now proposing incentives for contractors to use aggressive collection techniques. Even if individual contract employees were not to be evaluated on the basis of their individual collection amounts, surely they will know that if they do not produce, they will not have a job. Paying a contractor out of its tax collection proceeds clearly encourages overly aggressive tax collection techniques, the exact dynamic RRA 98 sought to avoid.

Additionally, RRA 98 allows a taxpayer to recover damages from the federal government if an IRS employee is found to have inappropriately accessed or misused confidential taxpayer information. However, under H.R. 1169, such a taxpayer could only seek damages against the collection company, so if a contractor cannot pay a judgment the taxpayer is out of luck.

Poor Experience with Private Debt Collectors

The contractors will say that state and non-tax federal efforts have been wildly successful, but independent sources have a different view. On April 15, 2002, at a hearing before the House Government Reform Committee, National Taxpayer Advocate Nina Olson testified on private tax collection. She said “Few state and private creditors are subject to the significant due process protections enjoyed by Federal taxpayers in the post RRA 98 era. My own personal experience with private contractors attempting to collect State tax debt has not been positive. In my former tax practice, which included a large number of collection cases, I continually struggled with private collection employees of different skill levels and expertise. It was difficult to get a case out of the hands of the collection agency and back into the tax authority for issue resolution.” She went on further to state “Contractors resisted revising inappropriate collection terms and agreements.”

And the Department of Education’s experience with using contractors to help prevent and collect defaulted student loans has been heavily criticized. A GAO report (GAO-03-531T) dated March 12, 2003, found that “neither Congress nor the public can determine whether FSA’s (Office of Federal Student Aid) default management goals have been met.” And a Department Inspector General Report (ED-OIG/A07-B0008) issued in November 2002, focused on FSA’s Modernization Partner Agreement with its contractor. This IG report found that the performance measures to review the work of the contractor “did not provide sufficient quantifiable or qualitative information to determine if the contractor’s performance was in accordance with the terms of the contract.” The IG also criticized the Department for using inaccurate baseline information used to calculate payments to the contractor, which resulted in larger payments to the contractor than what should have been actually earned. No wonder contractors think this is a great program.

Widespread Opposition to Privatization of Tax Collection

NTEU is not alone in its opposition to this proposal. At a hearing on April 8, 2003 before this subcommittee, the Tax Executives Institute, an association of business tax professionals, testified that “using outside, for-profit contractors could impede taxpayer privacy and undermine the perception of fairness. Such concerns are even more acute if the companies are compensated on a contingency basis, which raises significant due process issues.”

At that same hearing, the National Association of Enrolled Agents, testified in opposition to the tax collection privatization initiative, stating that “the opportunities for disclosure of taxpayer information combined with the potential for aggressive collection approaches inherent in a bounty-incentive approach runs counter to the protection of taxpayer rights.”

And a representative of the Tax Section of the American Bar Association at the April 8th hearing urged caution, and pointed out that “paying vendors a percentage of collections appears to be inconsistent with the prohibition of collection statistics in the 1998 Revenue Reconciliation Act.”

IRS employees were demoralized by the 1997 Congressional hearings and have worked hard to repair the damage to their image, much of which was due to inaccurate information. However, the American public rating of the IRS is significantly higher than what it was in 1997. Now, the Administration is going to turn around and tell the IRS workforce that private collection agencies will be let loose to recover unpaid tax debt? And if the contractors are overly aggressive and it turns out to be a repeat of the 1996 pilot project disaster, it will be the IRS employees labeled again as the jack booted thugs when the contractors are long gone.

The risks of privatizing tax collection are enormous. It is a disservice to the taxpayers, and a disservice to IRS employees to pay contractors a bounty to collect taxes. Instead of rushing to privatize, the IRS should make the necessary investments today in increased agency staffing, resources, and better training, so that the compliance gap can be closed without compromising taxpayer rights. 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.

Thank you for giving me the opportunity to testify today.