Wall Street Pit

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.