Privatized IRS Debt Collections Program Generates Less Than Expected Revenue and Underreported Costs

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A program authorized by Congress in 2015 to the Internal Revenue Service to outsource the collection of certain unpaid tax debts brought in only about half of the money planned, according to a new audit, while racking up costs that the agency has not correctly reported.

The private debt collection program has brought in a total of nearly $970 million through fiscal 2020, the Treasury Inspector General for Tax Administration found in a new report, resulting in net revenue for the $679 million government after companies took their 25% cut. That’s well below the Congressional Budget Office’s projection that the program would have brought in $1.9 billion at that time. The IRS assigned the companies 3.4 million cases valued at $32 billion in tax debt.

The IRS also underreported program costs by $7 million, the IG said, by not tracking the total price of background checks, printing, postage, tips and cybersecurity. These issues are ongoing, the listeners added. IRS officials disputed the charge, saying the underreporting was significantly less and it largely met its legal obligations. The IG countered that the agency was failing to give lawmakers and other stakeholders a full account of what it took to make the program work.

The privatization is the third such effort administered by the IRS since 1995, with previous iterations having been quickly rolled back due to poor management and negative returns. The IRS launched the most recent program last year after President Obama signed a law requiring it in 2015. The IG had previously found in a scathing report that private companies left taxpayers vulnerable to scams and to operating practices, that they were trusted to report complaints themselves and bring in only a small fraction of the debt they are responsible for collecting.

The program was established despite rejection from some lawmakers, good government groups and employee advocates, who warned that history has shown that privatizing tax debt collection is inefficient and targets the nation’s most vulnerable taxpayers. .

As required by law, the IRS used part of the proceeds from the privatization effort to hire 400 of its own compliance staff. These employees accounted for about half of the government’s net revenue from the program.

Although the initiative was designed to reimburse its costs, the IG found that actual expenditures far exceeded reimbursements. The IRS used about $36.5 million of its own appropriations to cover costs related to the private collection program without disclosing it.

Kristin Walter, spokeswoman for the Partnership for Tax Compliance, a group that represents private businesses in the debt collection program, said the initiative was successful.

“TIGTA and the IRS seem to have different views on how best to calculate some of the program costs, but what no one disputes is that the PDC program has helped taxpayers get back on track. and brought in over $1 billion to help fund the government,” Walter said.

The National Taxpayer Advocate has frequently criticized the program and said last year that the IRS unfairly terminated refund agreements with thousands of taxpayers after some of the contracts under the initiative expired. The agency has since worked to reinstate those plans under its new providers. The attorney’s office previously said its predictions that the program would target taxpayers struggling to meet basic expenses had come to fruition. The bureau found in 2018 that one in five taxpayers targeted by private businesses lived below the federal poverty level.

Some Democratic lawmakers have introduced legislation to again force the IRS to end the program. Sen. Ben Cardin, D-Md., said in 2018 it was unfair and a waste of money.

“Putting a target on the backs of low-income taxpayers has cost taxpayers money every time it’s been attempted,” he said. “It has to stop for good.”

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