Income Tax: Reviving A Bad Idea

In the highway funding bill currently under consideration, Congress is threatening to steer the Internal Revenue Service back into a familiar cul-de-sac.

The House-passed version of the bill would allow the IRS to use private collection agencies to pursue unpaid income taxes. But this is not an innovation; it is a return to a practice that was tried and previously discarded. Congress authorized the IRS to use private bill collectors back in 2004. Accounts were farmed out to collection agencies beginning in 2006, but the IRS gave up on the practice just three years later. The IRS Taxpayer Advocate later produced an analysis showing that, apart from a short-term jump as collection agencies plucked the low-hanging fruit, using collection agencies did not really generate more revenue compared to internal IRS collections. Then-IRS commissioner Douglas Shulman said, in stopping the program, “I believe this work is best done by IRS employees.”

The 2006 to 2009 run was itself a second attempt. The first, which ran less than a full year in the mid-1990s, resulted in a net loss of $17 million for the government. The second program lost less, but still lost the government money overall. The Taxpayer Advocate’s analysis concluded that “the IRS was significantly more effective than the [private collection agencies] in collecting tax liabilities in all but the first six months after case receipt, collecting about twice as much as a percent of the dollars available for collection.”

In other words, using private collection agencies is both more costly and less effective than giving the IRS the resources to do the job itself.

So why did House Republican leaders want to revive this bad idea? We can guess. Likely in part they supported the measure because they needed money to pay for the highway bill, and it is convenient to assume $5 billion can be recovered through private debt collectors, even in the face of evidence to the contrary.

But House Republicans probably supported this addition to the bill mostly because the GOP is utterly fed up with the partisan abuses of the Obama-era IRS and its stonewalling of congressional investigators looking into those abuses. The idea of boosting the agency’s budget, even for a worthwhile purpose such as collecting money that is undeniably owed to the Treasury, is just too distasteful for them to contemplate.

While their frustration with the political streak running through the Service in its current incarnation is understandable, this so-called solution is hopelessly short-sighted. Bounty hunting is incompatible with fair and efficient public administration. Whether it is states abusing unclaimed property laws, law enforcement leaning on civil asset forfeiture to fund itself, or governments treating traffic cops as revenue collectors, asking fair enforcement from people operating for their own profit is doomed to fail.

The IRS, at least in theory, is not concerned with collecting the maximum amount of tax from citizens. The Service’s job is to determine and collect the correct tax, no more and no less. Bounty hunters – in this instance, the private debt collectors – do not care about being correct. They might paraphrase an old song this way: If squeezing you is wrong, we don’t want to be right.

IRS agents also have tools at their disposal to work with taxpayers, such as negotiable payment plan schedules, as well as enforcement tools such as property liens, bank account levies and wage garnishments. These coercive tools cannot properly be put in the hands of private collectors acting without impartial supervision.

Overly aggressive tactics are not the only thing taxpayers have to worry about if the IRS decides to employ private collections agencies. Every day telephone fraudsters claiming to represent the IRS seek to scam taxpayers, and they often succeed. According to Accounting Today, some estimates place the figure paid to these scammers at over $23 million. The Service even has a hotline to report instances of this deception. IRS spokespeople have continually reminded taxpayers that the IRS initiates contact with taxpayers exclusively by mail and will never demand immediate payment over the phone.

Debt collection agencies, however, typically rely on the phone as the first method of contact. Now that the House wants to sic government-paid bounty hunters on the American populace, ordinary citizens may be left to figure out which aggressive caller is really out to satisfy a valid tax debt and which is a fraudster.

Good luck with that.

Let’s hope the Senate kills this bad idea when the highway bill goes to conference. It will not pay for much in the way of road repairs, and it is going to create all sorts of potholes of its own.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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