By: The Attorneys of Tenenbaum Law, P.C.
Over the years, the Internal Revenue Service has not had the resources to collect all outstanding debt owed to it, even though it may be fully adjudicated uncontested debt, already assessed, owed by taxpayers who may be able to pay. According to some estimates, this collectible debt totals approximately $13 billion dollars. Rather than budget more money for the IRS, however, Congress has chosen to allow private debt collectors to pursue these debtors. As an incentive, the private debt collectors will be able to keep up to 25% of the amount collected. The program was signed into law on October 22, 2004, with the passage of the American Jobs Creation Act of 2004 (P.L. 108-357).
While advocates believe that private debt collectors are needed to collect taxes and ensure that all taxpayers pay their fair share, opponents argue that the collection of taxes is an inherently governmental function. Opponents further argue that private sector collection companies cannot be trusted with a taxpayer=s personal information and that the wrongful disclosure of taxpayer information can cause irreparable harm not only to the taxpayer, but also to the system. The government, however, counters that it is simply seeking an alternative means of enforcement.
Interestingly, the use of private debt collectors has become commonplace in New York State, for out-of-state collection of debts owed to the Department of Taxation and Finance.
Congress first allocated $13 million for the IRS to test the use of private debt collection companies in fiscal years 1996 and 1997. The pilot program was considered a failure due to the limited powers of the private agents in terms of the scope of work permitted and the number and type of cases referred. The IRS additionally experienced difficulties with its computer systems while attempting to identify, select, and transmit collection cases to the private debt collectors. Further, the private companies were paid a flat fee for their services rather than a percentage of the amount collected, as in the present law. The IRS collected approximately $3.1 million attributable to the private collection companies; expenses, however, were also $3.1 million, and the IRS lost more than five times that much in opportunity costs, due to the diversion of its employees from collection action to work on the pilot program.
Despite the minimal success of the IRS= initial pilot program, President Bush again asked lawmakers to permit the IRS to hire private agencies to supplement debt recovery efforts as part of his 2005 budget proposal. The new law has several provisions designed to counter the problems of the pilot program and the concerns for individual privacy.
The private debt collectors are subject to the same statutes protecting the taxpayer which are applicable to the IRS, as well as the more stringent rules of the Fair Debt Collection Practices Act. Collection agencies will only be permitted to contact taxpayers by letter first, followed by a telephone call to request full payment. The private collection agents must also advise every taxpayer contacted of the Taxpayer Advocate program. Notably, collectors will be subject to the same personal legal liability as IRS employees for abusive tactics.
The new law also permits the private agencies to offer up to five-year installment agreements to taxpayers who are unable to pay in full. If a taxpayer is unable to pay in full with a lump sum or with such an installment agreement, the private debt collection agency must forward the taxpayer=s financial information to the IRS for further action.
Despite the enactment of the law in autumn of 2004, it may be some time before private debt collection is fully in place. One timetable suggests that the IRS will ask for applications for private vendors in late 2005, select one or more in 2006, and begin some outsourcing in early 2007.
Partial Installment Agreements: Another important provision of the American Jobs Creation Act of 2004 authorizes installment agreements for less than the full amount due. Taxpayers will now have the opportunity to enter into an affordable installment agreement even if they cannot pay in full during the time available; presumably with the consequent benefit of a hold on collection while the agreement is in place.
This could have far-reaching effects not only on negotiations of installment agreements, but also on the Offer in Compromise program. An Offer in Compromise is a settlement with the IRS, allowing the taxpayer to pay less than the full amount due, in satisfaction of all outstanding liabilities. In determining whether an Offer in Compromise should be accepted, one factor the IRS considers is whether payment could be made in full through an installment agreement. Rather than accept an Offer, the IRS now has the alternative of collection over time, which may yield a greater amount. The law also requires the IRS to review these partial payment installment agreements at least once every two years, to determine if the financial condition of the taxpayer has changed, so as to warrant an increase in the payments being made. This is not as advantageous to the taxpayer as an Offer in Compromise, which is for a fixed sum.
*Attorneys with the firm of Karen J. Tenenbaum, P. C., in Melville, NY. The firm concentrates in the resolution of tax controversies. We acknowledge the contributions of Michelle E. Espey, Esq., to this article.