While the use of private collection companies to recover delinquent tax debt saw a sharp increase in 2021, they remain a very small — and particularly effective — player in the overall landscape, recouping just 2.78% of the total value assigned to them by the IRS.
This is the conclusion of a recent report from the Treasury Inspector General for Tax Administration, as part of the legally required biannual assessment of private collection agency performance.
Private collection agencies have gone in and out of use over many decades. The current program was instated in 2017 as part of the Fixing America’s Surface Transportation Act. Four private agencies were authorized by the IRS to collect tax debt otherwise considered unrecoverable. Since then the companies have been assigned more than 4 million accounts totaling $36.8 billion in delinquent taxes. TIGTA said that, in the time the most recent program has existed, these companies have collected approximately $1 billion of those debts or about 2.78%. This is despite a spike in activity in 2021, where the agencies managed to collect $441.8 million, which TIGTA said was likely due to the increasing number of cases that the agencies had in open inventory, as well as collections from payment arrangements set up in prior years continuing to pay.
TIGTA noted, in fact, that last year’s figures represent a full 43% of the total levies collected since the program’s birth. It also pointed out that half of the payment arrangements set up by the private companies wind up defaulting.
Despite these figures, the TIGTA report said that the program does bring in slightly more money than it costs. The IRS has incurred about $370 million in costs since the program began; this means the private collection agencies have generated about $720.8 million in net revenues.
Beyond the agencies themselves, TIGTA faulted the IRS’s management of the program. It noted that, in the second contract round, the IRS dropped two companies, which meant taxpayers who’d made agreements with them had to get a new agreement from the IRS itself. Further, while cases of those with very low incomes are supposed to be handled by the IRS itself, TIGTA found about 15,000 cases that had been assigned to the private agencies. It also noted that some with potential identity theft issues, as well as some receiving Social Security assistance, were also improperly assigned to the program.
TIGTA also faulted the IRS for having insufficient documentation assuring that private tax collectors have completed the appropriate background checks, as well as a lack of follow up when it comes to responding to incident reports involving them.
In its recommendations, TIGTA said the IRS should:
- Develop a solution to situations where a contract with a collection agency ends and taxpayers suddenly need a new payment plan, including reassigning inventory as well as continuing service (the IRS agreed);
- Abate any penalties and interest that accrued between when the payment arrangement was terminated and when the taxpayer enters into a new payment resolution with the IRS (the IRS disagreed, saying it has no legal authority to do so and furthermore felt it inappropriate anyway);
- Have a solution to bring accounts of low-income taxpayers out of the private collections program and back to the IRS (the IRS disagreed with the assertion they were inappropriately placed in the program);
- Ensure programming works to recall accounts of those who began receiving Social Security assistance after striking a payment plan with a private agency (the IRS agreed);
- Ensure that programming is in place to prevent taxpayers with potential identity theft indicators from being assigned to the private agencies, and recall from the PCAs the taxpayers’ accounts that receive a potential identity theft indicator after agency assignment (the IRS disagreed, saying it already has procedures in place for this);
- Improve background check documentation (the IRS agreed);
- Clarify the rules around how often a debt collector can call someone on their cell phones (the IRS agreed);
- Conduct follow up reviews for reported incidents (the IRS agreed); and,
- Develop a process to ensure that misdirected payments from the agencies are applied to the proper taxpayer account after the Form 3210 is separated from the payment (the IRS agreed).
