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by Harry Rabb, C.P.A.
Special to Tropical Breeze
In her annual report to Congress, National
Taxpayer Advocate Nina Olson said that the Internal Revenue
Service's private tax debt collection program (PDC) is falling way
short of projected goals. And, according to Olson, the IRS knows
it.
In May, the IRS estimated that the program
using private collection agencies (PCAs) to pursue delinquent tax
debts would raise gross revenue of between $1.5 billion and $2.2
billion over the next 10 years. It was estimated that yearly
collections would reach a midpoint average of about $185
million.
The IRS now acknowledges that the program
won't hit these targets, Olson said in a statement. Instead of
$185 million a year in collections, the IRS estimates the private
debt collectors reported gross revenue of $31 million for Fiscal
Year 2007.
"The collection of federal tax debt is a
core governmental function," Olson wrote in her annual report. "The
PDC initiative is failing in most respects. It is not meeting
revenue projections. It is not more successful than the IRS at
finding hard-to-locate taxpayers. It is significantly less
successful than IRS employees at fully resolving taxpayer past due
accounts. Most significantly, the IRS has placed the interests of
the PDC's above the interests of taxpayers and tax
administration."
In 2004, the American Jobs Creation Act,
signed by the President in October of that year, created section
6306 of the Internal Revenue Code permitting private sector debt
collection companies to collect Federal tax debts. As a result, the
IRS established the PDC initiative, which was implemented in two
stages; the first a limited implementation in Fiscal Year 2006, the
second a full implementation in Fiscal Year 2008.
Private collectors began work in September
2006. Iowa-based CBE Group and New York-based Pioneer Credit
Recovery Inc., a unit of SLM Corp., are two firms collecting tax
debts, using letters and telephone call centers.
Since 2004, the PDC initiative has been
subject to heavy criticism. Democrats object to the program, saying
IRS workers can do the job at less expense and with greater
protection of taxpayer privacy.
Beyond financial considerations, Olson
took aim at the IRS' failure to require the private companies to
disclose training materials, scripts, letters and operational plans
relating to taxpayer contacts -- materials that the IRS itself must
disclose about its own collection operations.
"The IRS substantially undermines the
concept of a level playing field by allowing the telephone calling
scripts and related information about how PCAs deal with taxpayers
to be concealed from public view and scrutiny."
In both 2006 and 2007, Olson called on
Congress to repeal the private tax debt collection project.
President Colleen M. Kelley of the
National Treasury Employees Union, who has been leading the fight
against the use of private debt collectors, said, "The Taxpayer
Advocate's report is the most damning evidence yet of the
incredible failure of this misguided program."
The financial returns in the first year of
the program are particularly telling. According to Olson's report,
while the IRS projected that the initial stages of the program
would cost $71 million and bring in approximately $134 million, the
facts are that between October 2006 and September 2007, the work of
the private companies resulted in net collections of only $20
million.
The private companies are paid up to 24
percent of the money they collect. "If the IRS had allocated that
$71 million in start-up costs toward the use of its own employees,
the agency would have been able to bring in as much as $1.4
billion," Olson said.
In response to criticism and after
auditing the program, the IRS has revised sharply downward its
projection of gross revenue to be collected by the private
companies for Fiscal Year 2008. It now stands at between $23
million and $30 million -- far less than the agency's original
estimate of $88 million for the fiscal year.
"The initiative has failed to demonstrate
that it makes good business sense," said Olson. "As measured by the
IRS's performance, the PCA's performance is lackluster, at
best."
• • •
This information is provided as a public
service and should not be construed as individual accounting or tax
planning advice. For information on how these general principles
apply to your situation, please consult an accounting or tax
professional.
Harry Rabb is a C.P.A. and partner in
Cormier & Rabb, CPAs, Accounting, Tax and Consulting Services,
28163 U.S. Hwy. 19 N., Ste. 204, Clearwater. Call 727-796-2459.
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