IRS private debt-collection program hurts low-income Americans

“It is extremely likely that these taxpayers do not have the ability to meet their basic living expenses.” National Taxpayer Advocate warns

While directing the IRS to use private debt-collection firms to seek nearly $400 billion owed, Congress instructed the tax agency to ensure that taxpayers “have an adequate means to provide for basic expenses,” National Taxpayer Advocate Nina Olson said in the annual report to Congress.

But the watchdog’s review of tax returns filed as of late September by 4,141 taxpayers found that 19% of the group had incomes below the federal poverty level. These taxpayers had a median income of $6,386, the report said.

Additionally, 25% of the group had incomes below 250% of the federal poverty level, a common low-income marker. They had a median income of $23,096, the report said.

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The IRS likely would have given these taxpayers hardship status and classified their debts as currently uncollectible if the tax agency had handled the accounts itself, wrote Olson. Instead, the tax agency assigned the cases to private debt-collection firms that don’t conduct financial analyses before contacting the taxpayers for repayments, the report said.

“No one is making the IRS make these bad decisions,” wrote Olson, who called the actions an end-run around Congressional safeguards. “The harm to these taxpayers is something IRS leadership consciously decided to do despite my personal efforts, and those of my organization, to stop it.”

The report additionally suggested that the private debt collections are a waste of money.

The tax agency assigned nearly $920 million of “inactive tax receivables” to private collection firms through Sept. 14. About $7 million, or less than 1% of the total tax debts assigned for collection, had been recovered as of that date, the report found in a review of IRS data.

The costs totaled approximately $20 million through Sept. 30, with roughly $1 million in commissions paid to the private debt-collection firms and the rest covering other program expenses.

“Thus, it does not appear that the (private-collection agencies) are particularly effective in collecting the debts assigned to them,” Olson’s report said. “In any event, the cost of the (private debt collection) program thus far exceeds the revenue it generates.”

The IRS  said it would study the report’s findings and recommendations. “The National Taxpayer Advocate’s annual report covers a wide range of issues and topics, and IRS leadership will be reviewing these,” the tax agency said.

This file photo taken in 2014 shows National Taxpayer Advocate Nina Olson with tax code books at the Internal Revenue Service in Washington, D.C. (Photo: Susan Walsh, AP)

 The new criticism of private debt collection focuses on a controversial program the IRS launched at the direction of Congress in 2017, years after previous versions of private debt-collection efforts ended with limited success.

Consumer advocates have argued that scammers potentially would harm taxpayers by posing as representatives of the private-collection companies used by the IRS. Separately, the union that represents IRS employees has said those workers would do a better collection job at less cost if Congress gave the IRS sufficient personnel funding.

Then-IRS commissioner John Koskinen said in April when the collection effort launched that the tax agency would work to ensure that the four companies chosen for the job would “work responsibly and respect taxpayer rights.” 

While urging taxpayers to beware of potential scammers, Koskinen said the only people being contacted by the companies are taxpayers who had been contacted earlier by the IRS about overdue tax payments.

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc