IRS private debt-collection program hurts low-income Americans

Kevin McCoy | USA TODAY

Show Caption Hide Caption It's time to start getting ready to do your taxes The IRS will start processing tax returns on Jan 23rd.

The Internal Revenue Service's handling of its private debt-collection program is harming lower-income Americans who can least afford to repay tax debts, a federal watchdog warned Wednesday.

The program also may be a waste of money, based on the cost of the program and a review of the actual payments recovered.

While Congress directed the IRS to use private debt-collection firms to seek nearly $400 billion owed, the tax agency also was expected to follow an existing rule designed to ensure that taxpayers "have an adequate means to provide for basic expenses," National Taxpayer Advocate Nina Olson said in the annual report to Congress.

But the watchdog's review of tax returns filed as of late September by 4,141 taxpayers who made tax payments after their cases were assigned to private collectors found that 19% of the group had incomes below the federal poverty level. These taxpayers had a median income of $6,386, the report said.

Additionally, 25% of the group had incomes below 250% of the federal poverty level, a common low-income marker. They had a median income of $23,096, the report said.

More: That call from an unlisted number? Might be a collections rep for IRS

IRS turns to debt collectors to call about unpaid taxes

The IRS likely would have given these taxpayers hardship status and classified their debts as currently uncollectible if the tax agency had handled the accounts itself, Olson wrote. Instead, the tax agency assigned the cases to private debt-collection firms that don't conduct financial analyses before contacting the taxpayers for repayments, the report said.

"No one is making the IRS make these bad decisions," wrote Olson, who called the actions an end-run around Congressional safeguards. "The harm to these taxpayers is something IRS leadership consciously decided to do despite my personal efforts, and those of my organization, to stop it."

The report additionally suggested the private debt collections are a waste of money.

The tax agency assigned nearly $920 million of "inactive tax receivables" to private collection firms through Sept. 14. About $7 million, or less than 1% of the total tax debts assigned for collection, had been recovered as of that date, the report found in a review of IRS data.

The costs totaled approximately $20 million through Sept. 30, with roughly $1 million in commissions paid to the private debt-collection firms and the rest covering other program expenses.

"Thus, it does not appear that the (private-collection agencies) are particularly effective in collecting the debts assigned to them," Olson's report said. "In any event, the cost of the (private debt collection) program thus far exceeds the revenue it generates."

The IRS said private debt collectors return cases to the tax agency if a taxpayer said she or he was unable to make repayments now or in the near future. Although revenue from the collection program has been low, it is projected to increase over time, the IRS said.

The new criticism of private debt collection focuses on a controversial program the IRS launched at the direction of Congress in 2017, years after previous versions of private debt-collection efforts ended with limited success.

Consumer advocates have argued that scammers potentially would harm taxpayers by posing as representatives of the private-collection companies used by the IRS. Separately, the union that represents IRS employees has said those workers would do a better collection job at less cost if Congress gave the IRS sufficient personnel funding.

Then-IRS commissioner John Koskinen said in April when the collection effort launched that the tax agency would work to ensure that the four companies chosen for the job would "work responsibly and respect taxpayer rights."

While urging taxpayers to beware of potential scammers, Koskinen said the only people being contacted by the companies are taxpayers who had been contacted earlier by the IRS about overdue tax payments.

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc