Blog sponsored by Bankrupt-Law.com


By DAVID CAY JOHNSTON
If you owe back taxes to the federal government, the next call asking you to
pay may come not from an Internal Revenue Service officer, but from a
private debt collector.
Within two weeks, the I.R.S. will turn over data on 12,500 taxpayers - each
of whom owes $25,000 or less in back taxes - to three collection agencies.
Larger debtors will continue to be pursued by I.R.S. officers.
The move, an initiative of the Bush administration, represents the first
step in a broader plan to outsource the collection of smaller tax debts to
private companies over time. Although I.R.S. officials acknowledge that this
will be much more expensive than doing it internally, they say that Congress
has forced their hand by refusing to let them hire more revenue officers,
who could pull in a lot of easy-to-collect money.
The private debt collection program is expected to bring in $1.4 billion
over 10 years, with the collection agencies keeping about $330 million of
that, or 22 to 24 cents on the dollar.
By hiring more revenue officers, the I.R.S. could collect more than $9
billion each year and spend only $296 million - or about three cents on the
dollar - to do so, Charles O. Rossotti, the computer systems entrepreneur
who was commissioner from 1997 to 2002, told Congress four years ago.
I.R.S. officials on Friday characterized those figures as correct, but said
that the plan Mr. Rossotti had proposed had been forestalled by Congress,
which declined to authorize it to hire more revenue officers.
Critics of the privatization plan point not only to the higher cost but also
to what they say is a greater potential for abuse. With private companies in
the mix, they say, debtors could more easily be tricked into paying money to
scam artists using spoof Web sites or other schemes, a problem the I.R.S.
alerted taxpayers to in April. Brady R. Bennett, collections director for
the I.R.S., said that by 2008, about 350,000 past-due tax records will be
distributed among about 10 private debt-collection agencies. To guard
against fraud, he said, the agencies will contact taxpayers only by
telephone or mail - not the Internet - and will instruct them to send all
payments directly to the United States Treasury, not the private collection
agency.
One of the three companies selected by the I.R.S. is a law firm in Austin,
Tex., where a former partner, Juan Peña, admitted in 2002 that he paid
bribes to win a collection contract from the city of San Antonio. He went to
jail for the crime.
Last month the same law firm, Linebarger Goggan Blair & Sampson, was again
in the news. One of its competitors, Municipal Services Bureau, also of
Austin, sued Brownsville, Tex., charging that the city improperly gave the
Linebarger firm a collections contract that it suggested was influenced by
campaign contributions to two city commissioners.
Joe Householder, a spokesman for Linebarger, which specializes in delinquent
tax collections, said it had resolved the issues raised by the Peña case in
2002 and that it believed it had acted properly in Brownsville. The mayor of
Brownsville, Eddie Treviño Jr., said that the contract vote had been
unanimous and scoffed at the accusations of misconduct.
The two other companies that have won debt collection contracts from the
I.R.S. are Pioneer Credit Recovery of Arcade, N.Y., a division of the SLM
Corporation, and the CBE Group of Waterloo, Iowa.
The main objection so far to the privatization program is that it is more
expensive than internal collection. "I freely admit it," Mark W. Everson,
the tax commissioner, told a House of Representatives committee in March.
Privatizing government services is often promoted as a way to cut costs. But
the government would probably net $1.1 billion from private debt collectors
over 10 years, compared with the $87 billion that could be reaped if the
agency hired more revenue officers, as Mr. Rossotti had recommended.
Taxpayer rights are at risk with privatization, Nina B. Olson, the I.R.S.
taxpayer advocate, warned Congress earlier this year. "Because private
collectors will operate under rules of profit maximization rather than the
I.R.S.'s customer-service based policy," she warned, the private collectors
may have less incentive to safeguard taxpayer rights.
Al Cleland, a retired I.R.S. tax collector in Minnesota, predicted that
using private collectors would cause some debtors to owe more.
"We always told people to get current on their taxes first, so they would
not have more penalties added, and then work on paying off their back
taxes," Mr. Cleland said. "A private collection agency has no incentive to
tell taxpayers that, so people will pay more penalties."
Mr. Bennett of the I.R.S. said that such advice was correct, but that it
applied primarily to small business owners, whose cases will not be sent to
the private agencies.
Under federal budget rules, money spent to hire tax collectors is treated as
a discretionary expense, and Congress is cutting discretionary spending. In
business terms, the rules treat the I.R.S. as a cost center, not as the
government's profit center.
The private debt-collection program, however, is outside the budget rules
because, except for the start-up costs, the collectors are to be paid from
the proceeds.