IRS Missed Debt Collection Opportunities After Private Collector Program: Report

The Internal Revenue Service did not take action on 47 percent of a sample of unpaid tax cases returned to it from a Private Debt Collection (PDC) pilot program cancelled in 2009, according to a report made public Wednesday by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA — which provides audits and investigative services to promote integrity, economy and efficiency in administering IRS laws — also said the IRS did not take action on 10 percent of the installment agreement cases returned from the PDC program or capture private debt collection program data that could help the IRS improve its own collection practices.

The report did point out that prior to the recall of PDC cases, the IRS did not have the resources to work the cases.  It also said that the IRS took appropriate action on cases returned from the PDC program in FY2007 because the 2007 recall included procedures that required IRS employees to work every case returned. However,  TIGTA said those procedures were not in place for the larger recall in 2009 and that these cases were not selected for collection action due to collection policies and inventory assignment practices.

“We did not consider a case actually worked unless it was assigned to an employee and collection actions were taken by that employee. Cases have a higher probability of collection when taxpayers are contacted,” Michael R. Phillips said in a memo.  Philips is the Deputy Inspector General for Audit at the TIGTA’s Small Business/Self Employed Division.

As a result of the inaction, the TIGTA estimates that as much as $516 million will go uncollected over the next five years from similar unassigned cases in the IRS’ inventory that would have been assigned to the PDC collection program.

“The IRS assured us all that the agency could do a better job with these tax cases than outside firms and didn’t need any help,” said Senator Charles Grassley (R-Iowa) in a statement. “It turns out that the IRS isn’t doing a better job and in many cases, isn’t doing the job at all. The IRS and Treasury Department went out of their way to stop a means of collecting tax debt that the IRS otherwise will never collect. They bowed to union pressure and terminated an alternative collection program before it had a chance to reach its full potential.”

Grassley, a former chairman of the Senate Finance Committee, is a long-time supporter of the IRS private debt collection program.

The TIGTA has recommended that the IRS evaluate its collection policies and procedures for inventory assignments that otherwise would have been assigned to the PDC Program or consider reinstituting the private debt collections program and fund all costs through the program collections – a recommendation likely to re-ignite the private debt collection debate. The report also notes that although the IRS discontinued the PDC program, it may still have authority to enter into contracts with private debt collection agencies under the Internal Revenue Code. To remove this authority, legislation would need to be passed by Congress and signed by the President.

It has been more than two years since the IRS cancelled contracts with private collection agencies in favor of keeping its delinquent tax recovery program in-house – with opponents and proponents of the PDC program speculating that the decision would end the debate about whether public or private collection employees could deliver taxpayers the most bang for their buck.

The TIGTA report comes a day after the auditing unit issued a report stating that the IRS could potentially collect additional revenue each year by reducing the time between notices it sends to delinquent taxpayers.  It also comes about a year after the Government Accountability Office said the study the IRS used to support its decision to cancel the PDC program “was not soundly designed” to support that decision.

IRS management said it agreed with TIGTA’s recommendation to evaluate its case assignment policies and adopt PDC best practices, but not with its recommendation to consider reinstating the PDC program. The IRS noted that during FY2011, it implemented an analytics system to improve balance due case selection and prioritization its new Automated Collection System (ACS) contact with delinquent taxpayers and its collection field force.  But the IRS said the TIGTA’s methodology inflates the potential future collection rate for accounts worked through the PDC program.

“It assumes future collection rates that are unsupported by actual results, and excludes potential revenue collections that may result from the IRS working these accounts in the future,” the IRS said.