Don't Mess With Taxes

A highway funding bill is finally moving through Congress.

It was stalled for months following the Senate's approval this summer of a transportation bill, but yesterday (Nov. 5) the House approved its highway measure.

The two bills must be reconciled by a conference committee. But at least there's some time to smooth out policy potholes. The Highway Trust Fund has money, thanks the latest in a series of short term funding measures, through Nov. 20.

One fiscal provision, however, won't have to be hammered out.

Both the House and Senate versions of the bill require that the Internal Revenue Service once again hire private debt collectors in some overdue tax cases.

Some House resistance: The private collection agency provision originated in the Senate. The House decided, for fiscal reasons, to include it in its version.

A group of Democratic Representatives offered an amendment to remove the collection agency language from the bill. It failed.

There's a chance, albeit tiny, the issue could come up in conference between the two chambers, but I suspect that even if it does, it won't go anywhere. There seems to be growing bipartisan support for the effort, as evidenced by Sen. Chuck Schumer's (D-N.Y.) effort, which was unsuccessful, to include the private collection agency requirement in the tax extenders package back in 2014.

So expect to see bill collectors getting another shot at bringing in overdue taxes, just like in the 1990s and from 2006-2009.

And I suspect this iteration of private tax debt collection will end like those earlier ones: not well.

Prior private tax collection problems: During the last experiment with privatizing tax debt collection, the collection system got tangled in contracting controversies.

Then it bogged down when one of the companies the IRS finally hired in 2006 got tangled in legal difficulties. The bill collection agency and Uncle Sam agreed to part ways.

Once private collectors began calling, taxpayers complained that the tax debt collectors were exhibiting their bill collecting worst tendencies. They reportedly harassed taxpayers and used overly aggressive collection tactics.

The collection coup de grace came when the private agencies' fiscal inefficiency became clear.

In 2006, then IRS Commissioner Mark Everson admitted to Congress that it would be cheaper to hire more IRS agents to do the collecting of overdue taxes, but that wasn't possible. Why? Because the federal tax agency wasn't given a big enough budget to hire more employees.

Sound familiar?

And House appropriators ultimately decided to cut off money for the private tax collectors.

Tax collection ch, ch, ch, changes: So what makes Congress believe that the private process will work this time?

Lawmakers swear they and the Internal Revenue Service have learned from the earlier bad experiences.

The transportation bill spells out who the private collection agents cannot go after:

"A tax receivable shall not be eligible for collection pursuant to a qualified tax collection contract if such receivable [is]
(1) is subject to a pending or active offer-in-compromise or installment agreement,
(2) is classified as an innocent spouse case,
(3) involves a taxpayer identified by the Secretary as being (A) deceased, (B) under the age of 18, (C) in a designated combat zone, or (D) a victim of tax-related identity theft,
(4) is currently under examination, litigation, criminal investigation, or levy, or
(5) is currently subject to a proper exercise of a right of appeal under this title."

Plus, there's the money. Although prior private collection efforts ended up costing Uncle Sam more than they raised, supporters point to new estimates that private debt collectors this time will bring in around $5 billion.

Good luck with that. I suspect this crop of privatize the government lawmakers will learn the same lessons as their predecessors. The bill collection industry has a terrible record and worse reputation when it comes to dealing with "customers," and the whole process is fiscally inefficient.

Bad tax collection history repeated: It would be better to simply give the IRS the money it needs to hire staff to do that part of the agency's job.

But the IRS is a political anathema to many on Capitol Hill and they intend to use the power of the purse strings to punish the agency and, in many cases, us taxpayers.

If I were a betting woman, I'd put my money on Congress eventually cutting off the collection agencies again. 

But first we going to have to go through this painful process once more time.

Will it be the last? Maybe. Maybe not.

As the old saying goes, those who don't learn history are doomed to repeat it.

More collector coverage: The possibility probability that private bill collectors will once again be sicced on taxpayers is big enough that it also got my attention last this week at my other tax blog.

As I mentioned over at Bankrate Taxes Blog, a Taxpayer Advocate Service analysis found that the IRS was "significantly more effective" than the private debt collectors in bringing in money, "collecting about twice as much as a percent of the dollars available for collection."

Also at Bankrate this week, I commented on the current low IRS audit rate. That's good for taxpayers, but not good for the U.S. Treasury.

You usually can find my additional tax thoughts at Bankrate on Tuesdays and Thursdays. If you miss them there and then, check here at the ol' blog for those posts' highlights and links. 

You also might find these items of interest:

• Grassley gung-ho on private tax debt collectors
• Private property tax collector troubles
• IRS and debt collectors, a partnership made in ...