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Private tax debt collectors have netted more than $1 million so far, but privacy and other issues remain worrisome

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The tax collection efforts of four private debt collectors are paying off, bringing in $56.6 million in previously uncollected tax revenue in the first 14 months they've been on the job.

However, it cost the tax bill collectors $55.3 million to do that job, netting Uncle Sam only $1.3 million.

That's the word from an Internal Revenue Service report on the most-recent iteration of the private tax debt collection program.

"Contrary to critics' claims and despite its slow-roll out, the IRS private debt collection program is already demonstrating that it can more than pay for itself with revenues returned to the Treasury," said Sen. Charles Grassley (R-Iowa) in a statement accompanying his release last week of the IRS report.

"The most recent data shows revenue returned to the Treasury exceeds all associated program expenses, including 2016 and 17 set-up expenses. A program that works as it should is a rarity in the federal government," added the long-time champion of the private tax debt collection program.

Third time a charm? This latest version of private tax debt collection is the third that the IRS has been forced to use.

It was mandated as part of the 2015 transportation bill. Estimates at that time projected that private collection agency (PCA) efforts would bring in $2.38 billion in new revenue.

Critics of PCA involvement in the U.S. tax system point to the failure of previous programs.

The IRS first used PCAs in 1996 and 1997 as part of Congressionally-authorized pilot projects. The 1996 test collection was cancelled after a year when it was discovered that contractors regularly violated the Fair Debt Collection Practices Act. The effort ended up costing the Treasury $17 million.

When a second such collection attempt a decade later was halted, the U.S. government reported that the program had resulted not in new revenue, but a loss of almost $4.5 million.

Some success so far: This latest attempt to get money from delinquent tax accounts deemed uncollectable by the IRS began in April 2017.

This time, four private debt collection agencies — CBE Group of Cedar Falls, Iowa; Conserve of Fairport, New York; Performant Recovery of Livermore, California; and Pioneer Credit Recovery of Horseheads, New York — have been sharing the collection duties.

And they seem to be having some success in collecting at least something from the accounts passed along to them by the IRS.

The IRS report reveals that each collection agency received in 2017 around 32,000 overdue accounts and more than 93,000 each in such unpaid tax accounts in 2018.

In fiscal 2017, the four companies convinced 3,327 taxpayers who owed $18.9 million to set up installment payment agreements with the IRS. Through mid-June of this year, the companies report that 14,572 individuals in tax debt totaling $95.2 million have established such payment plans.

CBE Group leads its collection colleagues in the amount of installment agreements entered (6,702) and total dollars collected ($43.6 million). However, Performant has generated the highest dollar commitment — an average of almost $7,000 — per installment agreement, slightly more than CBE's average of $6,500 per agreement.

Worried about lower-income taxpayers: While the latest number are encouraging, some issues remain.

A key concern is they types of taxpayers that private debt collectors can contact.

The law excepts some tax accounts from PCA assignment, including debts already being paid by installment agreements, debts that are under litigation and instances where the taxpayer is deceased or under 18 years old or where a spouse is seeking relief from a tax position taken by his/her husband/wife.

However, the National Taxpayer Advocate says the private collectors are going after lower-income individuals whose tax debts typically would receive additional consideration if they were being handled by IRS collection agents.

Taxpayer security at risk: A recent Treasury Inspector General for Tax Administration (TIGTA) report also found that the collection agencies going after old tax bills have some security vulnerabilities.

The TIGTA report examined security at the four IRS-hired collection agencies and found that the companies have established secure methods for collecting and maintaining taxpayer data.

However, TIGTA also discovered that the IRS was unaware that one private collector couldn't provide monthly vulnerability scans of systems containing taxpayer data. In addition, notes the report, three of the four collection agencies were not correcting or improving critical- and high-risk vulnerabilities within the required 30 calendar days.

Other areas of concern cited in the IRS watchdog's report included:

  • Three of the four PCA mailrooms where taxpayer correspondence and payments are received weren't included in the IRS' annual security assessments.
  • One of the private collectors lacked a secure mail processing area for payments and didn't secure misdirected payments prior to sending them to the IRS.
  • One of the PCAs didn't back up video footage.
  • Three of the four collection agencies didn't back up their video footage to an offsite location.

The IRS agreed to most of TIGTA's recommendations to improve PCA handling of taxpayer data. The federal tax agency said it will communicate all vulnerabilities in a timely way, develop policies about the use of mobile devices, perform annual security assessments over mailrooms and conduct a feasibility study to identify possible options for ensuring appropriate data encryption.

More ammunition for PCA enemies: The National Treasury Employees Union (NTEU), which represents IRS employees and has long been critical of private debt collection, viewed the TIGTA findings as a further indictment of private tax debt collection.

Not only are the potential taxpayer privacy breaches worrisome, said NTEU, but the report also underscores the added cost the federal government will face to deal with insufficient PCA security.

"Americans are already under siege from cyberattacks and hackers who are trying to steal their personal data and financial information. Congress should make sure that the IRS does not expose them to even more threats because they let private contractors do government work," said NTEU President Tony Reardon.

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