Comments on IRS proposed use of private debt collection agencies: June 12, 2002.

On June 12, 2002, TEI President Robert L. Ashby sent the following letter to Treasury Secretary Paul O'Neill, concerning the proposed use of private debt collection agencies by the Internal Revenue Service. The letter was drafted under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is David L. Bernard of Kimberly-Clark Corporation.

I am writing on behalf of Tax Executives Institute to express concern about the Internal Revenue Service's recent testimony before the House Government Reform Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations, discussing the proposed use of private debt collection agencies to collect delinquent taxes. Such an action would constitute a radical change in the way federal taxes are collected in this country. TEI believes that the proposal represents poor tax policy, could imperil taxpayer rights, and would likely erode taxpayer confidence in the fairness of the tax system. We strongly recommend that the proposal not be adopted.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of in-house tax practitioners. Today, the Institute has 53 chapters in the United States, Canada, and Europe. Our 5,200 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in the United States and Canada; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. Hence, TEI represents the business community as a whole, and our members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily basis. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. Membership in TEI is not open to individuals employed by law, accounting or other consulting firms. We believe that the diversity and professional training of our members, together with our in-house orientation, enable us to bring a balanced, unique, and practical perspective to the issues raised by the proposed use of private debt collection agencies by the IRS.

The IRS's Filing and Payment Compliance Strategy

In its testimony before the House Government Reform Subcommittee, the IRS discussed its plans to implement a filing and payment compliance (FPC) initiative to resolve collection issues quickly and fairly. The goal of the initiative is to resolve all balance due cases above a minimum threshold and shorten the filing and payment compliance lifecycles. TEI commends the IRS for working to ensure that all taxpayers pay their taxes in a cost-efficient manner. As Commissioner Rossotti emphasized in his testimony, however, protection of taxpayer rights must be a component of the FPC strategy. As the IRS spokesman noted, "[u]nlike private collection agencies, the IRS often takes inherently governmental actions involving judgment, such as discretionary decisions on liens and levies on delinquent accounts." TEI wholeheartedly agrees. Thus, we believe that contracting out collection activities to private agencies is ill advised.

Because TEI's members are generally part of the IRS's Large and Mid-Sized Business Division, they are not often involved with the IRS's collection function. Nevertheless, TEI is concerned about the effect of the proposal on tax policy. Taxpayers' perception that the tax system is fair is essential to voluntary compliance. For the tax system to work, taxpayers need to know that, when they deal with their government, they will be treated in a fair and impartial manner. The use of private firms to perform a core function of government--the collection of taxes due--is inimical to this goal. As a practical matter, collection agencies involved in performing ministerial functions would be unable to assist a taxpayer who questioned the underlying tax liability. In addition, low-income taxpayers--who do not have access to representation--may be pressured to enter into unreasonable collection agreements. Thus, we agree with National Taxpayer Advocate Nina Olson, who outlined several significant concerns about the initiative during the hearing.

Moreover, using outside, for-profit contractors could impede taxpayer privacy and hence further undermine the perception of fairness. Employing private collection agents invokes all of the concerns raised by the sharing of sensitive taxpayer information with persons not employed by the Internal Revenue Service, and in fact not employed by the federal government or any governmental entity. Further, such concerns are even more acute if the companies are compensated on a contingency basis, which raises significant due process issues. At least one state court has found contingency-based arrangements to be "void as against public policy." The Georgia Supreme Court said: "The people's entitlement to fair and impartial tax assessments lies at the heart of our system, and, indeed, was a basic principle upon which this country was founded. Fairness and impartiality are threatened where a private organization has a financial stake in the amount of tax collected as a result of the assessment it recommends." Sears, Roebuck & Co. v. Parsons, 260 Ga. 824, 401 S.E.2d 4 (1991). Finally, even in non-contingent arrangements, it would be difficult, if not impossible, to afford taxpayers their legal rights--including referrals to the Taxpayer Advocate Service--if private collection agencies are used.

Some commentators have rightly criticized the use of private firms to collect taxes as "bounty hunters." TEI recognizes that IRS must move to effectively resolve collection issues, but we believe that the better approach is to provide the agency with sufficient funds to perform its governmental duties in an efficient manner. Private collection agencies should not be used to perform these governmental functions.

Conclusion

Tax Executives Institute urges the IRS to reject the use of private collection agencies to collect unpaid taxes. We appreciate this opportunity to present our views on this important issue. If you have any questions, please do not hesitate to call David L. Bernard, chair of TEI's IRS Administrative Affairs Committee, at 920.721.2230, or Mary L. Fahey of the Institute's professional staff at 202.638.5601.