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Subscribe to the NTA’s Blog and receive updates on the latest blog posts from National Taxpayer Advocate Erin M. Collins. Additional blogs can be found at www.taxpayeradvocate.irs.gov/blog.
Last week, I returned from vacation to read a press release from a newly formed organization consisting of private debt collection (PDC) agencies working IRS accounts. “Nina Olsen [sic] has consistently made false and misleading claims about the IRS and its Private Debt Collection Program to advance her own political agenda,” the organization’s spokesperson asserted.
While I don’t often take the time to respond to ad personam attacks, this one deals with a core IRS program, so I think it deserves a response – particularly given some of the questionable claims it made.
It’s no secret that I believe the collection of taxes is a core governmental function that should not be outsourced to for-profit businesses that are paid on commission. I have written about the use of private collection agencies (PCAs) repeatedly in my annual reports to Congress and elsewhere. But it is worth taking a moment to summarize the basis of my concerns. While others have investigated the practices used by private collection agencies, my focus has been on IRS policies and IRS administration of the statutory program.
Federal tax collection requires the IRS to balance two objectives that often are in conflict. One objective is to collect all taxes that are due. The IRS must collect taxes both because government operations depend on revenue collection and because of considerations of fairness – it is not fair for some taxpayers to pay their taxes while others don’t.
The other objective is to refrain from collecting tax when doing so will leave taxpayers unable to pay their basic living expenses. Congress has adopted this principle in several statutes, found in the Internal Revenue Code (IRC). For example, the law requires the IRS to release a levy when it determines the levy “is creating an economic hardship due to the financial condition of the taxpayer.” (IRC § 6343(a)(1)(D)) Similarly, for purposes of determining the adequacy of an offer in compromise, the law requires the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.” (IRC § 7122(d))
The IRS has developed and published these schedules of allowances, and they are known commonly as the Allowable Living Expense (ALE) standards. When the IRS performs an analysis of a taxpayer’s financial condition, it generally will not require the taxpayer to make payments to the extent that doing so would leave the taxpayer with less funds than the ALE schedules provide. In fact, the IRS will generally place taxpayers it knows to have incomes below ALE levels into what is known as “Currently Not Collectible (CNC) – Hardship” status and won’t attempt to collect tax from them. And notably, the IRS does not assign the cases of taxpayers determined to be in CNC – Hardship status to the PCAs. (The IRS may require a taxpayer to liquidate assets if it determines that valuable assets exist, but such an action would generally be taken by a Revenue Officer and, in any event, could not be taken by a PCA.)
Thus, except in unusual circumstances, the ALE threshold is the “gold standard” based on law and policy for determining whether a taxpayer can afford to pay. At present, the IRS says it lacks the resources to perform a comprehensive financial analysis of all taxpayers with unpaid tax debts. IRS databases and other systems overall generally contain sufficient data to carry out this type of analysis, but the data is divided up and stored across an array of databases that largely do not “communicate” with each other. While I believe the IRS in the near future can create an algorithm to make this determination, it can use a proxy to approximate that result as an interim measure, as it already does for certain purposes as described below.
Congress has established 250 percent of the federal poverty level as the definition of “low income taxpayer” for purposes of qualifying for assistance from Low Income Taxpayer Clinics, and it has provided that taxpayers applying for installment agreements who fall below that threshold do not have to pay user fees. Similarly, the IRS maintains an automated levy program (the “Federal Payment Levy Program”) that offsets government payments like Social Security retirement benefits and military pensions to satisfy delinquent tax liabilities – except where the taxpayer’s income falls at or below 250 percent of the federal poverty level. Thus, 250 percent of the federal poverty level is often viewed as a proxy in lieu of performing a comprehensive financial analysis. Again, the goal here is to balance the government’s interest in collecting revenue with the government’s interest in refraining from taking collection action where doing so would leave a taxpayer without adequate means to pay basic living expenses.
Proponents of the PDC program point out that there are tens of billions of uncollected taxes on the books, and they say they can help collect taxes that the IRS simply can’t pursue because of resource constraints.
While that is true in theory, I believe the fundamental flaw in that argument is this: A large portion of uncollected tax receivables that the IRS does not pursue are likely uncollectible – or should not be collected – because they are owed by taxpayers who can’t afford to pay.
Keep in mind that even though the IRS is arguably understaffed, it maintains a robust function of thousands of employees whose sole job is to collect tax that is owed but not voluntarily paid. It has a field function. It has a centralized automated function, meaning that many collection activities can be carried out by computers. It has the extraordinary power to garnish a taxpayer’s wages, levy against a taxpayer’s bank account or Social Security benefits, place a lien against a taxpayer’s property, and even seize a taxpayer’s property like a house or car. (Unlike other creditors, in almost all instances, the IRS can take these actions administratively, without seeking approval from a court.) Most taxpayers receive refunds, and the IRS routinely (and automatically) withholds those refunds to satisfy past-due tax liabilities. And the Criminal Investigation division can conduct criminal investigations of taxpayers who are believed to be illegally concealing assets.
In fiscal year (FY) 2017, the IRS collected close to $40 billion in delinquent taxes.
And it should be emphasized that the accounts it chooses to pursue are not random. The IRS uses data analytics to prioritize and pursue the delinquent accounts that it believes will produce the highest return on investment. Although I believe the IRS can improve its data analyses and better select the debt it pursues, it is clearly collecting a significant amount of the unpaid taxes that should be collected.
The cases that are left over – the cases the IRS chooses not to work – are now generally assigned to the PCAs. But the reality is that most of these cases involve taxpayers whom the IRS itself would not pursue. These taxpayers are overwhelmingly low income.
Shortly before Congress mandated that the IRS use private debt collectors, the IRS analyzed collection data for FY 2013 and found that 79 percent of the accounts it would have been required to assign to PCAs under the definition in the law involved taxpayers with incomes at or below 250 percent of the federal poverty level.
The early returns on the private debt collection program largely confirm this conclusion. As of the second quarter of FY 2018 (through March 29, 2018 – basically a year of operation), IRS data show that of taxpayers who made payments while their debts were assigned to PCAs:
• 43 percent who entered into installment agreements had incomes below their ALEs; and
• 46 percent had incomes below 250 percent of the federal poverty level.
To be clear, these data points reflect taxpayers who not only were contacted by PCAs but who actually made payments. Forty-three percent of these taxpayers had incomes below their ALEs – which means that if the IRS had performed a financial analysis, it generally would have placed these taxpayer into CNC – Hardship status and would not have assigned them to PCAs.
The second data point illustrates that, to the extent the IRS believes performing financial analysis on all taxpayers is too resource-intensive, 250 percent of the federal poverty level is an effective proxy that produces nearly the same results.
Presumably for this reason, the Taxpayer First Act passed by the House of Representatives in April would carve out taxpayers with incomes at or below 250 percent of the federal poverty level from PCA assignment. The vote on the bill? 414-0.
Based on the press release the PCAs’ group issued, the group doesn’t appear to like the idea of carving out these taxpayers. While Congress and the government believe the IRS should not knowingly collect tax from low income taxpayers who likely are struggling to pay basic living expenses, the PCAs are collecting a sizable portion of their payments (and earning commissions) from these taxpayers.
Since the industry’s press release accuses me of making “false and misleading claims,” let’s take a closer look at some of its own.
First, the press release refers to taxpayer payments as “voluntary” seven times. That is certainly not how most taxpayers see it. I have firsthand experience with this. Before I joined the IRS, I was the founder and executive director of a Low Income Taxpayer Clinic (LITC) in Richmond, Virginia. I represented low income taxpayers for many years in states that retained private debt collectors for the bulk of their tax collection activity. I know from my experience that low income taxpayers often lack financial savvy and are terrified of what a debt collector might do to their lives. To these taxpayers, the notion that payments are “voluntary” is preposterous.
I routinely saw taxpayers agree to installment agreements with monthly payment amounts greatly in excess of what they could afford and often at harm to their welfare and their ability to be compliant in the future. All except the most sophisticated of taxpayers (i.e., taxpayers with tax debts who understand the ALE standards) are reasonably concerned there will be further adverse consequences if they decline to make payments.
The PCA group’s press release goes on to say that the PDC program “seeks to expand the customer service capacity of the IRS to offer a segment of taxpayers . . . a variety of manageable and purely voluntary payment plans.” This language may resonate within the debt collection industry, but to a taxpayer who feels pressured to make payments, the characterization of debt collection as an expansion of the IRS’s “customer service capacity” feels even more absurd than characterizing the payments as “voluntary.”
Second, the press release says that “taxpayers with the means to [pay] are most likely to participate in the program, while those experiencing financial hardship are referred out of the program and back to the IRS.” This may be true in theory – if a taxpayer tells the PCA caller that he or she is in financial hardship – but it does not reflect what typically happens in practice. Most taxpayers assume they are expected to pay, and it doesn’t occur to them to describe financial hardship. The fact that 43 percent of taxpayers who made payments have incomes below the ALEs demonstrates how untrue this is.
Third, the press release charges that my “focus on taxpayer level of income over a single year is intentionally misleading” because it “creates an incomplete picture as many people have investment accounts, savings accounts, stocks, real estate, fluctuating annual income levels, and other means.” It is true that a small percentage of taxpayers may fit within this description. But not many. Given the IRS’s extraordinary power to garnish wages, levy on bank accounts, and file liens against homes, taxpayers who can afford to pay generally don’t risk losing their assets by getting cross-wise with the IRS. In addition, the same issue arises when the IRS applies the ALEs to evaluate an offer in compromise or determine whether to place a taxpayer into CNC – Hardship status. The IRS reserves the right, for example, to reopen a CNC – Hardship status case if the taxpayer makes a significant amount of money in a future year.
Fourth, the press release notes my concern that a high percentage of taxpayers who agree to enter into installment agreements default on their payments due to financial hardship and says “[t]here is absolutely no factual basis for such a concern nor any evidence she has provided other than speculation.” As I discussed in my FY 2019 Objectives Report to Congress, our analysis of IRS data on a year of PDC program operation shows the default rate was 28 percent for installment agreements taxpayers entered into while their accounts were assigned to PCAs versus 16 percent for installment agreements entered outside the PDC program. While there is obviously no way to get into the mind of each taxpayer to find out the reason for his or her default, the combination of knowing these taxpayers are disproportionately low income and knowing that the default rate is 75 percent higher for installment agreements entered into while taxpayers’ accounts are assigned to PCAs than for other installment agreements strongly suggests that taxpayers feel pressured into committing to payment plans they cannot afford and cannot maintain.
Fifth, the press release says:“The program will be fully cash positive in the third year, and over the next 10 years will deliver billions in recovered revenue for the U.S. Treasury.”
In the past, repeated claims that the program would generate net revenues did not materialize, and if they do this time, the amounts are likely to remain relatively small. When Congress directed the IRS to resume the program in 2015, the Joint Committee on Taxation projected a ten-year revenue score of $2.4 billion. That’s an average of $240 million per year. By comparison, the IRS collected $3.4 trillion last year in timely and voluntary tax payments, and its collection function brought in close to $40 billion in enforced payments. Thus, even if the PDC program manages to collect as much as the congressional estimate projects, that amount will be less than one percent of what the IRS’s own collection function collects. Moreover, the Joint Committee on Taxation’s revenue projections focused solely on tax collections and didn’t offset those totals by the administrative costs the IRS incurs to run the program. If administrative costs are considered, net revenue – if any – will obviously be lower.
The press release makes one statement that I believe is largely accurate. It says I have said the PDC program “targets poor Americans.” Based on the IRS’s FY 2013 data run that found about 79 percent of PCA-eligible cases involved taxpayers with incomes at or below 250 percent of the federal poverty level and actual program data showing nearly 45 percent of all payments from PCA-assigned accounts came from taxpayers with incomes below the ALEs, I do believe – as I wrote to Congress several years ago – that this program “appears to place a bulls-eye on the backs of low income taxpayers.” But in fairness to the PCAs, I want to emphasize that this result is inherent in the statute as the IRS is currently administering it. It is not a choice the PCAs are making. The PCAs are given cases but are not informed of taxpayer income levels, so they are simply doing their jobs.
So . . . where does all this leave us?
Well, for now Congress has spoken: It has directed the IRS to use private debt collectors. Therefore, despite my belief that tax collection should be handled by the government – because it requires the exercise of judgment and discretion – I am focused on making the existing program run in a manner that is fair to taxpayers and ensures their rights are protected.
My primary focus is on ensuring that, in accordance with statutes and IRS policy, taxpayers are left with sufficient funds to pay their basic living expenses and do not feel pressured into making payments that they can’t afford and that require them to forgo basic needs. My own experience in representing low income taxpayers and common sense make clear that, contrary to the claims in the industry press release, most taxpayers who are contacted by a debt collection agency feel pressured into making payments and do not feel they can say no to the “variety of manageable and purely voluntary payment plans” with which they are presented.
The cleanest way to address the problem would be to screen out taxpayers with incomes below the ALE guidelines from assignment to the PCAs. As noted, when the IRS performs a financial analysis and determines a taxpayer is below the ALEs, it (i) generally does not attempt to collect from the taxpayer; (ii) places the taxpayer’s account into CNC – Hardship status; and (iii) removes the case from “potentially collectible inventory” and does not assign it to PCAs for collection.
Because the IRS says it lacks the resources to perform a financial analysis with respect to all taxpayers, and because to date it has declined to program an algorithm that would systemically identify these taxpayers at risk of economic hardship, both Congress and the IRS have adopted 250 percent of the federal poverty level as an easy proxy for determining economic hardship. Based on the early results of the program, it is an extraordinarily good proxy, producing almost the same results as a full ALE analysis.
When the House considered the proposal to remove the accounts of taxpayers with incomes at or below 250 percent of the federal poverty level from the PDC program, the Congressional Budget Office concluded the net cost would be just $51 million over a ten-year period – or an average of a mere $5.1 million per year.
With the IRS poised to send hundreds of thousands of cases to PCAs and with many, if not most, involving low income taxpayers whose cases the IRS would not send if it had the ability to perform a full analysis, the choice is clear. These taxpayers can be protected with minimal revenue loss.
I suspect the industry will not be happy if Congress or the IRS decides to remove taxpayers with incomes at or below 250 percent of the federal poverty level from the PDC program, because low income taxpayers constitute a large percentage of their cases (and their revenues). I am guessing this proposal is what prompted them to form an organization to promote the program and attack me personally. But as I’ve tried to lay out in this blog, I think the public interest here is clear and compelling.
I am heartened that the House of Representatives endorsed this approach on a 414-0 vote. I am hopeful the Senate will soon do the same. And I would be happy to speak directly with anyone who wants to have a substantive discussion about these issues.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.