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Recent articles by Jeff Schnepper: • Let Uncle Sam pay for college, 3/16/2003 • Investing strategies that can cut your taxes, 1/15/2003 • Alimony payments offer a less taxing alternative, 1/5/2003 More... |
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| Should the IRS hire private tax collectors? | |||||||||||||||
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The Internal Revenue Service wants to hire private collectors to hunt down tax cheats. Skeptics worry about invasion of privacy, high cost and overly aggressive tactics. By Jeff Schnepper Anybody remember the old song, Theyre Coming to Take Me Away, Ha-Haaa!"? Pamela J. Gardiner, the Treasury Departments inspector general for tax administration, recently announced that the IRS wants to send 2.6 million delinquent taxpayer accounts annually to private collection companies. The news sent shivers down my spine. Not only might the feds be coming after you, but now it looks like we might be getting a private army of tax bounty hunters putting you in their gun sights. Ive thought about what to do if you do get a call from Acme Tax Collections, but lets deal with two questions now. First, why? The answer, apparently, is that the government is owed some $13 billion from individuals who would pay if asked or nudged. But it cant collect the money with its current staff. So its proposing to hire private collectors to bring in the cash in. The commission: 25% of whats owed -- about $3.25 billion. Is this something new in collections? Yes and no. By law, the IRS cannot hire out its tax collections without specific Congressional approval. But the idea of privatization of tax collection, sometimes called tax farming, has been around since the time of the ancient Egyptians, and has been used by the ancient Greeks, the ancient Romans and the Italians and English in the Middle Ages. Private tax collection for real estate taxes is practiced today by most jurisdictions in the United States, and a number of states hire contractors to collect income taxes. President Bush had included a proposal for private collections in the administrations fiscal 2004 budget request for the IRS. H.R. 1169, which would implement the proposal, was introduced by House Ways and Means Oversight Subcommittee Chair Amo Houghton, R-N.Y., in March. A similar bill is pending before the Senate. While skeptics abound, no one has been able to derail the idea. According to Treasury estimates, the initiative would generate an additional $46 million in revenue in 2004, $476 million during the five-year period ending in 2008, and as much as $1 billion by the end of 2013. So, lets say Congress does give the IRS the OK to hire private collectors and you owe the IRS. What can you do to protect yourself from this potential hoard of private tax collectors at your door? I wouldnt waste time. You have two choices: Immediately file an Offer in Compromise. This is an offer to pay the IRS, but on a reduced basis. It can be based on one of these three criteria:
Just the filing of the offer stops the IRS collection process in its tracks. By law, all collection activity, including any private collectors, must cease immediately while the offer is outstanding. Alternatively, you can enter into an Installment Agreement. Thats a contract between you and the IRS for you to pay off your debt, with interest, over time. Use Form 9465 for the Installment Agreement. You can get this from the IRS Web site. This too, will stop the collection process. Fewer audits equals more tax cheating The interest in privatization is growing as a result of reductions in IRS budgets and staffing during the 1990s. The agency was limited in how ambitious it could be by a 1998 law that greatly restricted its agents activities. A major result of that decline has been soaring levels of uncollected taxes. The total is now $282 billion. Most of it is uncollectible, the IRS Oversight Board told Congress last week. Much of that money is not being collected from the wealthy and corporations. But a growing amount is owed by middle-class folks who realize the odds of getting audited are low, says Rep. Earl Pomeroy, D-N.D. "I think that as much as anything is giving fuel to this notion that 'I can cheat, no one will ever know.'" This isnt the first time our federal government has turned to private tax collectors. In 1996 and 1997, Congress let the IRS spend $13 million to test the use of private tax collectors. The collectors really didnt collect, however. They only helped the IRS locate and contact taxpayers. These collectors reminded them of their outstanding liabilities and suggested payment options. If the taxpayer agreed, he would be transferred from the private collectors to the IRS staff. The private collectors were paid a flat fee, regardless of what was actually paid to the IRS. The pilot program was discontinued because the results were meager. The IRS collected an additional $3.1 million through the private collectors, but expenses were also $3.1 million. But the situation is worse now. New IRS Commissioner Mark W. Everson told Congress recently that tax cheats are taking advantage of the fact that the IRS cannot continually pursue each taxpayer who fails to pay a tax liability. Fair enough, but what about the other side of the equation? The Houghton bill would let the private tax collectors keep up to 25% of the money they collect. How aggressive do you think theyd become with that kind of reward dangling before them? The IRS strongly insists the collectors will be prohibited from threatening or intimidating taxpayers. I must confess a bit of skepticism about this, but you never know. Worries about aggressive tactics My skepticism is shared by others. Colleen Kelly, president of the National Treasury Employees Union, says the idea is risky in terms of things going wrong -- and it would be costly. She says it could lead to a gross invasion of the privacy of American taxpayers. Admittedly, she has an ax to grind because she believes IRS employees could do the work more cheaply. But, at a recent hearing, Sen. Arlen Specter, R-Pa., said, My concern is that a private collections agency may engage in tactics that a government agency would not. And Nina Olson, the IRS Taxpayer Advocate, said, I have a level of discomfort with the concept of using private collection agencies based on my earlier professional experiences representing taxpayers in states that used them. Why cant the IRS do the job itself? Isnt the collection of taxes so inherently a government function that it shouldnt be delegated to the private sector? In addition to the constitutional issue of privacy, what about the constitutional issue prohibiting the delegation of a government function to a private agency? What about the fact that each IRS collection officer collects an average of $900,000 annually? A report by former IRS Commissioner Charles Rossotti estimated that spending $296 million to hire more IRS compliance employees to focus on accounts receivable would result in additional collections of $9.47 billion in known tax debts per year -- a return of $31 for each dollar spent. In comparison, using private agencies would cost $3.25 billion to collect $13 billion -- a return of only $3 for each dollar spent. As for the idea of private income tax collectors, why not just budget more for the IRS collection process? I agree with Rep. Pomeroy , D-N.D., that hiring contractors is an idea that, frankly, is not ready for prime time. | |||||||||||||||
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