Since 2004, when Internal Revenue Code (IRC) § 6306 was enacted as part of the American Jobs Creation Act, the IRS has had the statutory authority to outsource the collection of tax debt. The IRS exercised this authority in its prior private debt collection program from about 2006 to 2009, but the program was ended due to concerns about its return on investment. Congress amended the statute in 2015, and the IRS is now required to outsource collection of “inactive tax receivables.” Even with this Congressional mandate, as I explained in my 2016 Annual Report to Congress, and my recently released Fiscal Year 2018 Objectives Report to Congress, I believe the IRS has overstepped its statutory authority in implementing its current Private Debt Collection (PDC) initiative.
As a threshold matter, it was generally agreed, prior to the enactment of IRC § 6306, that the IRS could not use PCAs to collect Federal tax debts without congressional authorization. In its 2004 and 2005 Bluebooks, the Bush administration summarized pre-IRC § 6306 law in a single sentence: “Federal tax liabilities generally must be collected by the IRS and cannot be referred to a private collection agency (PCA) for collection.” The House-Senate conference committee report accompanying the American Jobs Creation Act noted that although 31 U.S.C. § 3718 in general permits federal agency heads to enter into contracts with PCAs to recover debts owed to the United States, subsection (f) of that statute excludes from this authorization the collection of debts under the Internal Revenue Code. Because congressional authorization was needed for the IRS to outsource the collection of tax debt, it follows that the IRS may only use PCAs to collect Federal tax debts to the extent authorized by Congress. In fact, the Bush administration described its proposed legislation as allowing PCAs “to engage in specific, limited activities to support IRS collection efforts.”
What IRC § 6306 authorizes the IRS to do is enter into “qualified tax collection contracts.” A qualified tax collection contract is a statutorily defined term. It’s an agreement for services: (A) to locate and contact a taxpayer; (B) to request full payment from such taxpayer and, if the taxpayer cannot make full payment, to offer the taxpayer an installment agreement for a period not to exceed five years; and (C) to obtain financial information with respect to such taxpayer.
Under the current program, the IRS is not restricting the activities of private collection agencies (PCAs) to these statutory terms. It is allowing PCAs to set up installment agreements of up to seven years. Under procedures described in the IRS’s PCA Policy and Procedures Guide, when PCAs contact taxpayers, they will first solicit full payment of the debt. If that is not forthcoming, the PCA will propose an installment agreement, which can be for as long as seven years. The only qualifier is that if the installment agreement is for more than five years, the PCA is required to obtain approval from an IRS technical analyst. This is the first obvious departure from the terms of IRC § 6306. But even worse, the IRS is allowing PCAs to monitor these six- or seven-year installment agreements and to receive commissions on payments taxpayers make pursuant to those agreements. This is not authorized by IRC § 6306.
Maybe these monitoring arrangements could be viewed as “back room” operations the IRS could contract for, like Lockbox collection services, but they cannot be grafted onto IRC § 6306. My view is that paying PCAs commissions with respect to payments made on installment agreements in excess of five years, absent a separate contract and fee schedule for these “backroom operations,” is an improper payment and misuse of funds.
Part of the explanation for why the IRS would want to proceed in this manner could be that the statute authorizes the IRS to retain up to 25 percent of the payments taxpayers make pursuant to installment agreements PCAs set up. Unlike other collected amounts, the IRS doesn’t have to deposit those amounts into public coffers. So the more debts PCAs collect, the more the IRS retains for itself. The statute also authorizes paying PCAs commissions of up to another 25 percent of the amount collected, so up to 50 cents of every dollar collected by a PCA are diverted from public coffers. By enacting IRC § 6306, Congress sanctioned this outcome, but within clearly defined limits. One of those limitations is that PCAs may only offer taxpayers, and receive commissions with respect to, installment agreements of up to five years.
Allowing PCAs to set up, monitor, and receive commissions on installment agreements in excess of five years is not the only example of the IRS’ interpretation of IRC § 6306 that I question. IRC § 6306(c) requires the IRS to assign tax receivables that are included in “potentially collectible inventory.” The term is undefined in the statute or in any other IRS guidance, which suggests that the IRS has some discretion to decide which debts fall within that category. In fact, the IRS has determined that the term does not include liabilities designated as Currently Not Collectible due to the economic hardship of the taxpayer. The IRS also agrees that the debts of Social Security Disability Income recipients and Supplemental Security Income recipients should not be assigned to PCAs, nor should open TAS cases. But the IRS includes in “potentially collectible inventory” other debts that should be excluded – for example, debts of taxpayers whose Social Security retirement benefits are not subject to Federal Payment Levy Program levies because their incomes are less than 250 percent of the federal poverty level. I believe the IRS has discretion to exclude these taxpayers’ debts from assignment to PCAs.
As another example of how I believe the IRS is misinterpreting the statute, the IRS is not requiring PCAs to solicit financial information from taxpayers, even though the definition of a “qualified tax collection contract” includes this element. That means PCAs will not collect financial information that could be shared with the IRS to determine whether a taxpayer can pay the debt and still pay for basic living expenses. This is in contrast with how the prior PDC program was managed, in which PCAs were allowed to collect such financial information and then turn it over to the IRS to make a determination regarding a taxpayer’s ability to pay. The calling scripts for one of the PCAs instruct the employee to “suggest that liquidating assets or borrowing money may be advantageous” and to “give the Taxpayer ideas on where/how to borrow,” even providing a laundry list that includes borrowing from a retirement plan or taking out a second mortgage on a home. The IRS might make a similar suggestion, but the difference is that IRS employees gather financial information which reveals when a taxpayer is in economic hardship, and they have no financial incentive to ignore indications of financial hardship. PCAs do not gather financial information, and their incentive structure doesn’t prod them to look for economic hardship.
To try and alert PCA employees of their obligation to respect taxpayers’ rights under the Taxpayer Bill of Rights, such as the right to a fair and just tax system which requires considering facts and circumstances that might affect taxpayers’ ability to pay, I taped a 45-minute video explaining how the Taxpayer Bill of Rights applies to PCA employees and activities. Using the video and other material, in January of 2017 my staff trained PCA managers and requested that all PCA employees be required to view the video as part of their training. The IRS has refused to impose this training requirement.
In an upcoming blog, I’ll describe the effect of the IRS’s PDC initiative on taxpayers and its disproportionate impact on taxpayers whose incomes are less than 250 percent of the federal poverty level and those who are at or below the federal poverty level.
Read more about the Private Debt Collection: Hardship (Part 2 of 3)
Read more about the Private Debt Collection: Recent Debts (Part 3 of 3)
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.
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