IRS to outsource debt collection: private companies will be able to pursue tax delinquents.

A provision in the American Jobs Creation Act of 2004 (AJCA) allows private collection agencies (PCAs) to collect federal tax debts. The IRS recently announced it expects to award the first three contracts for private debt collection in February 2006 and begin implementation in June 2006.

The service will enter into "qualified tax collection contracts" (as defined in IRC section 6306(b)) with PCAs to locate and contact taxpayers with outstanding tax liabilities and arrange payment. CPAs whose clients owe taxes should be aware of this new initiative to privatize federal tax debt collection.

SCOPE

The legislation generally allows PCAs to collect any type of tax imposed under the code. However, implementation is expected to focus on taxpayers who (1) have filed a return showing a balance due, but failed to pay it in full, and (2) have been assessed additional tax by the IRS and have made several voluntary payments toward satisfying their obligation, but have not paid in full.

PROCEDURE

A PCA will first try to contact a taxpayer by letter; if the letter is undeliverable, it will ascertain a correct address. If this fails, the PCA will attempt to contact the taxpayer by phone and request full payment. All payments are to be sent to the IRS, not to the collector. Taxpayers who cannot pay in full immediately will be offered installment agreements calling for full payment over no more than five years. If the taxpayer is unable to pay the outstanding tax liability in five years, the PCA will obtain financial information from the taxpayer and provide it to the IRS.

PROTECTING TAXPAYERS

The AJCA enacted provisions to protect taxpayers in this process. The use of subcontractors by PCAs will be limited; subcontractors will not be allowed to contact taxpayers, provide quality assurance services or compose collection notices. Also, direct contact with taxpayers and access to taxpayer-sensitive information will be afforded only to PCAs who have accepted all the obligations imposed under their contracts.

The Fair Debt Collection Practices Act also applies to PCAs, and taxpayer protections statutorily applicable to the IRS were extended to PCAs. PCAs also are required to inform taxpayers that assistance is available from the IRS National Taxpayer Advocate.

LIABILITY/COMPENSATION

Under IRC section 6306(d), the IRS will be exempt from liability for acts committed by PCAs. However, taxpayers were granted remedies for PCA acts or omissions under new IRC section 7433A. In addition, the Privacy Act of 1974 and IRC section 6103, which prevent unlawful disclosure of taxpayer information, also apply to PCAs, potentially subjecting their employees to civil and criminal liability.

Moreover, PCAs will be heavily screened before being selected, then given only enough information to contact taxpayers and seek payment. The IRS plans to hire three PCAs initially, gradually expanding to 10. PCAs will earn up to 25% of the amount they collect.

For more information, see Tax Practice & Procedures "IRS Initiative for Private Debt Collection," byJ. Matthew Yuskewich, in the January 2006 issue of The Tax Adviser.

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Lesli S. Laffie, editor

The Tax Adviser