Tax farmers

The IRS has decided to turn over data on individuals who owe back income taxes to collection agencies in order to collect these funds. This will only be for people who owe $25,000 or less to the IRS.

NYT Columnist Paul Krugman called this the comeback of tax farming in a column today and compared George Buxh to Louis XII. Is this really that bad an idea? The IRS has tax liens and the threat of prosecution for people who don't pay their taxes but this still doesn't always work. The later partly because the cost to bring someone to trial will be far above what is owed in back taxes. Will you really prosecute someone who owes $7,000 if the prosecution will cost ten times as much?

Collection agents, even those hired by the IRS, still have to obey the law. The abuses that were prevalent before passage of Fair Debt Collection Practices Act are mostly a thing of the past. On the other hand, if the IRS couldn't get a person to pay up, why should a collection agency be any more sucessful?

As described, the collection agencies will be calling and mailing the taxpayers. The taxpayer will still send their checks to the IRS.

I can see both sides of the argument here. TFM thinks the IRS should still do its own tax collecting. That's what we have this agency for.

Linked to- Bullwinkle Blog, Cao's Blog,

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 IRS 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 IRS 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 IRS officials acknowledge this will be much more expensive than doing it internally, they say 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 IRS could collect more than $9 billion each year and spend only $296 million -- or about 3 cents on the dollar -- to do so, Charles Rossotti, the computer systems entrepreneur who was commissioner from 1997 to 2002, told Congress four years ago.

IRS officials characterized those figures as correct but said Rossotti's proposal had been forestalled by Congress, which declined to authorize the agency 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 IRS alerted taxpayers to in April.

Brady Bennett, collections director for the IRS, 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 U.S. Treasury, not the private collection agency.

One of the three companies selected by the IRS is a law firm in Austin, Texas, where a former partner, Juan Pena, 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, Texas, 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, said it had resolved the issues raised by the Pena case in 2002 and that it believed it had acted properly in Brownsville. The mayor of Brownsville, Eddie Trevino 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 IRS are Pioneer Credit Recovery of Arcade, N.Y., a division of the SLM Corp., 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 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 Rossotti had recommended.

Taxpayer rights are at risk with privatization, Nina Olson, the IRS taxpayer advocate, warned Congress this year. "Because private collectors will operate under rules of profit maximization rather than the IRS' customer-service based policy," she warned, the private collectors may have less incentive to safeguard taxpayer rights.

Al Cleland, a retired IRS tax collector, 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," Cleland said. "A private collection agency has no incentive to tell taxpayers that, so people will pay more penalties."

Bennett of the IRS 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 IRS as a cost center, not as the government's profit center.