IRS initiative for private debt collection.

The American Jobs Creation Act of 2004 (AJCA), Section 881 (a)(1), created Sec. 6306, permitting private collection agencies (PCAs) to collect Federal tax debts. On Nov. 2, 2005, at the AICPA National CPA/IRS Tax Issues Meeting in Washington, DC, the IRS announced it expects to award the first three contracts for private debt collection in February 2006 and begin implementation in June 2006. The IRS will enter into "qualified tax collection contracts" (QTCCs) (as defined in Sec. 6306(b)) with PCAs that will locate and contact taxpayers owing outstanding tax liabilities and arrange payment from them.

For there to be an outstanding tax liability, there must first be an assessment under Sec. 6201. The new legislation generally allows PCAs to collect any type of tax imposed under the Code. It is anticipated, however, that implementation will focus on taxpayers who have (1) filed a return showing a balance due, but failed to pay it in full; and (2) been assessed additional tax by the IRS and made several voluntary payments toward satisfying their obligation, but have not paid in full.

Collection Process

According to the AJCA Conference Report, in the first step in the collection process, the PCA contacts the taxpayer by letter; see Conf. Rep't No. 108-755, 108th Cong., 2d Sess. (2004). If the taxpayer's last known address is incorrect, the PCA will search for a correct one. Next, the PCA will call the taxpayer to request full payment. The PCA cannot accept payment directly; rather, payments have to be processed by IRS employees. If taxpayers cannot pay in full immediately, the PCA will offer them an installment agreement providing for full payment of the taxes over as much as five years. If the taxpayer is unable to pay the outstanding tax liability in full over five years, the PCA will obtain financial information from the taxpayer and provide it to the IRS for further processing and action.

Taxpayer protection: Use of subcontractors by PCAs will be limited. Subcontractors will not be allowed to contact taxpayers, provide quality assurance services or compose collection notices. These provisions will lessen the burden on the Service employees charged with oversight activities. Also, taxpayers are further protected, because direct contact with taxpayers and access to taxpayer-sensitive information will be afforded only to PCAs that have accepted all the obligations imposed by the contracts.

There are several specific procedural conditions under which the PCAs have to operate. First, the Fair Debt Collection Practices Act applies to them. Second, taxpayer protections statutorily applicable to the IRS are also made statutorily applicable to PCAs. Third, PCAs are required to inform taxpayers of the availability of assistance from the IRS National Taxpayer Advocate.

No liability: Under Sec. 6306(d), the IRS will be exempt from liability for acts committed by PCAs. AJCA Section 881(b) added Sec. 7433A, making remedies available to taxpayers for acts or omissions committed by PCAs performing services under QTCCs. This will ensure that PCAs appropriately train their employees and take steps to prevent them from violating taxpayers' rights. PCAs will not be permitted to perform work under a QTCC for willful retaliation against or harassment of taxpayers, to the same extent that IRS employees are subject to termination for such activities. In addition, the Privacy Act of 1974 and Sec. 6103, which prevent unlawful disclosure of taxpayer information, already apply to PCAs. Both of these provisions subject PCA employees to civil and criminal liability.

PCA Eligibility

The Service will conduct a competitive bidding process in choosing PCAs. It will evaluate each agency's work on not only how much in unpaid tax is recovered, but also on quality factors, such as responsiveness to taxpayers. The privacy of taxpayers' returns will be protected; PCAs will only receive a taxpayer's name, phone number, address, the tax year in question and the amount due. PCA employees will have access only to cases assigned to them. PCA managers will have access only to cases and information assigned to their employees. Appropriate PCA managers and employees must successfully pass a personal screening and an investigation and be trained on IRS security and privacy policies and awareness, including the consequences for the violations identified above. PCAs will be required to submit to the Service verification of a successful personnel screening and an investigation and nondisclosure forms, before they will be given access to taxpayer data. PCA managers and employees must complete IRS-certified privacy safeguard and disclosure awareness training and must certify in writing that they have successfully completed such training before they can work on a delinquent taxpayer account. The Service has said it plans to phase-in PCAs, by hiring three companies to handle the initial work and eventually expand to 10 PCAs through a competitive bidding process.

A revolving fund will be generated from amounts collected by PCAs. They will be paid out of this fund for their services, which could be up to 25% of the amount collected under a QTCC.

Conclusion

The outsourcing of debt collection was previously implemented unsuccessfully in 1996. The current effort differs in many respects, including compensating PCAs on a percentage, rather than a fee, basis. Also, the assignment of simple cases affords IRS employees additional time to pursue more complex, larger ones.

FROM J. MATTHEW YUSKEWICH, CPA, WINTERSET CPA GROUP, INC., COLUMBUS, OH