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Private Collection Of Federal Tax Debt: Recipe For Disaster

Private Collection Of Federal Tax Debt: Recipe For Disaster

On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, or “FAST Act.” It provides long-term funding for transportation projects over a period of ten years.  The bill also requires the Internal Revenue Service (IRS) to use private debt collection companies.  The reasoning for the use of private collection companies is the IRS has billions in old uncollected tax debt that is not being actively pursued.  The IRS has only 10 years from date of assessment (barring any applicable tolling of the statute) to collect a tax debt and after 10 years, the debt is written off.  This lost tax debt is a major potential revenue source for the Federal Government that Congress does not want to lose.  The FAST Act is not the first time the IRS has used private debt collectors for the public’s tax debt.

In 1996, the IRS implemented a two year pilot program to use private debt collectors on a flat fee basis.  That program ended up being a disaster and the IRS stopped it after only one year.  The failures were sadly predictable.  The private tax collectors consistently violated the Fair Debt Collection Practices Act, did not collect very much revenue and actually cost the IRS millions of dollars.  Go figure.

Even though the pilot program of the 1990’s was a failure, Congress passed the 2004 American Jobs Creation Act to create a new program.  Congress made some changes to the second program by giving the private collectors stricter compliance guidelines and paid them on a commission basis, instead of a flat fee.  The second program continued for nearly three years before the IRS ended it and was again a failure.  The IRS lost money and taxpayers were again illegally harassed.  Studies have shown the IRS is better at collecting tax debt, because it has developed successful comprehensive systems over the last forty years.  Tax agencies are so good and cost effective at collecting debt, other government agencies use them for their collection efforts.  For example, the California Franchise Tax Board collects debts owed to the DMV and the Department of Child Support Services.

Under the new law, the IRS is required to use private debt collection companies to collect “inactive tax receivables.”  The law says these debts are defined as any tax debt that has been removed from the active inventory for lack of resources or inability to locate the taxpayer.  Also, debts for which more than 1/3 of the applicable statute of limitations period has lapsed and no IRS employee has been assigned to collect the receivable.  Lastly, these are debts for which, a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection.  These are basically tax debts the IRS has stopped trying to collect on and are sitting on the shelf collecting dust.

The private collection companies will be given these inactive debts since they are legally collectable and do not have any collection issues.  Private collection companies will not be given debts that are subject to a pending or active Offer-in-compromise, installment agreement, or innocent spouse cases. Also excluded, are cases currently under examination, litigation, criminal investigation, or levy.  Additionally, debts that are subject to appeal, from a deceased or minor taxpayer, from a designated combat zone, or a victim of identity theft are excluded.

The biggest problem with this new collection program is the added level of fraud that will probably occur.  Over the last few years scammers have used the public’s fear of the IRS to collect millions of dollars of fake tax debt from unsuspecting taxpayers by posing as the IRS on the phone.  The IRS generally does not call taxpayers regarding delinquent tax debt and uses mailed letters instead.  However, these new private tax collectors will use telephone collection tactics.  Taxpayers may be confused as to what is a legitimate private collection company versus someone pretending to be one.

IRS employees are governed by a code of conduct and are generally courteous and professional to work with.  Will private collection companies, whose paycheck is based on getting a taxpayer’s money be just as professional and polite?  Probably not.  Congress should just give the IRS more money, so it can hire more employees to do the job it is supposed to do. Somewhat hard to believe that the one agency of the Federal government tasked with collecting money has seen its budget cut over the last couple years.

– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation.  Mr. Harrel may be reached at 209-952-4545 or

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