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| The Basics | The tax man and the debt collector team up
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The IRS has found a perfect partner: the debt collection industry, filled with cowboys who lie, harass and abuse their targets. They could be coming after you.
By Liz Pulliam Weston
The federal government could pay for the entire war in Iraq -- and have more than $100 billion to spare -- if only the IRS could collect all the back taxes that are currently owed.
But the agency doesnt currently have the staff to fully pursue the debt thats considered collectible, which the IRS estimates constitutes up to $112 billion of the total $280 billion owed.
So Congress, at President Bushs urging, has given the IRS the ability to hire private debt collectors as part of the American Jobs Creation Act of 2004. The collectors will get to keep up to 25% of any tax debt they manage to reap. The program is expected to kick off in early 2006.
If all this doesnt give you the chills, then perhaps you dont know enough about the state of the debt collection industry today.
Industry rife with problems
Its a Wild West kind of world, with some law-abiding companies and a whole host of cowboys that dont care what laws are broken as long as they get their money.
And its not just deadbeats who get victimized. Collectors increasingly are targeting innocent consumers, trying to browbeat them into paying debts they dont owe. (See "Sleazy new debt-collection tactics for more details.)
The Federal Trade Commission last year received more complaints about debt collectors -- 34,543 -- than about any other industry, according to an agency report to Congress. The FTC believes those who complain are just a fraction of the total number of consumers who encounter deceptive, abusive and illegal collection practices, such as:- Calling at all hours of the day and night.
- Calling the borrower at work.
- Using obscene or abusive language.
- Threatening jail time or other actions the collector cant legally take.
- Revealing the alleged debt to third parties, including employers, parents, children, friends and neighbors.
Collecting taxes is such a fundamental function of the government. Do you really want to turn that over to (private) companies, some of which dont have the best track record? asked Chi Chi Wu, a staff attorney for the National Consumer Law Center. And if the debt collector engages in abuse, what does that do to the taxpayers trust in the government?
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The collection industry insists that there wont be abuses. The companies that get the contracts will be carefully screened and tightly controlled by the IRS, said Rozanne Andersen, general counsel for ACA International, which represents collectors.
Andersen said consumer rights may even be better protected when dealing with private collectors. Unlike the IRS, private debt collectors must abide by numerous state and federal laws regulating collections, including the Fair Debt Collection Practices Act.
The industry points to other government agencies that use private collections as an example of how well the new system could work. The Department of Education has long used private companies to help collect overdue student loan debt, and many states employ collectors for their back taxes.
Therein, however, lie the problems.
Dirty tricks and tactics
The experience in the student loan context is not the shining success many claim it to be, consumer advocate Deanne Loonin told Congress last year, but a legacy of many borrowers being harassed, deprived of their lawful rights and options, and misled.
Among other tactics, private student loan collectors have charged excessively high collection fees, coerced consumers into payment plans they couldnt afford, threatened to seize disability payments and other assets protected by law, and lied by pretending to be Department of Education employees, said Loonin, another staff attorney for the National Consumer Law Center.
Collection laws are complicated, as are the rights and remedies available to student borrowers who fall behind on their payments. A major problem is that many collectors have such high turnover that their employees are never properly trained in these intricacies.
Do you think the tax context is going to be any simpler? Wu asked. If collectors arent properly trained, they wont be able to provide the taxpayer with all their rights.
Privacy at risk
Theres another issue: privacy. The collection industrys Andersen said the IRS will reveal only limited information to debt collectors, rather than the taxpayers entire file.
But collectors arent always careful with the private information they receive. In 2004, reporters for a Columbus, Ohio, TV station WBNS discovered an unlocked dumpster full of unshredded documents containing private financial information on 449 people outside a collection agency charged with pursuing student loan and state tax debt.
The company, GC Services, claimed it had been set up by a disgruntled former employee. But the station found other employees who insisted that confidential documents were regularly discarded, rather than shredded. The station reported that the Ohio Attorney General severed GC Services contract with the state after the incident -- and that the dumpster behind the collection office is now locked.
It may not be worth it
Finally, theres efficacy -- will the risks involved be justified by the reward?
The collection industry makes the argument that getting deadbeats to pay what they owe will ease the burden on the rest of us law-abiding, taxpaying citizens.
The problem is that actually collecting this money is going to be pretty tough.
Government debts that are turned over to private collectors often arent the easiest to collect. After all, tax agencies tend to have some powerful weapons, like refund and wage garnishment, that allow them to easily pursue the lowest-hanging fruit. The debtors that are turned over to collectors are often far more elusive.
California, for example, has referred more than $2 billion in bad tax debt to private companies in the past 17 years -- of which about $50 million, or less than 3%, was actually recovered. The state paid collectors commissions of over $5.5 million, said California Franchise Tax Board spokeswoman Denise Azimi, and incurred an unknown amount of additional staffing costs to support the private collection program.
At best, the new IRS program is expected to bring $1.4 billion into the Treasurys coffers over the next decade, according to congressional estimates. Thats barely a drop in the federal tax bucket. Given the potential for abuse and violations of privacy, you have to wonder if its really worth the effort.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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