On May 23, the House Ways and Means Committee heard testimony on the Internal Revenue Service's (IRS) private debt collection program that lets outside contractors pursue federal tax debts. At the hearing, Chairman Charles Rangel (D-NY) requested that the IRS not issue additional contracts to private collection agencies (PCAs). The hearing resulted in an extensive discussion of the costs and benefits of the program, as well as a deeper understanding of how the program works and what is known about its results since it began in September 2006. The hearing's witnesses often made the point that IRS employees could perform the debt collection work more effectively, cheaper, and safer than the PCAs.

Nina Olson, chief of the National Taxpayer Advocate Service, an independent agency within the IRS to protect and resolve taxpayer issues, opposes the program. She testified that IRS employees are more productive in part because they can use tools that PCAs cannot. The only way PCAs can bring taxpayers into compliance is to make telephone calls and send letters to noncompliant taxpayers. PCAs have access to only limited information about taxpayers, out of concerns over taxpayer privacy. They are not empowered to enter into complex payment agreements. IRS employees, on the other hand, can see a taxpayer's complete records and are empowered to make special arrangements when required by circumstances. Olson testified that contrary to claims that the cases that have been outsourced are "easy," many require the discretion and personal information that only IRS employees can provide.

As a result, Olson said IRS employees bring in $20 for every dollar IRS spends, whereas PCAs bring in only four. Acting Commissioner Kevin Brown, however, said that the proper ratio for work done by IRS employees was actually closer to 13:1.

Without these tools, PCAs have trouble communicating with taxpayers. When PCAs call taxpayers by phone, they must confirm whom they are speaking with, but they cannot reveal private information about the tax debt they are pursuing. To confirm their identify, the taxpayers — on faith — have to divulge their Social Security numbers over the phone, which the PCA representative will then compare to his or her copy of the taxpayer's Social Security number.

Rep. John Lewis (D-GA) presented disturbing audio tapes of phone conversations between PCAs and taxpayers, as well as answering machine messages PCA representatives left for taxpayers. (See the committee's written transcripts.) PCA employees did not identify themselves, the nature of their business, or the purpose of their calls, and haggled with taxpayers to obtain their Social Security numbers. The taxpayers in the conversations refused to reveal their Social Security numbers and responded angrily when PCA employees asked repeatedly for the numbers but did not disclose the purpose of the conversations.

Most would agree this type of interaction is unacceptable, but PCAs claim it is unusual. Witnesses who supported the program cited a survey that found taxpayers who had been called by the PCAs reported a 94 to 96 percent "overall satisfaction" rate. The report was conduced by the PCAs themselves, however, and IRS employees typically score in the same range.

Further casting doubt on the validity of the survey cited, Gregory D. Kutz of the Government Accountability Office (GAO) testified the PCAs used flawed methods when they obtained data for the survey. The three PCAs administered the survey only for the cases where the taxpayer was cooperative. Each used different methods to select respondents, and only taxpayers whose identities had been confirmed were surveyed. What's more, GAO was unable to verify the results of two of the surveys, as the PCAs failed to keep the necessary records. Kurtz testified that the results of the survey were not valid because of these methodological flaws.

Thomas Penaluna, the president of the CBE Group, a PCA, testified there has been only one complaint against the PCAs that IRS has been able to validate. However, IRS evaluates complaints only when PCAs "self-report" them, and Olson testified the IRS uses a narrow definition of both what a complaint is and what a valid complaint is. (Examples of complaints.)

Chairman Rangel questioned Brown, the acting commissioner, about the incentive structure under which PCAs operate to collect taxes. Rangel proposed that because the private company gets to keep 21 to 24 percent of the taxes it is able to collect, the situation creates an adversarial relationship between the taxpayer and the PCA.

IRS employees, on the other hand, are prohibited from being compensated based on how much money they bring in as an individual in order to prioritize customer service and preserve taxpayers' rights. This creates an environment where the IRS can meet the needs of both the taxpayer and the federal government, while private companies have incentives to do whatever they can to bring in as much money as possible.

Underfunding the IRS
Brown, who supports the program, claimed underfunding of the collection function of the IRS made it necessary to outsource debt collection. Even if Congress increased the collection function's budget, Brown said these cases would not be pursued, as IRS would rather use the additional funding to pursue cases that would produce a high yield. According to Brown, the average tax owed by taxpayers whose cases are handled by PCAs is about $5,000.

Some members questioned why Congress had not fully funded the collection functions of the IRS, which would allow the agency to pursue all cases, including those that have been outsourced. Brown acknowledged that if IRS were fully funded, it would not need to run the outsourcing program.

The IRS has spent $71 million to get the program started, while PCAs have collected only $19 million, $3 million of which has been kept by the PCAs. If that money had been spent on IRS employees, by the IRS's rough return-on-investment ratio, the agency could have brought in $962 million.