As year 2006 closes, many taxpayers are eagerly anticipating the receipt of their W-2s and a refund check from the Internal Revenue Service (“IRS”). The year 2006 should be noteworthy to taxpayers for an entirely different reason. In September of 2006, the IRS implemented the first phase of a new private debt collection program to allow private debt collection agencies to collect delinquent federal taxes.   

 

Under the 2004 American Jobs Creation Act, Congress authorized the IRS to hire private collection agencies (“PCAs”) to collect the back taxes of delinquent taxpayers. In the initial phase of this new debt collection program, the IRS has contracted with three PCAs to contact approximately 12,500 taxpayers who owe back taxes. In the program’s second phase, the IRS will contract with up to 10 additional PCAs to contact approximately 40,000 taxpayers by the end of year 2008.   

 

Unfortunately, many taxpayers may not be aware of the new debt collection program and its far reaching implications with respect to the IRS tax collection process. Generally, PCAs serve three specific functions:

·         Locating and contacting taxpayers with delinquent IRS tax debts;

·         Requesting payment of specified taxes in a lump sum; and

·         Obtaining taxpayer financial information specified by the IRS.

 

IRS Commissioner Mark W. Everson has emphasized that the new debt collection program has been structured with tough safeguards and guidelines to protect taxpayer rights and privacy. “We’re going to implement this program very carefully so we have a good program on sound footing,” Commissioner Everson said. To its credit, the IRS has developed and implemented many procedures and safeguards (e.g., background checks, etc.) applicable to PCAs that should hold both the IRS and PCAs accountable for any violations of taxpayer rights and privacy.

 

Under the new private debt collection program, a taxpayer has the option to request that a delinquent tax account be handled or resolved by the IRS (i.e., opt-out) rather than by a PCA. Once the delinquent account has been transferred back to the IRS for resolution, the taxpayer has all the normal IRS collection and privacy protections under the law. For example, an IRS employee, in contrast to a PCA employee, has the legal authority to discuss and explore the entire list of IRS collection procedures, including innocent spouse relief (an innocent spouse granted relief of part or all of the joint tax liability); penalty abatement (avoidance of certain tax penalties and interest); installment agreement (full payment of an outstanding tax liability over time); offer in compromise   (payment of a reduced or deferred amount of an outstanding tax liability), etc.  Finally, because the IRS collection process is time sensitive from the date of the filing of the tax liability or collection action, the taxpayer may be disadvantaged or harmed as the collection clock continues to run during the period in which a delinquent debt is being handled by a PCA. 

 

There are a number of additional reasons for taxpayers to opt-out of the new debt collection program and place reliance upon the efficiencies of IRS collection process. First, PCAs are contracted to “collect overdue tax accounts” and not to act as a counsel or representative to resolve the taxpayer’s unpaid tax liability in the best interest of the taxpayer. Second, PCAs lack legal authority and training to resolve or recommend to taxpayers the appropriate tax collection options (e.g., innocent spouse relief, penalty abatement, installment agreement, offer in compromise, etc.) that are available to resolve IRS collection controversies and disputes.  Third, PCAs are unable to access the simplicity or complexity of the issues surrounding the taxpayer’s unpaid tax liability. Finally, PCAs are paid up to 24 percent of the collected tax debt and have a direct financial stake in the collection process. Also, opting-out of the new debt collection program protects vulnerable taxpayers (e.g., elderly or any indebted consumer) from scam artists taking advantage of the new debt collection program. 

 

In conclusion, taxpayers should give serious consideration to opting out to allow the IRS (not a PCA) to collect the unpaid tax debt and place reliance upon the normal IRS collection process or representation by a tax professional. In the interim, taxpayers should monitor the current Congressional action (S. 3887) that opposes the new debt collection program.