Private Debt Collectors Seem To Be Terrible At Collecting Back Taxes

Tucked away in the $305 billion highway funding bill signed into law earlier this month is a provision requiring the IRS to use private debt collectors to recoup past-due taxes.

This is problematic for a few reasons. First and foremost is that currently the IRS handles most tax collection. However, due to decreasing resources (few things are more politically popular with voters than slashing the IRS budget), Congress estimates that taxpayers owe somewhere in the order of $5 billion or so in back taxes (out of about $2.4 trillion in annual revenues).

The IRS has used private debt collectors in the past - and it didn't work out very well. A pilot program in 1996 showed that private collection agencies (PCAs) only contacted 14,000 out of 153,000 expected taxpayers (less than 10%) in the first year, collecting $3.1 million of revenues but costing $4.1 million in expenses. A second attempt in 2009 was cancelled for the same reason.

You'd think that private agencies would be more effective, but studies by the taxpayer advocate show that they simply aren't (likely because IRS agents have more authority to establish payment plans and waive penalties, when appropriate). A 2004 study showed that the IRS itself was about 70% more effective than PCAs at collections - and the IRS agents didn't even have a chance to collect in this study until AFTER the PCAs had tried, putting our trusty Internal Revenue agents at a disadvantage:


We also seem to be in the middle of a new wave of scam artists pretending to be the IRS over the phone. I've heard a lot of these voicemails from clients, typically from a DC-area phone number (202). According to the Inspector General, taxpayers have lost approximately $23 million to this fraud in the past two years.

I usually tell my folks not to worry or even bother returning these calls - the IRS doesn't initiate contact via telephone. They'll send letters or show up in person.

A private bill collector sure will.

Will keep you posted.