170411 MONEYBOX DebtIRSCollectors 1170x400 - The IRS Is Using Private Debt Collectors Again

The IRS Is Using Private Debt Collectors Again

And it may not end well.

Last year, Congress authorized the Internal Revenue Service to use private debt collectors to go after unpaid tax liabilities—and this month, if you are one of the unfortunate, you may have already had the pleasure first-hand. The U.S. Treasury hopes to assign up to 1,000 delinquent accounts a month to each of four different companies, which will be able to keep 25 percent of the tax bills they collect.

We’ve been here before—twice, in fact—and the government actually lost money. It is not at all clear why this time should be different. And even if the program does save the government money, as its proponents promise, turning over delinquent tax accounts to private debt collectors raises a host of issues that should give us pause.

First, there is the philosophical question of whether certain government functions are just too important to turn over to private contractors. Private business is reputed to be more efficient and effective than government. We already outsource garbage collection. Why not tax collection?

Being a tax law professor, I may be biased, but I think tax collection is different. Administering the tax system lies at the heart of the government’s duties, and hiring private collectors is different from hiring private garbage collectors. Taxes are one of the few ways people interact directly with their government. How they are collected has the potential to shape our view of the government and our obligations as citizens. Just ask the folks at United how even one bad experience can affect public perceptions.

But perhaps we now live in a world in which no government function is so essential that it cannot be outsourced. After all, we rely heavily on private firms to help collect intelligence and fight our wars. It’s hard to imagine a more central government job. Let’s set aside philosophical quibbles and focus on the practical.

Keeping tax collection in-house offers a number of advantages. The IRS has a detailed manual that clearly lays out what agents can and cannot do. The IRS can easily monitor its employees and discipline those who violate the rules. It can also modify the rules as issues arise. When considering how best to proceed against delinquent taxpayers, agents are instructed to take a variety of considerations into account, including whether pursuing a taxpayer is in the government’s best interests; the potential impact on the taxpayer’s ability to meet basic living needs; and alternatives to simply seizing property, such as compromising on the debt or initiating installment plans. Absent the profit motive, they may make more humane decisions.

Outsourcing proponents argue that private enterprise will be more efficient than government. But it is not clear that this is true. Comparing Medicare to the private insurance market reveals that private firms can be more expensive than government-run programs. Remember, private entities must build in a profit, which could easily overcome any efficiency cost savings. Indeed, aligning private and public interests is far more difficult than most people think, and private firms often earn more by being less efficient. And that doesn’t even take into account the potential corruption of public policy as private actors, feeding at the public trough, lobby the government to continue policies that serve their interests.

Turning tax collection over to private collectors also increases the likelihood for fraud. Currently, private parties pretending to be the IRS harass innocent taxpayers and pressure them into paying debts they don’t actually owe. The IRS never calls taxpayers, but most people don’t know this. With this new program, fraudsters won’t have to pretend to be the IRS—they can credibly claim to be private firms—and phone calls taxpayers receive might actually be legitimate. How are taxpayers supposed to distinguish between real and bogus calls from purported debt collectors?

The IRS argues that it will have communicated with taxpayers several times to inform them that they have debts and that they have been turned over to debt collectors. However, chances are that many of these taxpayers, in misguided but perhaps understandable efforts to avoid their problems, toss those letters without reading them. I’m not suggesting that this is a good strategy. It’s just that the move to private tax collectors will facilitate fraud, regardless of the precautions the IRS takes.

Years ago, the Democratic nominee for president, Michael Dukakis, said that he would enhance the IRS’s enforcement capabilities, only to be pilloried by his opponent, George H.W. Bush, who claimed that we would have an army of IRS agents at our doorsteps. Under the current plan, we may have an army of private debt collectors. Raise your hand if you have ever been contacted by a debt collection agency. Was it a good experience? Thought not. My wife’s old cellphone number used to belong to someone who owed some money. It took us years to convince the company that they had the wrong person. The high-pressure tactics employed by many debt collectors became so bad that Congress enacted the Fair Debt Collection Practices Act to regulate the behavior of debt collectors.

The debt collectors assure us they will comply with the law, and the IRS insists that it will monitor the debt collectors, setting up a complaint hotline for citizens who have experienced problems. Color me skeptical. The best way to monitor behavior and enhance accountability is to increase control, not cede it.

We have come to a point where audits have fallen to their lowest levels in over a decade, in large part because we have refused to fund the IRS at levels sufficient for it to carry out its mission. While these cuts have been touted as necessary in an era of tight budgets, the IRS falls into that rare category of government spending that actually raises revenues. Studies suggest that every $1 spent on enforcement yields $10 of revenue. And it is hard not to notice the distributional impact of our current policy, which reduces enforcement for larger taxpayers, while unleashing private debt collectors on the little guys.

It is sometimes fashionable to draw parallels between perceived degeneracy in the U.S. and Rome, suggesting that we are walking a Roman path to the end of our American empire. Another key factor in the Roman collapse was the abuses heaped upon the people by private tax collectors.

Let’s take another path—and start by fully funding the IRS.