Private IRS Debt Collectors May Have Broken Federal Law
In April 2017, the IRS began using private debt collectors to pursue unpaid back taxes. But after only two months, it appears at least one of the contractors may have broken federal law to get the job done.
2015 Law Allows for Private IRS Debt Collectors
The IRS does not have the staff to collect all the tax owed each year. One estimate recently said the IRS is owed about $138 billion. To address this, The Fixing America's Surface Transportation (FAST) Act of 2015 authorized the IRS to hire private debt collection companies to pursue payments from over 140,000 tax payers owing up to $50,000 each. The law allows private IRS debt collectors "to offer the taxpayer an installment agreement providing for full payment of such amount during a period not to exceed 5 years."
After identifying four collections agencies in 2016, the IRS announced it would launch its revised debt collection program in April 2017. This is the third try to privatize collections efforts. The last two, in 1996 and 2006, were each abandoned because the costs outweighed the amount collected. There were also concerns about abuse. The newest version will allow the IRS to assign "inactive tax receivables" to one of the collections contractors if at least one third of the the statutory collections window has passed without the case being assigned to an IRS collections employee, or if after being assigned, the taxpayer has not communicated with the IRS for over a year. However, a case will not be eligible for private collection if:
- The taxpayer has requested or entered into an offer-in-compromise or installment agreement
- It is an "innocent spouse" case
- The taxpayer is a minor, dead, in a combat zone, or the victim of tax-related identity theft
- The taxpayer is under examination, litigation, criminal investigation or levy, or
- The tax debt is under appeal.
National Taxpayer Advocate Says Program Raises Concerns
National Taxpayer Advocate Nina E. Olson has expressed concerns over the new program from the beginning. In April, she issued a report to Congress warning that the program could allow private collectors to pursue cases off-limits to the IRS. As she explained, the IRS is governed by statutes and administrative rules that keep it from trying to collect money from taxpayers experiencing economic hardship. But the law assigning these collections cases to private companies doesn't include the same protections. The private companies also do not have access to the training, guidance, and additional collections tools available to IRS agents negotiating payments with U.S. taxpayers. She warned that this could result in private companies collecting on debts from economically challenged taxpayers the IRS itself would not pursue.
Senator Inquiries Reveal Poor Taxpayers Are a Target
Two months into the program, four U.S. Senators have reviewed the situation and found Olson was right. Democrats Elizabeth Warren, Jeff Merkley, Sherrod Brown, and Benjamin Cardin obtained records from the private IRS debt collectors, including the accounts assigned and the scripts used to collect on them. As of mid-May, the IRS had sent approximately 9,600 accounts to contracted debt collection companies. The data showed that 79% of all accounts eligible for private collections are taxpayers earning less than 250% of the federal poverty level. 38% earned less than $20,000 a year. Olson told Tax Notes:
"We would never touch these taxpayers. . . and yet we are sending them out to , and really getting money from them."
She believes that if the IRS applied the "potentially collectible inventory definition" to these taxpayers, their economic hardship and income would put them below the IRS expense allowances and would exclude them from collections. But the private IRS debt collectors are not applying the same definition, and at least one appears not to be telling taxpayers about it at all.
Debt Collectors' Pressure Taxpayers to Pay May Be Illegal
The scripts received from Pioneer Credit Recovery, a division of Navient Corp., direct employees to pressure taxpayers to "give us what you can." They tell employees to suggest debtors sell assets, borrow money from family, friends, and employers, take out second mortgages, and tap into their retirement accounts, all to pay off their tax debts. They also instruct debtors that "extra payments or higher payments can be accepted at any time."
These tactics are common among private consumer debt collections agencies, but not for the IRS. The government traditionally weighs what a person owes against what he or she can reasonably afford. Offers-in-compromise and installment plans are only used when they will not impose a financial hardship and will fully resolve a taxpayer's debts.
Some of Pioneer’s tactics may even exceed the legal limits set out in the statute. For example, Pioneer employees may propose a 7-year payment plan, when the law limits any installment payments to 5 years. They also fail to disclose many options available to taxpayers. The Senators believe some of the of Pioneer’s tactics may have even violated the federal Fair Debt Collection Practices Act. The data has been referred to the Federal Trade Commission for review.
Taxpayers should be very careful negotiating with anyone, the IRS or a private collections company, about past-due tax debt. There are many scams that take advantage of taxpayers’ lack of knowledge about their own tax obligations. Even legitimate efforts to collect a tax debt should be carefully reviewed with an accountant and a tax attorney to make sure your rights are protected, and you get a resolution you can afford.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years’ experience. If you have questions regarding private IRS debt collections or installment arrangements, contact Joe Viola to schedule a consultation.