The IRS Paid $20 Million Last Year for the $6.7 Million Brought in by Private Debt Collectors


By Molly Olmstead

A new report by a federal watchdog organization has found that the Internal Revenue Service has lost millions in the past financial year by contracting out to private debt collectors, which not only were found to have received commissions from work actually done by the IRS but which also punished some of the poorest Americans by flouting the rules excusing hardship cases from debt collection.

The report, published Wednesday by an independent office of the IRS called the Taxpayer Advocate Service, found that private debt collectors that brought in $6.7 million in back taxes in the past fiscal year but cost the IRS $20 million.

The most damning element of the report came in its finding that these agencies often leaned on people without financial cushions. The IRS, by its own rules, does not collect from those who cannot afford to do so and still pay for basic living expenses. Even though they were expected to follow that same rule, the private agencies did not do so: 19 percent of those they collected from had incomes below the federal poverty level, at an average income of around $6,000, and some received Social Security or disability payments.

The law requires the IRS to outsource some of its tax debt, the report noted. Congress passed a law in 2015 requiring the use of outside contractors, according to the New York Times.

But the report concluded the agency’s use of private debt collectors was one of the “most serious problems”:

[The private debt collection] program as implemented has not generated net revenues and results in the IRS improperly paying commissions to [private collection agencies] for work they did not perform. In the meantime, the most vulnerable taxpayers are making payments and entering into installment agreements they cannot afford, according to the IRS’s own measures. The IRS should honor its commitment to taxpayers and do more to ensure that its [private debt collection] program operates in accordance with the law and respects taxpayers’ rights.

The report also found the IRS knew it was paying the private tax collection companies commissions—sometimes as much as 25 percent—for work actually done by the IRS “but has no plans to change its procedures,” as its official position is that the contracts with the private agencies require it.

The report warned Congress that the agency was in dire need of greater funding, which it reported had shriveled to a fifth of what it was in 2010. The Republican tax bill will make the IRS’ work much more complicated, and the new obligations will mean it will need significantly more funding in order to tackle all the administrative problems it will create.