Using Private Debt Collectors as a Substitute for the IRS Is a Bad Deal

January 11, 2018

Matthew Gardner
Senior Fellow

If President Trump is indeed a deal maker, then he should dismantle Congress’s decision to rely on private debt collectors as a substitute for the Internal Revenue Service. This decision, championed for years by Sens. Charles Grassley, R-Iowa, and Chuck Schumer, D-New York, is a lousy deal for everyone–American taxpayers, the federal government–except private debt collectors.

The new Taxpayer Advocate report, released earlier this week, finds that the use of private debt collectors has cost the federal government $3 for every dollar of unpaid tax it brings in. Last year, the report finds, the IRS paid $20 million to private debt collectors, with only $6.7 million of settled tax debt to show for it.

Disturbingly, the report also finds that private companies disproportionately collect from families living below the poverty line, directly violating the guidelines Congress has set for collecting taxpayer debts. The report finds that 19 percent of those making tax payments after being contacted by private debt collectors had incomes below the poverty line, which is significantly higher than the national poverty rate.

What makes this especially galling is that the IRS itself has long abided by sensible rules requiring it to avoid collecting tax debts from low-income families when doing so would impose an immediate economic hardship. The law requires the IRS to ensure that low-income taxpayers “have an adequate means to provide for basic living expenses.” But private collectors, the NTA report notes, “have no obligation or incentive” to make any such inquiries. This means the choice to farm out tax collections is endangering “taxpayers that Congress explicitly and specifically sought to protect.”

Even if we didn’t know that private debt collectors were endangering at-risk families’ livelihood in a way that makes the government worse off, it would still be worth asking: why is a government organization that exists to collect revenue outsourcing its most fundamental task to private companies in the first place? You’d have to ask Congress, which authorized the current private-debt-collection program in 2015.

We know that directly funding the IRS is every bit as efficient as private debt collectors are inefficient: IRS appropriations routinely yield between $4 and $10 for each additional dollar of enforcement spending, and IRS audits funded by these appropriations are, in theory, targeted to wealthy tax avoiders. If Congress appears more interested in channeling enforcement dollars to private debt collectors that prey on poor Americans, the unavoidable conclusion is that congressional leaders are now fundamentally uninterested in fairly collecting tax revenues, and are especially uninterested in making sure the most well off Americans pay their fair shares.

Any organization can benefit from having an internal watchdog whose main job is to ask, ad nauseum, “why are you doing it THAT way?” In the nearly 17 years since Nina Olson took the job of National Taxpayer Advocate, she has asked this question in ways that have challenged virtually every domain of the IRS’s activity. The NTA’s new findings on private debt collection aims this question directly at our leaders in Congress: why would you under fund an agency that cost-effectively raises revenues in a way that respects taxpayer rights, while simultaneously channeling IRS funds to private agencies that are neither effective nor respectful of taxpayer rights?