I.R.S. Enlists Debt Collectors to Recover Overdue Taxes

The Internal Revenue Service is about to start using four private debt-collection companies to chase down overdue payments from hundreds of thousands of people who owe money to the federal government, a job it has handled in house for years.

Unlike I.R.S. agents, who are not usually allowed to call delinquent taxpayers by telephone, the outside debt-collection agencies will have free rein to do so. Consumer watchdogs are fearful that some of the nation’s most vulnerable taxpayers will be harassed and that criminals will take advantage of the system by phoning people and impersonating I.R.S. collectors.

Additionally, one of the four companies that the I.R.S. has hired, Pioneer Credit Recovery, a subsidiary of Navient, was effectively fired two years ago by the Education Department from its contract to collect delinquent debt for misleading borrowers about their loans at what the department called “unacceptably high rates.”

Proponents of the plan, who include Democrats and Republicans, point out that the debtors are shirking their tax obligations and that collecting from them will add to the Treasury’s coffers. The congressional Joint Committee on Taxation estimated that the new debt-collection program had the potential to gain a net $2.4 billion over the next 10 years.

“Collecting tax debt that’s due and not in dispute is a matter of fairness to the many taxpayers who pay what they owe,” said Senator Charles E. Grassley, Republican of Iowa. “It’s been clear for a long time that the I.R.S. isn’t collecting the debt that these contractors will focus on.”

Twice before, in 1996 and 2006, the I.R.S. has tried to farm out some of its collection duties. Both times, the programs were shut down and deemed failures. The most recent attempt cost millions more than it took in. It also generated thousands of complaints, including one oft-repeated horror story about an older couple who received more than 150 phone calls in less than a month.

Even so, Congress passed a law in 2015 ordering the I.R.S. to once again outsource some of its delinquent debt. The provision was buried in a $305 billion highway funding bill. The agency hired four companies — CBE Group, ConServe, Performant and Pioneer Credit Recovery — and started giving them cases this month.

The companies will work on commission, earning up to 25 percent of the delinquent debt they collect.

The I.R.S. is owed some $138 billion in severely overdue payments on 14 million accounts, according to agency data, and that huge sum drives lawmakers crazy. Enlisting the private sector’s expertise to solve the problem is an idea that comes up again and again.

High-profile lawmakers on both sides of the aisle backed the latest debt-collection plan. In addition to Mr. Grassley, Senator Chuck Schumer of New York, the Democratic leader, has been a proponent of using private collectors for years. Three of the four companies that won the latest I.R.S. contracts are based in the two senators’ states.

Mr. Schumer held a news conference in October to announce the 300 new jobs Pioneer planned to add in upstate New York as a result of the I.R.S. contract. The jobs “will help inject new life into the regional economy,” he said.

Proponents of this kind of outsourcing say that the benefits go beyond jobs. During his confirmation hearing, Steven T. Mnuchin, President Trump’s Treasury secretary, said that employing for-profit collectors to pursue money owed to the government “seems like a very obvious thing to do.”

But Nina E. Olson, whose job at the Internal Revenue Service is to be an advocate on behalf of taxpayers, strongly disagrees.

Outsourcing the collection of federal tax debt is “a bad idea,” she wrote in a letter to Congress. “It disproportionately impacts low-income and other vulnerable taxpayers, and despite two attempts at making it work, the program has lost money both times, undermining the sole rationale for its existence.”

In years past, Ms. Olson said, the outside collectors employed by the government used psychological tricks that may have coerced some debtors into payments they could not afford.

According to a study by the I.R.S.’s Taxpayer Advocate Service, which Ms. Olson runs, the last time the agency used outside collectors — from 2006 to 2009 — the companies collected a net amount of around $86 million while pursuing $1.6 billion in debt.

After the remaining debt was returned to the I.R.S. for renewed collection attempts, agents brought in another $139 million — 62 percent more than their private counterparts.

With the administrative cost of running the program factored in, the I.R.S. lost $4.4 million, an agency analysis found.

John A. Koskinen, the commissioner of the I.R.S., said the new program takes a “streamlined” approach, with significantly lower overhead than the last attempt. The plan is to turn 140,000 accounts over to the four companies this year, all with a balance of $50,000 or less.

“We will do everything we can to make sure this program is effective,” Mr. Koskinen said at a congressional hearing this month. “Because if it works, that would be fine. If it doesn’t work, I don’t want anyone saying, well, we actually sandbagged it some way or the other.”

Both the I.R.S. and the debt collectors say they will be mindful of taxpayers’ rights. Pioneer will “comply with debt collection rules and consumer protections,” the company said in a statement posted on its website. (The other three collectors did not respond to requests for comment.)

That has done little to assuage consumer advocates’ concerns about the potential for abuse. More than two dozen groups sent a letter to Mr. Koskinen last year urging the agency to adopt additional safeguards, such as excluding debtors whose incomes are less than 250 percent of the poverty level.

Ms. Olson warned that the program appeared “to place a bull’s-eye on the backs of low-income taxpayers.”

The I.R.S. does not try to collect from those who make only enough to afford basic living expenses. Some 1.8 million taxpayers have debts that the agency deems uncollectable because of economic hardship.

But there are no legal protections to keep those taxpayers out of the private collection program. Ms. Olson’s office analyzed 360,000 delinquent accounts that could be turned over for private collection; among those who filed recent tax returns, more than a third had income of less than $20,000.

“You don’t want to be going after folks like that,” said Chi Chi Wu, a lawyer with the National Consumer Law Center. “If you turn the screws on them to the point where they can’t afford their rent, that’s not good for anyone.”

In February, the I.R.S. put out its annual list of the biggest tax frauds. Phone calls from criminals posing as I.R.S. agents were the top problem. “During filing season, the I.R.S. generally sees a surge in scam phone calls that threaten police arrest, deportation, license revocation and other things,” the report said.

At the time, the commissioner, Mr. Koskinen, was quoted in a news release saying: “If you’re surprised to get a call from the I.R.S., it almost certainly isn’t the real I.R.S. We generally initially contact taxpayers by mail.” Now that private companies are authorized to call taxpayers on behalf of the agency, that advice may no longer hold.

“This is like putting out barrels of honey for scammers,” said David C. Vladeck, a professor at Georgetown Law School and the former director of the Federal Trade Commission’s consumer protection bureau.

He also is among the people alarmed by the agency’s selection of Pioneer, a unit of Navient, a debt-collection giant that the Consumer Financial Protection Bureau sued in January. The bureau accused Navient of failing at nearly every stage of the student loan collection process.

“What is the I.R.S. thinking?” Mr. Vladeck said. “There’s a very dark cloud hanging over Pioneer. The idea that the I.R.S. would engage it nonetheless to be its agent in debt collection is just stunning.”

The I.R.S. declined to comment on its selection of Pioneer, which along with CBE was one of the three outside companies the agency used in 2006.

The consumer agency’s lawsuit asserts that Pioneer misled troubled borrowers about the benefits of resuming payments on lapsed accounts. Navient is fighting the lawsuit and has denied any wrongdoing.

The I.R.S. says that delinquent taxpayers whose accounts are turned over to the private collection agencies will have already received many letters by mail from the agency, urging them to pay and warning them that the debt would be turned over to a third party for collection.

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