Private Tax Collection: Will Congress Ever Learn?

The use of private collection agencies to collect delinquent taxes has been tried by the federal government several times. Up to this point, all of the attempts have been failures. So why does Senator Charles E. Schumer (D-NY) want to use them again? Could he be politically motivated?

Senator Schumer has had a provision inserted into the tax extenders bill that will require the IRS to contract with four private collection agencies to collect delinquent income taxes. Did I mention that two of those agencies are located in Senator Schumer’s congressional district?

As I mentioned, we’ve been down this path before. The first attempt to collect delinquent taxes by someone other than the IRS was in 1872 when Congress authorized contracts between private citizens and the U.S. Treasury Department to collect delinquent taxes. The collectors were entitled to retain 50% of the amount they collected. The process lost money and generated so many complaints that it resulted in the resignation of William Adams Richardson, Secretary of the Treasury.

Two other uses of private collection agencies were made in 1996 —1997 and 2006 — 2009. Both lost money and resulted in numerous consumer complaints. In one instance, private tax collection agencies collected approximately $98 million in delinquent taxes but it cost the Treasury over $110 million to administer the program. The Treasury Department also estimated that one of the programs would raise more than $1 billion in revenue, however the program ended up losing money.

Based on past experiences with private tax collectors you’d think that Congress would have learned its lesson. Private tax collection services don’t work. In addition to being money-losing operations there are other reasons not to hire private debt collectors.

Private debt collectors—

• have little incentive to keep taxpayer data confidential,
• are often heavy handed in dealing with taxpayers,
• are not inclined to offer payment options,
• usually cost more than the taxes they collect, and
• have no incentive to help the taxpayer correct simple errors.

My Solution

I have a better solution that doesn’t require the services of a private debt collector. Why not just collect the $3.3 billion in back taxes owed by current and retired employees of the federal government? (http://money.cnn.com/2014/05/23/pf/taxes/federal-workers-delinquent-taxes/) After all, the IRS knows where they work, so why not set up an affordable payment plan and deduct it from their paychecks each pay period?

What do you think?