Private tax-debt collectors clock in today

The big tax collection experiment has begun. The IRS has turned over the accounts of 12,500 delinquent taxpayers to three private bill collectors and today they officially start tracking down those folks. By the end of the year, the agency hopes to hand over another batch of names, bringing the total to 40,000 unpaid accounts that will be in the hands of the private sector instead of being followed up on by IRS employees.

As I've mentioned many times before here in the blog, I'm not alone in thinking this is not the best idea the IRS has ever come up with. Members of Congress, tax professionals and academicians join me in being skeptical. Loyola Law School professor Lauren Willis even goes so far as to characterize the IRS itself as the "biggest tax cheat" by moving forward with the project.

And we all have reason to be a bit leery. It's not like the IRS doesn't have some idea about what might happen. The agency has tried this before.

Back in 1996 and 1997, Congress earmarked $13 million for the IRS to test the use private debt collection companies. Back then, the feds considered the collection of taxes to be an inherently governmental function so only government employees were permitted to actually collect the taxes.

The private debt collection agencies "assisted" the IRS in locating and contacting taxpayers, "reminding" filers of their outstanding tax bills and "suggesting" payment options. If the taxpayer then agreed to make a payment, he or she was transferred from the private debt collection company to the IRS.

The private collectors were paid a bit differently back then, too. The companies got a flat fee for services rendered, meaning the amount of tax ultimately collected didn't really matter to them. This time, however, the bill collectors will get around 23 percent of every taxpayer dollar they bring back to Washington, D.C.

That's a great deal for the debt collectors, but not so great for Uncle Sam. IRS Commissioner Mark Everson has acknowledged to Congress that using these three firms will be almost eight times more expensive than relying on his own agency employees.

But costs, be damned. The private sector can do everything the gov'ment does only better, right? Right? We shall see. Apparently that wasn't the case the last time the IRS went this route.

The original private tax debt collection pilot program was discontinued because of disappointing results, according to Government Accountability Office reports. Back then, the IRS collected $3.1 million thanks to the debt collectors. The expenses for the program: $3.1 million. Plus, the IRS also booked "lost-opportunity costs" of $17 million because its own collection personnel were diverted from their usual collection responsibilities to work on the pilot.

Maybe the IRS has learned from that first foray. Maybe these private collection agencies will actually bring in much more unpaid tax money this time. And maybe the three firms doing the job in 2006 won't be the stereotypical abusive bill collectors, tempted to use any means possible to bring in the tax money ... and associated commissions.

I want all that to happen. But I'm not holding my breath. And I wouldn't be surprised to see Congress ax the program, either by agreeing to an IRS budget that eliminates the money for private tax debt collection or by specifically passing a bill prohibiting the practice in the future.