When Treasury Secretary Steven Mnuchin was asked at his confirmation hearing what he thought about using private companies to collect money owed to the government, he replied that it “seems like a very obvious thing to do.”
It may have been obvious, but it certainly was not economical. Private debt collectors cost the IRS $20 million in the past fiscal year but brought in only $6.7 million in back taxes, the agency’s taxpayer advocate reported Wednesday. That was less than 1 percent of the amount assigned for collection.
What’s more, private contractors in some cases were paid 25 percent commissions on collections that the IRS made without their help, according to the annual report by Nina E. Olson, who heads the Taxpayer Advocate Service, an independent office within the IRS.
While Republicans have been the most vocal proponents of privatizing public services, congressional Democrats are equally responsible for the IRS’ program. Despite the pointed failure of similar efforts in the past, Congress passed a law in 2015 requiring the IRS to use outside contractors to make a dent in the $138 billion that taxpayers owe the government.
The outsourcing began in April. Since then, the report stated, “the IRS has implemented the program in a manner that causes excessive financial harm to taxpayers and constitutes an end run around taxpayer rights protections.”
The IRS excuses hardship cases from collection efforts to ensure that households can still pay for basic living expenses, but the private collectors apparently are not following those rules. An analysis of the collections by the advocate’s office found that 45 percent were from taxpayers whose incomes fell below the minimum threshold, including those who received Social Security disability payments.
The report underscored Olson’s repeated complaints that Congress is underfunding the agency, warning that the new tax law will bring added pressures that will further impair its ability to respond to taxpayers, update technology and maintain compliance programs. Since 2010, funding for the IRS has shrunk by a fifth, after taking inflation into account.
The agency receives more than 95 million phone calls a year, for example, but it expects to answer only about 60 percent during the current filing season; that number is estimated to decline to 40 percent for the rest of the year. And that was before the new law was passed. If previous tax code changes are any guide, the number of queries is likely to more than double, pushing down the response figure even more.
A preliminary estimate by the IRS figured that the new law would require an additional $495 million over the next two fiscal years to handle tasks like updating programming, answering phone calls, drafting and publishing new forms, revising regulations and training employees on the new code.
Olson said in the report that “the discussion about IRS funding has largely proceeded based on false choices — either ‘you can’t trust the IRS to administer the tax system, so don’t fund it’ or ‘because the IRS doesn’t have enough funding, it can’t do the things it needs to do to administer the tax system.’ ” Both added funding and service improvements are needed, she said.
Among the most serious problems identified by the advocate’s office is a lack of advance notice when citizens are in danger of losing their passports because they owe the IRS more than $50,000.
Sarah Allen, an IRS spokeswoman, said the agency’s leaders would review the taxpayer advocate’s proposals.