Taxpayers defaulted on over half of payment arrangements with private debt collectors
Private collection agencies that have contracted with the Internal Revenue Service to collect overdue tax debts have collected nearly $500 million since 2017, according to a new report, but that’s just a fraction of the over $30 billion owed.
The report, from the Treasury Inspector General for Tax Administration, found that as of May 14, 2020, the IRS has assigned over 3.28 million taxpayer accounts totaling more than $30.1 billion in delinquencies to private collectors since the inception of the program in April 2017. The private collection agencies have collected approximately $498.4 million from those accounts and established more than 130,000 payment arrangements, but taxpayers later defaulted on more than half of them.
The IRS began contracting with the debt collection agencies as a result of a 2015 law, the Fixing America’s Surface Transportation Act, which required the IRS to start using private collection agencies, or PCAs, to collect inactive tax receivables from taxpayers, despite the objections of the Obama administration. The IRS had twice before had programs involving PCAs but had closed down the programs because of complaints about taxpayer harassment by the debt collectors and because the collection agencies did not bring in the amount of revenue promised.
Nevertheless, some members of Congress pushed for revival of the program and provisions for it were inserted in the 2015 highway-funding bill. Four collection agencies are now operating as contractors under the program: CBE Group, Conserve, Performant and Pioneer. TIGTA has been performing a biannual assessment of the program since it was revived, and the latest annual report was posted on Thursday.
Last year, President Trump signed into law the Taxpayer First Act, which includes some significant changes to the administration of the IRS’s private debt collection program. They include adjustments to PCA case inventory criteria aimed at protecting some low-income taxpayers from being subject to PCA collections along with an increase in the maximum length of installment agreements that private collectors can offer taxpayers.
The report found the collection agencies continue to perform well on telephone calls in terms of quality metrics. The four agencies are averaging 99.4 percent for quality, and each PCA individually has a quality score close to 100 percent. The IRS implemented a new payment method in fiscal 2019 that it calls the Pre-Authorized Direct Debit payment option. However, TIGTA sees a risk with that program of too many PCA employees gaining access to taxpayer banking information, which increases the risk of fraud.
The report noted that in fiscal year 2019, the IRS didn’t follow the plain language of the Tax Code, allowing PCAs to take commissions on unstructured payments that aren’t associated with a qualified collection contract.
"The law for PCAs to solicit payments from taxpayers is clear on what PCAs are allowed to do, and the law does not provide for PCAs to offer taxpayers the opportunity to make unstructured payments," said the report. "During our site visits and discussions with PCA management, they acknowledged that their employees have experienced circumstances in which taxpayers cannot meet the minimums to initiate a payment arrangement but can make reduced monthly payments. Continuing to allow PCAs to accept unstructured payments without a review of a taxpayer’s financial situation increases the likelihood that these taxpayers will be put into a financial hardship situation and will eventually default."
The IRS has started to exclude taxpayer cases with Social Security Disability Insurance from PCA inventory, according to the new requirements of the Taxpayer First Act. However, the IRS said the Social Security Administration lacks the legal authority to provide Supplemental Security Income information in order for the IRS to exclude those taxpayers from PCA inventory.
“Therefore, the IRS is completely dependent on the PCAs to ensure that the accounts of taxpayers receiving Supplemental Security Income are returned to the IRS,” said the report. “Additionally, TIGTA determined that the methodology being used by the IRS to exclude low-income taxpayers at or below 200 percent of the Federal Poverty Level may not prevent all of these taxpayers from being assigned to PCAs.”
Taxpayers who are under a tax levy are supposed to be exempt from being assigned to a private collection agency. However, TIGTA identified 14,586 taxpayers who were subject to the State Income Tax Levy Program while assigned to PCA inventory. The IRS received levy proceeds from those taxpayers amounting to $6,228,806. TIGTA also identified seven taxpayers with levy payments totaling $7,419 while in active payment arrangements with PCAs.
TIGTA made seven recommendations in the report to improve program efficiency and protection of taxpayer rights. The IRS agreed with two of the seven recommendations and disagreed with five recommendations. The IRS plans to review the collection agencies’ procedures during the annual security review to make sure they’re complying with the IRS’s official policy and procedure guide and appropriate security measures to safeguard the information needed for establishing pre-authorized direct debit payments. The IRS also plans to update its policy and procedure guide and PDC Operations Guide and conduct reviews to make sure the collection agencies protect against potential disclosure of taxpayer information.
The Partnership for Tax Compliance, an industry lobbying group representing the private collection agencies, pointed to several of the successes described in the report.
"The latest TIGTA Biannual Report highlights the key successes of the IRS Private Debt Collection (PDC) Program,” said the group. “This program, under which the IRS partners with private collection agencies (PCAs), has greatly expanded the customer service capability of the IRS and provides taxpayers with customized, flexible payment plans that allow them to pay down tax debt over time.
To date, the PDC Program has supported taxpayers in their efforts to fulfill their tax obligations resulting in the direct collection of nearly half a billion dollars in tax underpayments previously thought to be uncollectible. Fifty percent of this revenue directly bolsters the U.S. Treasury, while another 25 percent has allowed the IRS to hire, train and sustain 383 new, specialized collections employees, as part of the IRS Special Compliance Personnel (SCP) Program. This PDC Program funded department of the IRS has collected $218 million in additional past due tax revenue.
In addition to highlighting the financial successes of the PDC Program, TIGTA also highlights the exemplary performance of the PCAs, with program quality and customer satisfaction scores consistently averaging 99 percent and 93 percent, respectively. Ultimately, the TIGTA report makes clear that the PDC Program is a successful one — for taxpayers, the IRS and the federal government.”
Eric Hylton, commissioner of the IRS’s Small Business/Self-Employed Division, also responded to the report and said the IRS would take steps to protect taxpayer information. “We make safeguarding sensitive information and protecting taxpayers from fraud a priority,” he wrote. “While there are safeguards in place to protect against misuse of this information, we will review the procedures for acquiring bank information as it relates to pre-authorized direct debit payments to determine whether modifications are warranted. We will also update our procedures to have the quality reviewers monitor to ensure telephone background noise cannot be heard in order to further protect taxpayer information.”