<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:91098.wais]
USE OF PRIVATE COLLECTION AGENCIES TO IMPROVE IRS DEBT COLLECTION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MAY 13, 2003
__________
Serial No. 108-21
__________
Printed for the use of the Committee on Ways and Means
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91-098 WASHINGTON : 2003
_______________________________________________________________________
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio EARL POMEROY, North Dakota
JERRY WELLER, Illinois GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of May 6, 2003, announcing the hearing.................. 2
WITNESSES
Internal Revenue Service, Hon. Mark W. Everson, Commissioner..... 8
Internal Revenue Service, Nina E. Olson, National Taxpayer
Advocate....................................................... 20
U.S. Department of the Treasury, Pamela J. Gardiner, Acting
Treasury Inspector General for Tax Administration.............. 26
______
ACA International, Rozanne M. Andersen........................... 41
Allied International Credit Corporation, Dexter Smith............ 48
Diversified Collection Services, Inc., Jon D. Shaver............. 53
National Consumer Law Center, Chi Chi Wu......................... 58
National Treasury Employees Union, Colleen M. Kelley............. 29
North Carolina Department of Revenue, Alan Felton................ 34
SUBMISSIONS FOR THE RECORD
COLLECTCORP, Inc., statement..................................... 75
GC Services, LP, Houston, TX, Robert S. Young, statement......... 77
Kramer & Frank, PC, Saint Louis, MO, Donald B. Kramer, statement. 78
National Society of Accountants, Alexandria, VA, statement....... 78
USE OF PRIVATE COLLECTION AGENCIES TO IMPROVE IRS DEBT COLLECTION
----------
TUESDAY, MAY 13, 2003
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:03 p.m., in
room 1100, Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
May 06, 2003
OV-4
Houghton Announces Hearing on the Use of
Private Collection Agencies to Improve IRS Debt Collection
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on private collection agencies. The
hearing will take place on Tuesday, May 13, 2003, in the main Committee
hearing room, 1100 Longworth House Office Building, beginning at 2:00
p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include the Honorable Mark Everson, Commissioner of the
Internal Revenue Service (IRS), and Nina Olson, the National Taxpayer
Advocate.
BACKGROUND:
Each year, the IRS collects over $2 trillion in tax revenue from
all sources. A small percentage of this amount is assessed, but not
collected. The IRS has 10 years to collect newly assessed taxes. Over
the past decade, the total inventory of unpaid tax assessments has more
than doubled. It has grown from $130 billion in 1992 to over $280
billion in March 2003.
Much of this amount represents tax debts that cannot be collected,
due to death or bankruptcy, but the IRS estimates that about $78
billion is collectible. The amount judged to be collectible has grown
by 12 percent during the past 2 years, and the inactive portion that
the IRS is not currently pursuing has grown by 38 percent. As of March,
the IRS had identified over $13 billion in tax debts that can only be
collected if the IRS has more resources.
The Bush Administration is highly concerned about the growth in the
inventory of uncollected taxes, and the IRS issued a Request for
Information that appeared in the Federal Register in January 2002 to
seek input from private collection agencies (PCAs) on how PCAs could
assist the IRS with its collection efforts, while preserving important
taxpayer protections in existing law. Using this information, the
Administration developed a proposal that appeared in the fiscal year
2004 budget request for the IRS. Chairman Houghton introduced
legislation (H.R. 1169) that would implement the Administration's
proposal.
In announcing the hearing, Chairman Houghton stated, ``We all know
that it is a duty of citizenship to abide by the rules and pay our
taxes. Yet, in the event that the rules are not followed, the IRS is
unfortunately not able to adequately enforce this obligation due to a
lack of funds. Enforcement is inconsistent at best. The Administration
is looking for innovative solutions to this problem, and I applaud them
for it.''
FOCUS OF THE HEARING:
The hearing will focus on the Administration's proposal to use
private collection agencies to support the IRS's collection efforts and
Chairman Houghton's bill to implement the proposal.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
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(202) 225-2610, by the close of business, Tuesday, May 27, 2003. Those
filing written statements who wish to have their statements distributed
to the press and interested public at the hearing should deliver their
200 copies to the Subcommittee on Oversight in room 1136 Longworth
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse sealed-packaged
deliveries to all House Office Buildings.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
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1. Due to the change in House mail policy, all statements and any
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Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will
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Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
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materials in alternative formats) may be directed to the Committee as
noted above.
<F-dash>
Chairman HOUGHTON. Good afternoon, ladies and gentlemen.
Thank you very much for coming to this hearing. We are
delighted to have the new Commissioner with us. I am going to
make an initial statement. Then, Mr. Pomeroy, who is the
Ranking Member, will make one, and if anybody else comes in and
wants to do that, that is okay, too. Then we will get to you,
Commissioner. So, thank you.
As I had indicated, really this is the first time we have
had you as the new Internal Revenue Service (IRS) Commissioner,
and we are delighted and honored that you are here. The
President, as many of you know, has shown great faith in Mr.
Everson by entrusting him with the critically important job of
managing the IRS, and I am sure he is up to the challenge.
Now, we are all familiar with the annual tax filing ritual,
but thankfully few Americans are familiar with the IRS
collections process. Of the $2 trillion per year that the IRS
collects through self-assessment, a small percentage, but a
large amount in real terms, approximately $60 billion--$60
billion--remains unpaid at the end of the year. Now, ideally,
the IRS would collect every individual tax debt owed to the
U.S. Department of the Treasury, but that has not occurred in
recent years.
It may never have occurred, but certainly the proportion
has not been in recent years. The backlog of unpaid assessments
has grown substantially since 2000, and the IRS estimates that
$78 billion of the total inventory of outstanding tax
liabilities is potentially collectible.
The IRS has determined also that it lacks the resources,
however, to pursue much of the unpaid taxes. This means that it
is inevitable without a change in the status quo that the tax
collection system will be conducted selectively. Some taxpayers
will experience the full weight of the IRS enforcement powers,
including liens, levies, wage garnishment and even bankruptcy,
while other taxpayers will be able to walk away from their tax
liabilities.
This is an unconscionable situation that must be remedied,
but we must also do this in a way that preserves taxpayer
rights in the confidentiality of tax return information.
Now, the solution proposed by the administration, and the
topic of our hearing today, is the proposal for the limited use
of private sector collection agencies (PCAs) consistent with
taxpayer rights so they can assist the IRS in its collection
efforts. The Administration has developed a detailed proposal
that will allow the IRS to benefit from the knowledge and
skills of private sector companies and also will allow IRS
revenue officers to focus on higher priority tasks.
Today, we are going to hear from a variety of experts on
this subject. I should note that 40 States already use private
debt collectors to assist in collecting unpaid tax debt, and
the Federal Government uses private companies to collect
student loan debt.
Our hearing today will review these efforts, and we will
hear how the IRS plans to address the challenge of implementing
this proposal while at the same time protecting taxpayer rights
and the confidentiality of return information.
I would now like to yield to a good friend of mine, the
Subcommittee's Ranking Member, Mr. Pomeroy from North Dakota.
[The opening statement of Chairman Houghton follows:]
Opening Statement of the Honorable Amo Houghton, Chairman, and a
Representative in Congress from the State of New York
Good afternoon. Before us today, for the first time, is the newly
confirmed Commissioner of the Internal Revenue Service, Mark Everson.
The President has shown great faith in Mr. Everson by entrusting him
with the critically important job of managing the Internal Revenue
Service, and I have no doubt that he is up to the challenge.
We are all familiar with the annual tax filing ritual, but,
thankfully, few Americans are familiar with the IRS collections
process. Of the $2 trillion per year that the IRS collects through
self-assessment, a small percentage--but a large amount in real terms,
approximately $60 billion, remains unpaid at the end of the year.
Ideally, the IRS would collect every individual tax debt owed to
the Treasury, but that has not occurred in recent years. The backlog of
unpaid assessments has grown substantially since the year 2000, and the
IRS estimates that $78 billion of the total inventory of outstanding
tax liabilities is potentially collectible. The IRS has determined that
it lacks the resources, however, to pursue much of the unpaid taxes.
This means that it is inevitable--without a change in the status
quo--that the tax collection will be conducted selectively. Some
taxpayers will experience the full weight of the IRS's enforcement
powers, including liens, levies, wage garnishment, and even bankruptcy,
while other taxpayers will be able to walk away from their tax
liabilities. This is an unconscionable situation that must be remedied,
but we must do so in a way that preserves taxpayer rights and the
confidentiality of tax return information.
The solution proposed by the Administration, and the topic of our
hearing today, is the proposal for the limited use of private sector
collection agencies--consistent with taxpayer rights--to assist the IRS
in its collection efforts. The Administration has developed a detailed
proposal that will allow the IRS to benefit from the knowledge and
skills of private sector companies and will allow IRS revenue officers
to focus on higher priority tasks.
Today we will hear from a variety of experts on this subject. I
should note that 40 states already use private debt collectors to
assist in collecting unpaid tax debt and the Federal Government uses
private companies to collect student loan debt. Our hearing today will
review these prior efforts, and we will hear how the IRS plans to
address the challenge of implementing this proposal, while at the same
time, protecting taxpayer rights and the confidentiality of return
information.
I would now like to yield to a good friend of mine, the
Subcommittee's ranking member, Mr. Pomeroy from North Dakota.
<F-dash>
Mr. POMEROY. Thank you, Mr. Chairman, and thank you for
holding this hearing. I do think this is a proposal that needs
our thorough evaluation. I want to begin by commending the
Commissioner. It is good to have a Commissioner again, and as
we mentioned in our meeting before the hearing, I have high
confidence in the newly confirmed Commissioner and look forward
to your new leadership on this critical government agency.
Mr. EVERSON. Thank you.
Mr. POMEROY. My concerns on the idea of suddenly enlisting
significant private bill collectors to help the Federal
Government collect back taxes is that it is an idea that
frankly is not ready for prime time. I think we need to look at
a lot of issues, and this hearing is going to be really the
best public forum to date for Congress to evaluate the idea.
I think you can start with the notion of collecting taxes.
Now, if there is ever an inherently governmental function, it
would seem like that really is to the core what would be a
governmental function: collecting the revenues it is owed for
purposes of running the government.
I also believe that further investigation in this shows
this is something the Federal Government has been doing a long
time, it does it very well, very efficiently, and has now an
operating environment where the Congress working with the IRS
over the years has put in place a number of taxpayer
protections very important to the rights of our taxpayers.
From an efficiency standpoint, the average IRS collection
employee brings in $900,000 in taxes each year. I think that
that is very impressive. It would seem to me that we could
expand collection, get at the uncollected debt this proposal
would address through private collectors by simply funding more
IRS collectors.
When we have to give private collectors enlisted in the
cause of collecting taxes a significant cut of the action by
way of their compensation, be it up to 25 percent, we are
diverting money that otherwise could be used to retire the
deficit or fund critical programs like the military, and we are
devoting it to compensation of private sector partners when
this could be much more cost effectively performed simply by
hiring and adding to the existing IRS collection system in
place.
Another very fundamental question I hope we can explore
today is what kind of cases are going to be sent out for
private collection? We have got a range of uncollected debt
including individuals armed with accountants and lawyers and
hiding behind the most elaborate yet phony tax avoidance
schemes ever devised, and we have got a lot of middle class
taxpayers that one reason or another have not paid what they
owed.
While it certainly would not seem fair to me if suddenly
this barrage of private debt collectors singled on the middle-
income, modest-income household, leaving the more elaborate tax
shelters for another day, a day that will not ever come in
light of the existing staffing for the IRS. So, we need to
learn more about how fairly this new private sector initiative
is going to be applied.
It certainly should not be just applied to your basic
middle-income household that is behind on their tax obligation.
We also need finally to explore whether the protections
that taxpayers have when they are subject to IRS debt
collection also exist when you have got a private bill
collector coming after them.
In 1998, and I believe the Chairman was very involved in
this legislation, we no longer allowed IRS employees to be
compensated based on percentage of what they bring in. There
were some horrific examples brought forward in the hearings
that we all recall of IRS overreaching in its debt collection,
individuals that were usurping their authority and basically
misapplying the authority of the Federal Government in
collecting debt, driven in part by the fact that they were paid
on a percentage basis: the more they brought in, the more they
made, and they overreached.
We prohibit that in public law, but will this same
prohibition attach to private collection efforts? Actually the
proposal looks as though that protection will not be in place.
That compensation could be up to 25 percent of revenues
collected, pure percentage based compensation, again putting in
place in the private sector the potential that you are going to
have the kind of abuse that we have moved to prohibit in the
public sector.
Will it happen? We do not know. These are questions that we
certainly have to thoroughly plumb before we rush this proposal
forward. So, in conclusion, Mr. Chairman, I just want to
commend you. This is the right hearing on an important topic,
and I think we all should pause before we go down this road and
fully evaluate the wide-ranging consequences that suddenly
enlisting private debt collectors could bring upon our
taxpayers. Thank you, Mr. Chairman.
[The opening statement of Mr. Pomeroy follows:]
Opening Statement of the Honorable Earl Pomeroy, a Representative in
Congress from the State of North Dakota
The Ways and Means Oversight Subcommittee is always interested in
exploring innovative ways to better administer our federal tax system.
One new proposal that merits our thorough review is the
Administration's plan to allow private debt collection companies to
begin contacting taxpayers for payment of taxes due.
Based on what I know going into this hearing, I would say that the
program is ``not yet ready for prime time.'' Fortunately, even the
Administration's proposal does not anticipate implementation of private
debt collectors until 2005. I would urge Committee Members to move
slowly and carefully on this matter.
The fundamental issue before the Subcommittee is whether
``privatizing'' IRS debt collection is a good or bad idea. I believe
that the public considers federal tax collections to be the job of the
IRS and Department of Treasury--an inherently governmental function. I
do not think that the public believes that federal tax collections
should be profitable business transactions for parts of corporate
America looking to expand their market share. The very notion of
unleashing a small army of bill collectors on the taxpayers of this
Nation should give us all major pause.
Clearly, the IRS could do more collection work if they had more
resources. An IRS collection employee averages about $900,000 in taxes
collected each year. This is quite impressive. It would seem to me that
the IRS could efficiently and effectively collect the next batch of
tax-owed cases ``in the queue.'' The notice and letter machines, the
telephone lines, the know-how, the entire process is there and ready to
go at the IRS. All that is needed are people and resources to work the
existing system. Why would we pay someone 25% of a $500 tax bill for
making a phone call or sending a letter to a taxpayer, when the IRS
could send that same letter or make that same phone call at little
cost? It seems silly to intentionally deny the IRS needed collection
funds and staffing, then say the IRS is ignoring many collection cases,
and thus we must turn to private collectors.
Putting this basic question aside, there are many unanswered
questions about how the Administration's privatization plan would work:
What types of cases will the IRS send to private collectors? Will
they be large dollar uncollected tax cases owed by the ``big boys,'' or
small amounts owed by working families? Will the cases be truly old and
delinquent, or will they be new taxes-due found on recently-filed
returns which the taxpayers fully intend to pay?
How will the private contractors be rewarded? The IRS Reform Act of
1998 specifically prohibits IRS employees from being evaluated based on
collection results in order to eliminate incentives to use overly
aggressive tax collection techniques. The private debt collector
approach goes in the exact opposite direction. It specifically rewards
collectors up to 25% of amounts collected. Why would we want to give
people who are not directly accountable to the Treasury Department
Secretary and IRS Commissioner a bounty for getting money from
taxpayers?
How can strong taxpayer protections be effective when dealing with
private collectors? IRS employees are subject to job termination by the
IRS Commissioner for harassing a taxpayer, destroying documents,
violating IRS rules, etc. How would ``bad'' contractors be identified
and would they too get fired? Further, the proposal explicitly prevents
taxpayers from seeking relief or damages from the IRS if a contractor
misuses confidential taxpayer information. Why would we want to reduce
taxpayers' protections in dealing with IRS collection agents after
fighting so hard for them in 1998?
So, in conclusion, I want to thank Subcommittee Chairman Houghton
for scheduling a hearing on this important issue. I share his view that
hearings, such as today's, are critical to our understanding and
evaluation of how to improve our administration and enforcement of the
tax laws.
Thank you.
<F-dash>
Chairman HOUGHTON. Okay. Well, thank you very much, Mr.
Pomeroy, and Mr. Everson, we are delighted to have you here,
and you follow an extraordinary man in Charles Rossotti, and I
know you are going to equal him and do it even better. So,
thank you, and we look forward to your testimony.
STATEMENT OF THE HONORABLE MARK W. EVERSON, COMMISSIONER,
INTERNAL REVENUE SERVICE
Mr. EVERSON. Thank you. Mr. Chairman, Mr. Pomeroy, thank
you for this opportunity to testify today. As you know, this is
my first hearing before the Subcommittee since assuming office
just last week. Mr. Chairman, I look forward to a productive
working relationship with you, Mr. Pomeroy, and the entire
Subcommittee and your staff.
During my tenure as Commissioner, I expect to focus on
three areas. One, we must continue the reorganization begun by
Commissioner Rossotti in order to improve customer service. We
must stay the course; employees and managers at all levels of
the organization must fully embrace the changes he launched.
Two, we must continue the information technology
modernization program. Its success is critical to establishing
a more efficient and effective IRS.
Three, we must strengthen the integrity of our Nation's tax
system through enhanced enforcement efforts. The IRS must deter
those who might be inclined to evade their legal tax
obligations and appropriately pursue those who actually do. It
is as simple as this: people should pay what they owe.
The President's budget requests a real increase in
resources targeted toward enforcement, new money to expand
enforcement efforts with a sharper focus on high income/high
risk taxpayers and businesses. However, in order to attack
systemic problems such as uncollected debt, we must use all,
and I repeat all, available tools but, of course, with
appropriate controls.
In this regard, the budget contains an important
legislative proposal that would authorize the IRS to contract
with PCAs, to supplement current tax collection efforts for a
targeted category of debt.
I would like to emphasize that this proposal is totally
distinct from competitive sourcing and will not result in the
loss of a single job at the IRS. While Federal employees could
do this work, as you know, appropriated resources are scarce,
and I would like to point out that for 8 out of the last 10
fiscal years, the IRS has actually received less than its full
budget request.
The proposed use of PCAs is a realistic approach. As the
National Taxpayer Advocate states, quote: ``PCAs appear a
limited but reasonable option.''
For the purposes of this initiative, the Treasury
Department and the IRS identified over $13 billion in
individual tax debt designated as currently non-collectible.
The cases the IRS would refer to PCAs are those where the
taxpayer would likely pay the outstanding tax liability if
contacted by telephone.
These include situations where a taxpayer filed a return
indicating an amount of tax due but did not also send in
payment for that full amount. These cases also would include
situations where the taxpayer has made three or more voluntary
payments of tax that was assessed by the IRS.
The IRS would not refer to PCAs cases for which there is
any indication that enforcement action would be required to
collect the tax liabilities. The IRS will avoid referring cases
that would require IRS expertise or the exercise of discretion.
I want to stress in the strongest possible terms that PCAs
would be prohibited from threatening or intimidating taxpayers.
Indeed, the PCAs would be governed by all of the same rules by
which IRS employees are held accountable. The taxpayer
protections woven throughout this proposal have also been
thoroughly reviewed by the National Taxpayer Advocate who will
be testifying this afternoon.
From my previous perch as Deputy Director for Management at
the Office of Management and Budget (OMB), I am also acutely
sensitive to the need for proper supervision of outside
contractors. I want to assure the Subcommittee that PCAs and
PCA employees will receive close supervision by the IRS to
ensure compliance with taxpayer protections and applicable
policies and procedures. The National Taxpayer Advocate will
continue to be involved in this process.
Mr. Chairman, I want to make one final point. The
President's initiative builds on a record of success at both
the State and Federal level. The PCAs are common across more
than 40 States including those represented on this
Subcommittee. We will work to take the best from these
different approaches, and we will also benefit from their
lessons learned.
In the Federal arena, I would like to point out that PCAs
are being successfully used by both the Financial Management
Service, within the Treasury Department and the U.S. Department
of Education. Under the Debt Collection Improvement Act of 1996
(P.L. 104-134), non-tax debts of a certain age owed to Federal
agencies such as defaulted loans must be referred to the
Finance Management Service (FMS). The collection of the debt is
the responsibility of PCAs and this system is working very
well.
In addition, I have confirmed with the Deputy Secretary of
Education that that Department's experience with PCAs is also
very positive. Thank you. That concludes my oral statement. I
would be happy to take any questions.
[The prepared statement of Mr. Everson follows:]
Statement of the Honorable Mark W. Everson, Commissioner, Internal
Revenue Service
Mr. Chairman and Members of the Subcommittee, there is a
significant and growing backlog of cases involving individual taxpayers
who are aware of their tax liabilities but have not paid them. We
believe that many of these taxpayers have simply chosen not to pay,
even though they have the means to do so. This is unfair to every hard-
working taxpayer who has paid his or her fair share of taxes. Indeed,
nothing undermines the confidence of honest taxpayers in the tax system
more than the perception that other taxpayers who can pay their
liabilities are able to get away with not paying.
The Administration's FY 2004 budget proposes to support the IRS's
collection efforts with private collection agencies (PCAs) that will
engage in carefully defined and limited collection activities. PCAs
would be used to address two groups of taxpayers. The first group
consists of taxpayers who have filed a tax return showing an amount of
tax due, but who have failed to pay the tax. The second consists of
taxpayers who have been assessed additional tax by the IRS and have
made three or more voluntary payments to satisfy that additional tax,
but who then have stopped making payments. These taxpayers clearly are
aware of their liabilities. In many cases, however, they are taking
advantage of the fact that the IRS cannot continually pursue each
taxpayer who fails to pay an outstanding tax liability. We believe that
PCAs could efficiently and effectively address these liabilities.
PCAs would allow the IRS to focus its enforcement efforts on more
complex cases and issues. Significantly, because PCAs would work the
simplest and most straightforward collection cases they would enable
the IRS to handle more collection cases at an earlier stage in the
process--before those accounts become stale and harder to collect.
Over 40 states have used private collection agencies successfully
as part of their tax collection efforts, and other federal agencies
have used private collection agencies for a number of years to collect
a significant amount of delinquent federal nontax debt. Once the
required authorizing and funding legislation are enacted, the IRS would
be able to begin placing outstanding tax liabilities with PCAs by as
early as a year later.
At the present time more than $13 billion in individual income tax
debt has been designated as uncollectible due to IRS collection and
resource priorities. Less than three years ago, this amount was only $7
billion. PCAs could be used to address many of these cases, and the IRS
is working to identify other appropriate cases that may be eligible for
referral if the necessary legislation is enacted.
Taxpayer protections will be fully maintained under this proposal.
The Treasury Department and the IRS determined early on that no
proposal to engage PCAs would ever be feasible unless and until those
developing the proposal could assure themselves and others that
taxpayer rights would not be weakened in any way. A taxpayer contacted
by a PCA would enjoy the same rights and protections as a taxpayer
contacted by an IRS employee. The taxpayer protections incorporated in
the Administration's proposal have been reviewed thoroughly in
consultations with the National Taxpayer Advocate (NTA). The NTA and
her organization would have a continuing role in ensuring that taxpayer
protections are maintained under any program using PCAs to support the
IRS's collection efforts.
Present Law
Under present law, the IRS must collect tax liabilities; they
cannot be referred to a PCA for collection. This stands in stark
contrast to other federal agencies that may, and often do, enter into
contracts with non-governmental parties for the collection of debts
owed to the United States.
Section 6301 of the Internal Revenue Code (Code) directs that
``[t]he Secretary shall collect the taxes imposed by the internal
revenue laws,'' and the Code defines the ``Secretary'' to mean
officers, employees, or agencies of the Treasury Department. The
reservation of tax collection authority to Treasury officers and
employees also is reflected in the Debt Collection Improvement Act of
1996 (DCIA), Public Law 104-34. The DCIA expressly permits federal
agencies to enter into contracts with private contractors for the
collection of debts owed to the United States. This authorization,
however, specifically excludes Federal tax debts.
The Treasury Department's Financial Management Service (FMS)
currently uses private collection agencies as part of its
implementation of the DCIA. Under the DCIA, nontax debts of a certain
age that are owed to most federal agencies must be referred by the
agency to FMS. FMS then may refer those debts to private collection
agencies for collection. Since 1998, FMS has collected $109 million in
nontax debts through the use of private collection agencies, with $43
million of this amount being collected in FY 2002. The amount being
collected through the use of private collection agencies has been
growing at a rate of at least 22 percent since 1999.
Section 7809(a) of the Code provides that collections received or
collected by authority of the internal revenue laws shall be paid daily
into the United States Treasury, without any deduction for
compensation, fees, costs, charges, expenses, or claims of any
description. The existing statutory exceptions do not cover potential
fees or compensation earned by a PCA. Therefore, unless modified,
section 7809 would require fees or compensation due to a PCA to be paid
only from funds already appropriated to the IRS. In contrast, under the
DCIA federal agencies that enter into contracts with private collection
agencies for the collection of public nontax debts are allowed to
deduct the fees owed to private collection agencies directly from the
amounts recovered.
Reasons For Change
Our tax system has a simple time-honored premise: each person who
is voluntarily meeting his or her tax obligations must have confidence
that his or her neighbor also is complying. While most taxpayers do
their best to comply with our tax laws, some do not. In those cases,
the IRS must exercise its enforcement powers to achieve compliance.
In recent years, the increased demands on the IRS's collection
resources have resulted, as of March 2003, in over $13 billion in
individual income tax debt being designated as uncollectible due to
collection and resource priorities. Not all of these delinquent tax
liabilities, however, are truly uncollectible. Rather, we believe that
many of these accounts could be collected relatively easily with
minimal follow-up efforts.
More troubling is the fact that this backlog of cases will only
grow over time. The total accounts receivable dollar inventory is
growing at an annual rate of 3-4%. Thus, without a significant change
in business practice, the pool of uncollected, but potentially
collectible, tax liabilities will continue to plague us. This not only
will result in billions of dollars of lost revenue but also will
undermine voluntary compliance by allowing some taxpayers to pay less
than their fair share.
PCAs would allow the IRS to address efficiently a significant
portion of currently inactive inventory. The cases the IRS would refer
to PCAs are those where the taxpayer would likely pay the outstanding
tax liability if contacted by telephone. These cases would include
situations where a taxpayer filed a return indicating an amount of tax
due but did not also send in payment for that full amount. These cases
also would include situations where the taxpayer has made three or more
voluntary payments of tax that was assessed by the IRS.
The IRS would not refer to PCAs cases for which there is any
indication that enforcement action would be required to collect the tax
liabilities. The IRS also would not refer any case that likely would
require IRS expertise or the exercise of discretion. Discretion is
required, for example, in determining how to best obtain payment of a
delinquent tax liability, including the use of enforcement tools such
as a lien or levy, where the taxpayer will not voluntarily enter into
repayment terms.
A Description Of The Administration's Proposal
The Administration's proposal has three components: (1) the
activities PCAs would undertake in support of the IRS's overall
collection efforts; (2) the taxpayer protections that would apply with
respect to actions taken by PCAs; and (3) the compensation of PCAs.
Statutory authorization is required for the IRS to use PCAs and the
revolving fund mechanism for compensating PCAs. In addition, certain
statutory changes would be required to ensure that all taxpayer rights
and protections would continue to apply. A number of the items
discussed below, however, would be addressed through the IRS's
administration of the program and its contracts with the PCAs. This
would provide the IRS with the flexibility needed to ensure that the
PCAs are used in a manner that best serves the proposal's objectives.
PCA Activities
Under the Administration's proposal, PCAs would focus on taxpayers
who are likely to pay their outstanding tax liabilities, either in full
or in installments, if they were located and contacted. These are
functions that would not require the exercise of discretion or involve
enforcement action. PCAs may be provided by the IRS with a specific
statement that can either be sent or delivered verbally to taxpayers
regarding the benefits of paying an outstanding tax liability, and the
potential consequences of failing to do so. This statement would not be
taxpayer specific, but rather would be a more general description of
the collection process that would serve an important taxpayer education
purpose.
Mr. Chairman, I want to stress in the strongest possible terms that
PCAs would be prohibited from threatening or intimidating taxpayers, or
otherwise suggesting, beyond the specific statement discussed above,
that enforcement action will or may be taken if a taxpayer does not pay
the liability. Decisions regarding enforcement actions will always
remain with the IRS. In no case would a PCA be permitted to take
enforcement action against a taxpayer.
After thoughtful consideration, we came up with the following
process that the PCAs would carefully employ to assist the IRS in
collecting delinquent taxes.
1.
LSelection of Accounts to be Referred to PCAs--The IRS would
select those cases likely to be the simplest to collect, based on
factors indicating that the taxpayer would likely pay the outstanding
tax liability if contacted by telephone. The initial identification of
referable accounts would target taxpayers who have indicated an amount
of tax due on a return but who have not paid that amount (so-called
``balance-due'' taxpayers). This initial identification also would
target taxpayers who have been assessed tax by the IRS (e.g., after
having failed to file a return or report all income received) and who
have made three or more voluntary payments of assessed tax. Again, the
IRS would not refer cases for which there is an indication that
enforcement action may be necessary or that IRS discretion would be
required to resolve the liability.
2.
LNotification by Mail--A PCA would send to each assigned
taxpayer's last known address a written notice informing the taxpayer
that the PCA is attempting to collect a debt owed to the IRS. (For
taxpayers who have filed a power-of-attorney with the IRS, the PCA
would contact the designated representative.) The notice would comply
with the requirements imposed by the Fair Debt Collection Practices Act
(FDCPA), 15 U.S.C. 1692 et seq., and the requirements applicable to
comparable notices issued by the IRS. Each notice would be accompanied
by a copy of IRS Publication 1 (``Your Rights as a Taxpayer''), which
provides a brief overview of the collection process, including a
taxpayer's right to seek assistance from the Taxpayer Advocate Service.
3.
LLocation of Taxpayers--In cases where the FDCPA notice is
returned as undeliverable, and for purposes of verifying a taxpayer's
telephone number, PCAs would obtain current contact information by
using automated database matching (e.g., running a name against an on-
line or electronic ``white pages'') and, if necessary, contacting
information sources, such as directory assistance. PCAs, however, would
not contact individuals (such as relatives and neighbors) or employers
in order to locate a taxpayer.
4.
LTelephone Contact with Taxpayers--After a FDCPA notice has been
sent to a taxpayer, the PCA would contact the taxpayer by telephone to
discuss the tax liability. The purposes of this call is to respond to
questions that the taxpayer may have, based on specific information
provided by the IRS to the PCA; request that the taxpayer pay the
amount due in full; and, if the taxpayer is unable to do so, offer the
taxpayer the ability to pay the full amount due pursuant to an
installment agreement providing for full payment of the liability over
a period of up to three years (a ``3-year installment agreement''). A
3-year installment agreement, like all installment agreements under
section 6159 of the Code, would be between the taxpayer and the IRS and
would be subject to all of the protections provided for under the Code,
including the restriction on levy under section 6331(k).
5.
LQuestions Regarding an Outstanding Liability--PCAs would have
access to specific information regarding an outstanding tax liability
(e.g., type of tax, tax years affected, dates of assessment, whether
the assessment is based on a taxpayer's own balance due return or an
IRS notice, prior payments, and application of prior payments) in order
to answer basic, but important questions that a taxpayer may have
regarding the liability.
L The taxpayer information provided to PCAs would be strictly
limited to the information required for the collection of the specific
tax liability at issue. PCAs would not receive, for instance,
information regarding a taxpayer's total or adjusted income, sources of
income, IRS examination results, delinquency history for liabilities
not being handled by the PCA, or employer information.
L Let me stress here too that PCAs would be trained with
respect to the information that they can, and cannot, provide in
response to a taxpayer question. PCAs would not be permitted to address
questions as to the validity of the liability, or the basis for the
liability, beyond providing the taxpayer with the basic account
information to which the IRS gives the PCA access.
6.
LFull Payment Of Outstanding Liability--PCAs would request that
a taxpayer pay the outstanding tax liability in full and provide
directions for doing so. PCAs would be provided with a specific
statement that they can make to taxpayers regarding the benefits of
paying the liability (including the stopping of interest and penalties,
and the release of any tax liens). All taxpayer payments, whether in
full satisfaction of an outstanding liability or an installment
payment, would be made directly to the IRS. PCAs would not actually
collect any amount.
L Mr. Chairman, in no case would a PCA be permitted to provide
advice to the taxpayer regarding the legality of, or proper way to
challenge the outstanding tax liability or the consequences of paying,
or failing to pay, that liability beyond the specific statement
provided by the IRS and the explanations in IRS Publication 1.
Taxpayers with further questions would be directed to consult with
their own advisor, with IRS personnel overseeing the PCA, or with the
Taxpayer Advocate Service.
7.
LPayment Pursuant To A 3-Year Installment Agreement--If a
taxpayer is unable to pay immediately the full amount of the
outstanding tax liability, the PCA would request that the taxpayer
enter into an installment agreement (i.e., full payment over time, not
to exceed 3 years).
L A PCA would be responsible for monitoring installment
agreements that are facilitated by the PCA. Specifically, a PCA would
monitor whether a taxpayer was making payments in accordance with the
terms of the installment agreement and, if payments stopped, would
contact the taxpayer in an effort to bring the taxpayer current with
the installment agreement. A PCA would be prohibited, however, from
threatening or intimidating taxpayers, or suggesting that enforcement
action will or may be taken if a taxpayer does not continue making
payments.
LA PCA would notify the IRS if a taxpayer remained in breach of
the installment agreement for nonpayment, and any decision to terminate
the installment agreement would have to be made by the IRS. Any
termination decision by the IRS would be subject to the notice of
proposed termination required by section 6159(b)(5), an independent
administrative review by the IRS Office of Appeals under section
6159(d), and the prohibition on levy under section 6331(k) until any
such review has been resolved.
8.
LCases Where a Taxpayer Cannot Pay in Full or Enter into a 3-
Year Installment Agreement--The Treasury Department and the IRS expect
that in certain cases, a taxpayer either may request to pay the
outstanding tax liability over more than three years or may indicate
that he or she is unable to pay the liability in full even over time.
In these cases, the PCA would attempt to obtain from the taxpayer
financial information in the same manner that the IRS does through its
Automated Collection System (ACS). Generally, this would involve the
PCA eliciting information from the taxpayer in response to specific
questions. The IRS would provide PCAs with specific training regarding
this process, and the information received would be forwarded to the
IRS.
L The IRS would evaluate the financial information collected by
the PCA for further action, as well as any offer by a taxpayer to enter
into an installment agreement other than a 3-year installment
agreement. Although the IRS would be responsible for reaching
resolution of the liability with the taxpayer (e.g., the execution of
an installment agreement other than a 3-year installment agreement),
PCAs would be permitted to monitor installment agreements reached
between the IRS and taxpayers who were contacted originally by the
PCAs. As with 3-year installment agreements, PCAs would monitor whether
a taxpayer was making payments in accordance with the terms of the
installment agreement and, if payments stopped, would contact the
taxpayer in an effort to bring the taxpayer current with the
installment agreement.
L Again, a PCA would be prohibited from threatening or
intimidating taxpayers, or suggesting that enforcement action will or
may be taken if a taxpayer does not continue making payments. A PCA
would notify the IRS if a taxpayer remained in breach of the
installment agreement for nonpayment, and any decision to terminate the
installment agreement would have to be made by the IRS. Any termination
decision by the IRS would be subject to the notice of proposed
termination required by section 6159(b)(5), an independent
administrative review by the IRS Office of Appeals under section
6159(d), and the prohibition on levy under section 6331(k) until any
such review has been resolved.
9.
LDeath, Bankruptcy, Incarceration, and Other Special
Situations--We would make every effort to refer only those cases where
a taxpayer is likely to agree to pay an outstanding tax liability if
contacted by a PCA. In some cases, however, the taxpayer will be unable
to do so because of a special circumstance. For these cases, the IRS
may develop specific procedures to permit a PCA to gather information
that would enable the IRS to resolve the account administratively.
These procedures, for instance, may permit the PCA to contact an
official representative of the taxpayer or taxpayer's estate (e.g., a
trustee in case of bankruptcy, or executor in case of death) as well as
access other publicly available sources such as court records.
An IRS support unit and PCA oversight team would work with each PCA
to ensure proper controls, protection of taxpayer rights, and
segregation of activities considered inherently governmental. PCAs
would be evaluated based on a balanced measure scorecard that would
reflect quality of service, taxpayer satisfaction, PCA employee
satisfaction, and case resolution, in addition to collection results.
Scorecard results would impact the number of taxpayer accounts that a
PCA would receive.
Taxpayer Protections
Under this proposal, taxpayer protections would be preserved under
existing law and through a combination of statutory amendments,
explicit contractual provisions, and detailed oversight by the IRS over
PCAs. This proposal, however, has been designed to minimize the
possibility that any PCA would be engaged in an activity that may
violate a taxpayer right or protection in the first place.
More generally, our experience with the 1996/97 IRS pilot and FMS'
more recent experience using PCAs to collect nontax debts indicate
that, properly structured, the use of PCAs to support the IRS's overall
collection effort would not threaten taxpayer rights or protections.
PCAs and PCA employees would be subject to extensive quality-
control monitoring by the IRS to ensure compliance with taxpayer
protections and applicable policies and procedures. This monitoring
would include ``live'' monitoring of telephone communications between
PCA employees and taxpayers, review of recorded conversations,
taxpayer-satisfaction surveys, audits of PCA records, and periodic
reviews of PCA performance. In addition, the IRS would specifically
monitor PCA compliance with taxpayer confidentiality requirements and
the restrictions contained in section 1203 of RRA 1998.
Mr. Chairman, the following are the specific safeguards that will
protect the taxpayer:
<bullet> LProtections Provided by the Fair Debt Collection
Practices Act (15 U.S.C. Sec. 1692 et. seq.)--PCAs would be required to
adhere to all applicable requirements and restrictions contained in the
Fair Debt Collection Practices Act (FDCPA). (Certain provisions of the
FDCPA have been incorporated into the Code in section 6304 so that they
apply to IRS employees.) PCAs, for instance, would be prohibited from
communicating with taxpayers at an unusual or inconvenient time or
place, or engaging in conduct that is harassing, oppressive or abusive.
<bullet> LProtections Against Unauthorized Disclosure (I.R.C.
Sec. 6103)--Sections 6103(n) and 7431(a)(2) of the Code currently
permit a taxpayer to pursue legal action against any person who is
permitted to receive tax returns and return information for purposes of
assisting in tax administration, but who unlawfully inspects or
discloses that information. Criminal penalties also may be imposed.
I.R.C. 7213, 7213A. These provisions would apply to PCAs. The
Administration's proposal would require annual reports outlining the
safeguards in place at the PCAs to protect taxpayer confidentiality and
PCA compliance with the taxpayer confidentiality provisions.
<bullet> LAssistance from the National Taxpayer Advocate (I.R.C.
Sec. Sec. 7803(c) and 7811)--The office of the National Taxpayer
Advocate provides assistance to taxpayers seeking help in resolving
their problems with the IRS. Any taxpayer experiencing a significant
hardship (as defined in section 7811 of the Code and the Taxpayer
Advocate Service manual procedures) relating to the manner in which the
internal revenue laws are being administered may seek assistance from
the office of the NTA. Under this proposal, PCAs would be required to
inform taxpayers of their right to obtain assistance from the office of
the NTA and to immediately refer any case where such assistance is
requested to the local Taxpayer Advocate office. All efforts by the PCA
to collect would be suspended until the office of the NTA decides
whether to act upon the taxpayer's request for assistance.
<bullet> LProtections with Respect to Third-Party Contacts (I.R.C.
Sec. 7602(c))--As explained above, PCAs would not, except in highly
unusual circumstances, communicate with third parties in a manner that
would constitute third-party contacts for purposes of the notification
and reporting requirements of section 7602(c) of the Code. A PCA would
be required to notify the IRS if the PCA intends to make a
communication governed by section 7602(c), and must receive specific,
written authorization from the IRS before the communication could be
made.
<bullet> LProtections with Respect to Installment Agreements--Any
installment agreement between the IRS and a taxpayer who is contacted
by a PCA (including 3-year installment agreements) would be treated
like any other installment agreement pursuant to section 6159 and,
therefore, would be subject to the protections provided by the Code.
These protections include the prohibition on levy during the
consideration and term of the installment agreement, as well as
immediately after a proposed rejection or termination of an installment
agreement. I.R.C. 6331(k). In addition, a taxpayer has a right to a
hearing with the IRS Office of Appeals following the termination or
rejection of an installment agreement. I.R.C. 6159(d), 7122(d).
<bullet> LProtections with Respect to Communications--PCAs would be
required to comply with Code provisions governing notices reflecting
balances due, penalties, and interest. I.R.C. 6631 and 6751(a)
(currently suspended until July 1, 2003) and I.R.C. 7522. In
addition, PCAs also would be required to follow Internal Revenue Manual
provisions governing taxpayer interviews by IRS employees.
<bullet> LProtections against Conduct that Violates Minimum
Standards--Section 1203 of RRA 1998 prohibits certain specified conduct
by IRS employees, including conduct in connection with the collection
of any unpaid tax. IRS employees, for example, are prohibited from
violating any constitutional or civil right of, or retaliating against,
a taxpayer or taxpayer representative. PCAs would be required to comply
fully with the provisions of section 1203, including, to the extent
permissible under applicable law, the removal or termination of PCA
employees who violate the requirements of this provision. The
Administration's proposal would require annual reports outlining
compliance by PCAs with the restrictions contained in section 1203 of
RRA 1998.
This proposal would amend section 7433, which generally permits
civil actions by taxpayers for unauthorized collection actions, to
extend this provision to actions by employees of a PCA. Taxpayers
therefore could bring actions for damages against a PCA employee if the
employee violated a protection provided by the Internal Revenue Code.
The amendment, however, would permit the government to intervene in any
action brought by a taxpayer against an employee of a PCA (whether
under section 7431 or section 7433), although in no case would the
government be liable for a wrongful act of a PCA.
PCA Compensation
Under the Administration's proposal, section 7809 of the Code would
be amended to create a revolving fund from the tax revenue collected by
PCAs, and the amounts in this fund would be used to compensate the
PCAs. IRS's administrative costs would be paid for from appropriated
funds. This proposed revolving fund mechanism is a critical component
of this proposal for two important reasons.
First, the revolving fund mechanism would allow the IRS to preserve
its existing collection resources for complex cases and issues. Second,
the revolving fund mechanism, in conjunction with the IRS's ability to
control the number of cases that are referred to PCAs, provides
flexibility with respect to the extent to which PCAs would support the
IRS's overall collection effort.
Revenue Estimates
In January 2002, the IRS issued a Request for Information regarding
the potential use of PCAs to support the IRS's overall collection
effort. Twenty-three firms responded. Several of the requests for
information concerned the average collection rates and fees for
contracts similar to the ones contemplated under this proposal. The IRS
also obtained average collection rates and fee information for state
and local government receivables.
Based on this information, the IRS's current inventory of
outstanding tax liabilities closed for workload balancing purposes, and
the IRS's expected future inventory of tax liabilities with similar
classification, the proposal is expected to return an incremental
$1.008 billion to the Treasury over 10 years. The Treasury Department
and the IRS are continuing their review of this estimate.
Conclusion
Mr. Chairman, in conclusion, the Administration's proposal to
permit the IRS to use PCAs could be an important tool to support our
overall compliance program. Taxpayer rights will be protected to the
fullest and the real beneficiaries of this program will be the
overwhelming majority of America's taxpayers who play by the rules and
expect everyone else to do the same.
<F-dash>
Chairman HOUGHTON. Well, thank you very much. I have a
question, and then I will turn it over to you, Earl, and then
we can go back and forth. Now, you have only been on the job--
what--a week?
Mr. EVERSON. A week. It seems a little longer, but----
Chairman HOUGHTON. All right. You will never be more
objective than you are now. Let me ask you a personal question
here. If you had been on the job 2 years ago, would you have
initiated this type of program, knowing what you knew then?
Mr. EVERSON. Let me say this because that sounds like it is
trying to look back at what happened under the previous
Commissioner.
Chairman HOUGHTON. Oh, I do not mean to----
Mr. EVERSON. Maybe that is not the----
Chairman HOUGHTON. No, no. I do not mean to throw any cold
water on former Commissioner Rossotti because he did an
absolutely great job.
Mr. EVERSON. You mean you think there should have been----
Chairman HOUGHTON. All of a sudden you are thrust into this
thing.
Mr. EVERSON. Right.
Chairman HOUGHTON. Would you have done this thing this way
and now?
Mr. EVERSON. I do not think that there is any question that
it makes sense to do this initiative. Appropriate resources are
scarce. After Commissioner Rossotti got in, he had to redirect
the IRS very clearly toward the service side of the business.
That involved to a certain degree a poaching from the
enforcement side.
He has talked about that. He laid it all out in his end-of-
term report, which I know you have seen, and so that does go
back into the period you talk about. What this initiative does
is it enables you to get to a piece, and only a piece, of this
whole enforcement question. The Ranking Member, Mr. Pomeroy, is
quite correct in stating we need to be working on high-end
taxpayers, the tax shelter schemes, all these areas.
This is another piece of it, and we can get to this piece
of it without the appropriated resources, and we can do it with
the proper controls. So, my answer is, yes, this is a tool that
the IRS should have available to it, and I think it is a good
tool now, 2 years ago, 10 years ago, as with the Education
Department when they began using PCAs, or in the future.
Chairman HOUGHTON. So, in effect, just to follow this up
very briefly, you feel that control, and you just mentioned
this, is adequate to sidestep some of the problems which they
had with the original IRS agents in trying to get an incentive
to bring people into court just for their own financial
benefit? You think that is controllable with these outside
agencies?
Mr. EVERSON. I think it is, sir. We have worked very
closely with the Taxpayer Advocate and the proposal that has
been developed. It builds off of a balanced scorecard concept
that looks at issues like customer satisfaction, employee
satisfaction, a whole number of areas. It is not as simple as
just saying maximize your return by the dollars you brought in.
That will not necessarily generate additional casework for the
various firms that will be involved.
There will be a whole series of factors which will be
carefully weighted to make sure that private collections are
not judged solely on the amount of dollars coming in. I think
we can handle that.
Chairman HOUGHTON. Okay. Thank you very much. Mr. Pomeroy.
Mr. POMEROY. Commissioner, following up on the Chairman's
line of questioning, I look at this really as Plan B for the
IRS, Plan A being staff up, staff up so that the IRS can do its
work. If in 8 of the last 10 years, the IRS has been able to
get through the OMB and into the President's budget a request
for resources that Congress has reduced, again in 8 of 10
years, clearly you were seeking a greater measure of internal
capacity to address this debt question than you presently have.
Is that correct?
Mr. EVERSON. I think we are looking broadly to increase all
the enforcement efforts along the lines of what you said. We
need a balanced program. I am not interested at all in going
after middle-income taxpayers or low-income taxpayers, and just
leaving the people who have more and owe more on their own. Of
course not. This is a relatively clear way to supplement that
whole program, and again I am going to, as I made the statement
last week before the Members of the House Committee on
Appropriations--I am going to take a fresh look, and if we
believe we need more resources on the enforcement side, we will
bring forward proposals.
This is a way of making sure that we can actually get to
the inventory that is already out there and we will not need to
actually even make that request. So, I think it is a pretty
clean way of doing it.
Mr. POMEROY. Although, Commissioner, I just think under the
circumstances of its implementation, it is not going to be
comprehensive in its reach. You do not propose that you will be
freeing up institutional resources by these private debt
collectors to have them applied to other work. They are going
to be doing the same thing. These just go to pots of
unrecovered debt that are sitting there unintended to; is that
correct?
Mr. EVERSON. That is absolutely correct, sir.
Mr. POMEROY. Reclaiming my time to make my point, you talk
about going after not those that involve some discretionary
call or elaborate review of the legitimacy of the tax shelter,
but rather debt where they have made some payments and then
fallen off, or they have filed a return, and the check does not
match what they owe. So, they indicate they are trying but they
do not quite get there, but they need a little prod. They need
a little kick in the backside to pay what they owe, and you and
I are absolutely in accord on that. People need to pay what
they owe and the IRS has to establish its absolute credibility
and seriousness that it is going to demand enforcement.
You are going to be required to pay what you owe or there
will be consequences. I do not know how we run a tax program
without that deeply imbedded in our institutional framework----
Mr. EVERSON. Right, yes.
Mr. POMEROY. The people's understanding of government. The
only things certain are death and taxes.
Mr. EVERSON. Yes.
Mr. POMEROY. Tax collection is part of taxes.
Mr. EVERSON. It should be, yes.
Mr. POMEROY. If we get to this situation where the only
people we are getting are those people that are filing a little
bit and are paying a little bit and then not, it would seem to
me that inherently that new effort is geared to middle and
moderate income households. I would expect most of these would
be in the $75,000 and below category. Wouldn't you, fairly?
Mr. EVERSON. That may very well be the case, but again in
the budget request that the President has put forth, he has
asked for additional moneys to attack these other problems that
you are referencing, and that I am very sensitive to as well.
Honestly, I think we cannot afford to say that we are going to
ignore any area. We have to have a feeling that there is an
obligation to comply across the spectrum of the taxpaying
public, and clearly we are going to target and work very
heavily in coming months on the corporate abuses, the tax
shelters, the offshore schemes, all of these areas. That is
where we are going to put the appropriate resources.
Mr. POMEROY. Commissioner, I think that the public is going
to look at this with somewhat of a jaundiced eye if, for
example, the Senate has proposed this in a pay-for as part of
their tax bill. Now, I do not know what their bill is by way of
breakdown, but the bill that came out of this Committee had
about 75 percent of the tax relief going to the top 5 percent
in terms of income of U.S. households over the next 10 years.
If connected with that, we have a new collection initiative
using private bill collectors sent out across the land targeted
at those under $75,000 as part of the same package, that is
going to seem viciously unfair to people.
On the one hand, if you are $75,000 and below, you do not
get much under the tax bill, and by the way expect a call
because we are going to send some private bill collectors after
you to collect the debt you owe. I think that maybe Congress
will want to think long and hard about whether we want to
cobble both of those elements in the same package if this is a
legitimate endeavor, and I certainly respect the seriousness
and professionalism of your approach in trying to collect what
is owed to the IRS.
This would be a bad way to start it, I think. I think there
would be a lot of cynicism out there about this. Anyway, that
is not a IRS issue. That is a political issue, but I very much
appreciate your testifying today. I yield back, Mr. Chairman.
Thank you.
Chairman HOUGHTON. Just to pick up on that a little bit,
maybe I misunderstood, but I do not think you were thinking of
picking on any one particular group. There is a whole variety
of people who are fudging on their taxes willfully or just out
of ignorance. You are trying to do that, and then in terms of
the 5 percent figure, you know the whole concept is when you
put a tax bill in, you ask people in the higher categories to
pay more of the tax, and when you take a tax off, they are in
necessity of relief that they would not have gotten under
ordinary circumstances.
So, I think what you are trying to do, if I understand it--
I do not mean to be answering your question--but to try to even
this thing out.
Let me ask you another question. You plan to require
companies to comply with this so-called Fair Debt Collection
Practices Act (FDCPA) (P.L. 104-208), which is a tough consumer
law that regulates the private debt collection industry. Can
you explain what this means and why it is important?
Mr. EVERSON. Well, yes, Mr. Chairman. There will be a very
rigorous procurement process to make sure we get qualified
effective organizations but also those that will act
responsibly in the conduct of this matter. My understanding of
that act is that it governs issues such as PCAs' conduct
relative to harassing people at certain hours, odd hours of the
day or night, and the FDCPA very much controls what kind of
contact they can or cannot make with the individual that owes
the money. So, we will be following that.
It is my understanding that this process is being practiced
by the Education Department. It is not a statutory requirement,
but it is one they impose on their collectors, so it is not as
if new ground is being broken here, sir. I think this is well
understood out in the industry as to how that applies. We will
absolutely assure that standards regarding contact with
individuals are applied. We will go beyond that, in fact.
I would note, again, that in the Education Department, the
PCAs actually have some authority to settle and negotiate some
of these issues. We are not giving that authority to the PCAs.
Under our proposal, the PCAs would be limited to call up and
say, Mr. Pomeroy, you have a balance due of $10,000; would you
like to pay that? Would you like to pay that all at once? Would
you like to pay that over a period of up to 3 years?
Mr. POMEROY. This is a hypothetical example, Mr. Everson?
Mr. EVERSON. I am not allowed to disclose any individual
taxpayer information.
Chairman HOUGHTON. He says he is going to refer it to Mr.
Houghton who has got to pay even more.
[Laughter.]
Mr. EVERSON. Anyway, that is how it would work and, yes, we
would adhere to that.
Chairman HOUGHTON. I have another. We have spent a lot of
time and money in terms of the computer system and the methods
of managing cases. We assume that that is going to go hand-in-
hand with this other program. We are just not going to stop.
Mr. EVERSON. No, Mr. Chairman, you are absolutely right. My
understanding is that this would require an additional
incremental investment now, something $10 to $15 million, to
develop a system, because we have to work very carefully with
the PCAs in terms of the data they would gather. It would be
very limited. Once you establish a program where somebody
agreed to pay over a 3 year period, you have to make sure you
are able to track it, and that information is fed into the IRS.
So, we will have to find some money and we will do this.
The IRS spends $2 billion a year on Information Technology
(IT), so I would like to believe that we will be able to find
money to get this system going and there will be overall work
on collection systems as part of the bigger modernization
effort as well.
Chairman HOUGHTON. Well, I do not have any other questions.
Do you, Earl?
Mr. POMEROY. No, I think we have covered it.
Chairman HOUGHTON. All right. Good. Listen, thank you very
much. I certainly appreciate your coming in. We look forward to
working with you.
Mr. EVERSON. Thank you.
Chairman HOUGHTON. Now the second panel is Ms. Nina Olson,
National Taxpayer Advocate of the IRS; Ms. Pam Gardiner, Acting
Treasury Inspector General for Tax Administration (TIGTA), in
the Treasury Department; Ms. Colleen Kelley, President of the
National Treasury Employees Union (NTEU); and Mr. Alan Felton,
who is the Assistant Secretary for Examinations and Collections
in North Carolina Department of Revenue.
Ladies, gentlemen, we are delighted to have you here, and
do not forget that there is a 5 minute rule, and if you can do
it any shorter than that, that would be okay also, whatever you
want, but watch that red light.
So, why don't we start, Ms. Olson, with you, if you are
ready. If not, we will wait for you.
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE
Ms. OLSON. Thank you, Mr. Chairman.
Chairman HOUGHTON. Okay. Thank you.
Ms. OLSON. This past year I have, in fact, worked closely
with the IRS and Treasury Department so that taxpayer rights
and confidentiality are protected in contract collection
arrangements. As you know, the Federal Government cannot
constitutionally delegate to private parties any power
inherently governmental, as evidenced by the exercise of
judgment and discretion. The government can contract out
ministerial acts, but it must retain sufficient control over
the private contractors to ensure against arbitrary or self-
serving use of government power.
This oversight and control is particularly important where
Federal tax debt is concerned because our tax system relies on
the willingness of taxpayers to voluntarily report, file, and
pay their taxes. That willingness will be eroded if taxpayers
believe that the government or its contractors are acting
capriciously in collecting the tax.
There is no question that the IRS must augment its current
efforts to collect outstanding tax debts. It may be true that
IRS employees are the best qualified and most efficient tax
collectors. However, in the absence of funding to hire
additional employees to work this inventory, PCAs could be used
for the collection of those tax debts which by definition and
careful selection are easily resolvable and not subject to
dispute.
Of course, any such arrangement must meet constitutional
requirements. Here are some of my major concerns for this type
of arrangement. First, IRS employees and PCA employees must
work on a level playing field. The PCA employees must be
subject to the same restrictions and penalties for overreaching
as are IRS employees. Otherwise, the IRS could get around
taxpayer protections Congress enacted by simply contracting out
tax collection.
The PCA employees should not be permitted to work on
accounts other than IRS cases and information obtained from
working an IRS account regardless of source cannot be used for
a non-IRS account that the PCA has involving that taxpayer.
Consumer groups and tax professionals have raised several
issues including the IRS's ability to conduct live as well as
taped monitoring of taxpayer calls, the application of FDCPA to
the PCAs without exception or exemption, and limits on the use
of subcontractors.
Using subcontractors increases the IRS's oversight burden
and could have the effect of weakening taxpayer protections
including confidentiality of tax return information. We
recommend that PCAs be prohibited from using subcontractors or
leased employees in any activity that involves direct taxpayer
contact or direct contact with or handling of taxpayer
information in activities other than skip tracing.
The legislation should clarify that subcontract employees
be subject to the same restrictions and liabilities as PCA
employees. When a subcontractor violates a contract provision,
it may be appropriate to impose a penalty on the contractor as
well.
Today, IRS employee performance evaluation is based on
balanced measures: employee satisfaction, customer
satisfaction, and business results. The proper balance between
these three aspects of tax administration creates good customer
service and prevents abuses. Compensation arrangements with
PCAs must reflect a similar approach.
If we do not structure compensation incentives properly,
PCA employees may place taxpayers into inappropriate payment
arrangements or fail to refer cases back to the IRS or the
Taxpayer Advocate Service (TAS).
Proper case selection is essential for success of this
program. If the IRS does not select cases carefully, PCA
employees will send these cases back to the IRS to be worked.
We will have a new backlog of cases, having resurrected the
taxpayer from one queue only to be placed into the black hole
of yet another queue.
Finally, taxpayers must have access to the TAS. The PCA
employees must advise taxpayers that if they are experiencing a
significant hardship, TAS may be able to help. Moreover, the
National Taxpayer Advocate should have the same statutory
authority to intervene in a PCA case and over PCA employees as
she has over other IRS employees. She must also have the
authority to issue a taxpayer assistance order to remove the
case from the PCA to the IRS for consideration.
When I was in private practice representing taxpayers in
State tax collections by PCAs, I witnessed first-hand many of
the abuses that the IRS proposal tries hard to avoid. Because
of these experiences and the concerns expressed by many others,
I have worked with the IRS and Treasury Department to structure
a proposal that if authorized will be a model for protection of
taxpayer rights. Although I would prefer that we not contract
out collection of tax debts, I believe that this proposal can
meet constitutional requirements, create a level playing field,
protect taxpayer rights and confidential information and
actually result in fair and accurate tax collections.
Should Congress authorize the use of PCAs to collect
Federal tax debt, my office will actively monitor its
implementation. Thank you for the opportunity to speak today.
[The prepared statement of Ms. Olson follows:]
Statement of Nina E. Olson, National Taxpayer Advocate, Internal
Revenue Service
Mr. Chairman and members of the committee, thank you for inviting
me here today to testify about the proposal to contract out the
collection of certain categories of tax debt to private collection
agencies. I must state at the outset that I have a level of discomfort
with the concept of using private collection agencies (PCAs) based on
my earlier professional experiences representing taxpayers in states
that utilize PCAs.<SUP>[1]</SUP> Much to their credit, both the
Department of Treasury and the Internal Revenue Service have included
the Office of the Taxpayer Advocate in the development of this proposal
and have sought to accommodate my office's concerns wherever and
whenever possible. In my testimony today, I will outline some of those
concerns and the proposal's attempts to address them.
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\[1]\ Internal Revenue Service: The Commissioner's Final Report:
Hearing before the House Comm. On Gov't. Reform, Subcomm. on Gov't.
Efficiency, Financial Management and Intergovernmental Relations, 107th
Cong. 107-169 (2002) (Statement of Nina E. Olson, National Taxpayer
Advocate, Internal Revenue Service).
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The Inherently Governmental Nature of Tax Collection
As early as 1819, the United States Supreme Court recognized that
the Federal Government's taxing power is ancillary to its
sovereignty.<SUP>[2]</SUP> In McCulloch v. Maryland, Chief Justice
Marshall stated that the power to tax ``is an incident of sovereignty,
and is coextensive with that to which it is incident.'' Thus, that
power--to assess and collect taxes--is ``inherently governmental.'' The
hallmark of an inherently governmental function is one that requires
the exercise of discretion in interpreting and executing the law. It is
a function that is recognized as ``so intimately related to the public
interest as to mandate performance by Government employees. . . .''
<SUP>[3]</SUP> An inherently governmental function cannot be delegated
by the government to private parties.<SUP>[4]</SUP> A ministerial
function, however, may be delegated to private parties.<SUP>[5]</SUP>
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\[2]\ Marshall v. McColloch, 17 U.S. 316, 429 (1819).
\[3]\ OMB Circular No. A-76, 6(e) (1999). The proposed revision
of OMB Circular No. A-76 states at (E)(1) that ``[a]n inherently
governmental activity is an activity that is so intimately related to
the public interest as to mandate performance by governmental
personnel.'' (November 14, 2002.)
\[4]\ Carter v. Carter Coal Co., 298 U.S. 238 (1936).
\[5]\ In the context of interest abatement, the IRS defines a
ministerial act as one that does not involve the exercise of judgment
or discretion. Treas. Reg. 301.6404-2(b)(1).
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Within these constitutional parameters, Congress has broad
authority to delegate such governmental powers. Such delegations must
establish clear standards that detail how and when private parties may
exercise government power. The delegating governmental body must
conduct sufficient oversight, including the establishment of procedural
safeguards, and retain sufficient control over private delegates to
ensure against arbitrary or self-serving use of government power. Under
such delegations of government authority, private parties are
essentially limited to advising the government and performing
ministerial acts. Functions involving the exercise of discretion are
reserved to the government itself.
Where the Federal Government seeks to delegate the collection of
federal tax debt to private parties, the activities must be limited to
those that do not involve the exercise of discretion. The Federal
Government must structure the terms of the contract and its
implementation so that the government has close oversight and control.
The head of the delegating agency must retain the authority to resolve
disputes, compromise claims or terminate the collection
action.<SUP>[6]</SUP> Finally, the Federal Government cannot dilute the
rights and protections taxpayers otherwise enjoy merely by contracting
out certain functions to private parties.
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\[6]\ 31 U.S.C. 3718(a).
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The Unique Nature of Tax Debt
I believe that taxes are fundamentally different from other types
of debt owed to the Federal Government for several reasons. First,
unlike other federal obligations, taxes are the ``lifeblood'' of the
government.<SUP>[7]</SUP> Second, because our tax system relies on the
willingness of taxpayers to voluntarily report, file, and pay their
taxes, there is the potential for an erosion of that willingness, if
taxpayers believe that the government or its contractors are acting
capriciously in collecting the tax. Third, the correct tax liability
often cannot be determined from the ``four corners'' of the taxpayer's
own return or even an IRS notice, thus, taxpayers are allowed to
dispute the correctness of a tax assessment, including their own
original assessment on a return. Taxpayers, the IRS and the courts are
often called upon to interpret the Internal Revenue Code and
regulations to determine the actual tax debt, and taxpayers can
challenge the amount of actual liability up to two years after their
last payment. These qualitative differences between tax debts and other
government accounts raise, in turn, serious practical challenges for
contracting out the collection of federal tax debt.
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\[7]\ Bull v. United States, 295 U.S. 247, 259 (1935).
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The Current Tax Gap and Potentially Collectible Inventory
Today, the Internal Revenue Service has a known $78 billion
inventory of potentially collectible debt, up from $68 billion in
September, 2000. Of the $78 billion potentially collectible inventory
(PCI), approximately 38 percent is in inactive status. This is debt
that the taxpayer has either agreed is due and owing and/or on which
the taxpayer has made at least three payments, yet the IRS is unable to
collect because it cannot locate the taxpayer or does not have
sufficient resources.
Most commentators, practitioners, and IRS employees believe that
the IRS can collect federal tax debt more efficiently than private
contractors. The IRS possesses many powerful tools with which to
collect debt. The application of liens, levies, other seizures,
compromises of tax, abatements of penalties and interest, the
determination of allowable expenses for purposes of an installment
agreement or ``currently not collectible'' hardship status--all of
these procedures involve the exercise of discretion. Issues arise in
the course of tax collection that may require the IRS to revisit the
underlying tax liability. Any attempt to collect tax is also an
opportunity to educate the taxpayer about his or her rights and
obligations under the Internal Revenue Code. As government employees,
IRS employees are trained in aspects of these procedures and are, to
various degrees, authorized to exercise discretion, where appropriate,
in the collection of federal tax debts.
However, Congress can reasonably conclude that it would make sense
for these valuable IRS resources to be applied to those aspects of tax
enforcement, including collection of intractable or elusive tax
accounts, that absolutely require the unique skills IRS employees
possess. Within constitutional boundaries, private contractors could
reasonably be used for the collection of those tax debts which, by
definition and careful selection, are easily resolvable and not subject
to dispute.
The Level Playing Field
Particularly with respect to the collection of federal tax debt,
Congress has seen fit to provide taxpayers with significant due process
protections and to place restrictions or requirements on IRS employees
whose function is to collect federal taxes.<SUP>[8]</SUP> Any
delegation of even ministerial authority must not dilute those rights
but rather must ensure that IRS employees and contract employees
operate on a level playing field. Otherwise, the IRS could subvert
existing taxpayer protections by simply contracting out the collection
of federal tax debt.
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\[8]\ These procedures include the lien and levy collection due
process hearings under IRC 6320 and 6330; the right to appeal an
offer in compromise or installment agreement determination under
section 7122(d); the taxpayer protections under RRA 98 section 1203;
and a right of action against the IRS for its employees' negligent
collection activity under IRC 7433.
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Therefore, any proposal for contracting out the collection of
federal tax debt must, at a minimum, incorporate the following
protections:
<bullet> LProvisions similar to those under section 1203 of the
Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98)
<SUP>[9]</SUP> that protect the taxpayer from harassment, threats,
retaliation, and that provide for similar sanctions (including
termination of employment) against any PCA employee who, after
investigation, has been found to have committed one or more of the
prohibited acts.
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\[9]\ Pub. L. No. 105-206 (1998).
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<bullet> LContractor liability for PCA employees' negligent
collection actions, to the same extent as is applicable to the IRS
under IRC section 7433.
<bullet> LRestrictions on taxpayer information shared with PCAs to
that which is necessary for the PCA to locate the taxpayer and to
collect the tax. Generally, this would only include the taxpayer's
name, last known address, tax year, type and amount of tax liability,
amount and date of payments made toward the tax debt, and the portion
of the tax liability attributable to tax, penalty and interest.
<bullet> LA prohibition that bars Private Collection Agency
employees working on IRS accounts from working on any other PCA
account. Similarly, any information obtained in the course of working
an IRS account, whether from the IRS, from the taxpayer, or from some
third source, cannot ``migrate'' to a non-IRS account that the PCA has
involving that taxpayer.
Implementation Issues
There are, of course, significant practical concerns regarding the
implementation of this proposal which would not only limit its success
in terms of tax collection but also impose undue burdens on taxpayers.
During the months I worked with Treasury and the IRS to ensure that
taxpayer rights were protected, I heard from many tax practitioners,
low income taxpayer clinics, and consumer groups. Here are some of the
practical concerns raised by my office and others about this proposal.
Selection of Appropriate Cases. The IRS has stated that it will
only send to PCAs those cases that meet the following criteria:
L (1) the taxpayer has either agreed to the tax debt and/or has
made three or more payments toward that debt; and
L (2) the taxpayer appears to have the ability to pay this debt in
full immediately or within 36 months.
It is vital to the success of this proposal that only those cases
that fit these parameters are selected and referred to the PCAs. If PCA
employees receive cases and make contacts with taxpayers, only to find
that taxpayers frequently cannot full pay the tax debt either
immediately or within 36 months; or they request penalty or interest
abatements; or they are candidates for offers-in-compromise or
currently-not-collectible status; or they challenge the underlying
liability, then these cases, which must be referred back to the IRS for
resolution because they require the exercise of discretion, will create
a backlog and be counterproductive. We will have resurrected the
taxpayer's account from the ``black hole'' of inactive potentially
collectible inventory and contacted the taxpayer, only to have the
account fall into another queue for the collection of unpaid taxes--
albeit a specific, dedicated queue.
Thus, the Service's initiatives for case analysis and selection
must be carefully planned, scrutinized, and funded. Systems must be in
place to identify trends in case selection on an ongoing basis and to
quickly alter the selection algorithms when problems arise.
Access to and Authority of the Office of the Taxpayer Advocate. IRS
Publication 1, ``Your Rights as a Taxpayer,'' describes the role of the
Office of the Taxpayer Advocate and will be enclosed in each PCA
contact letter. However, as a safeguard against any overreaching on the
part of PCAs, PCA employees should advise taxpayers that if they are
experiencing a significant hardship, the Taxpayer Advocate Service may
be able to assist them. The Taxpayer Advocate Service must have the
opportunity to provide training to PCA employees about how to recognize
a significant hardship situation under IRC section 7811, so that if a
PCA employee discovers a situation in his later dealings with the
taxpayer, he can remind the taxpayer about access to the Taxpayer
Advocate Service.
Finally, the National Taxpayer Advocate and her employees should
have the same statutory and delegated authority to intervene in a PCA
case and over PCA employees as they have over IRS employees, including
the authority to issue a Taxpayer Assistance Order to the IRS to have
the case removed from the PCA to the IRS for consideration. We do not
have this authority today.
Compensation and Balanced Performance Measures. IRS employees are
prohibited from being evaluated based on Records of Tax Enforcement
Results.<SUP>[10]</SUP> Today, IRS employee performance evaluation is
based on balanced measures--employee satisfaction, customer
satisfaction, and business results. The proper balance between these
three aspects of tax administration creates good customer service and
prevents abuses. The compensation arrangements with the PCAs must
reflect a similar approach. PCAs must be measured not only by the tax
that they collect or the accounts they bring to resolution but also by
the appropriate referrals they make back to the IRS or to the Taxpayer
Advocate Service. Moreover, while it may be too much to expect that
taxpayers contacted by the PCA will be happy that they are having to
pay an aged tax debt, they can at least feel that they were treated
professionally and courteously, that they received clear and helpful
explanations about the debt, that their rights and recourse were
clearly explained, and that their concerns were listened to and
addressed. Thus, customer satisfaction should be prominently factored
into PCA compensation.
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\[10]\ RRA 98 section 1204.
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In response to these concerns, the IRS plans to issue each PCA a
monthly scorecard that will cover the three aspects of balanced
measures, including customer satisfaction. Compensation will be tied to
the scorecard results. Further, the IRS plans to tie the placement of
future work (and future PCA revenue) to that score, such that it will
place additional cases with those companies having the highest score. I
do not know if this approach strikes the right balance to compensation;
I believe this is an issue that Congress should review very carefully.
I am keenly aware that PCA compensation must be structured so that
we do not create incentives for PCA employees to encourage taxpayers to
enter into payment arrangements that they will not be able to keep or
disincentives for PCA employees to refer cases back to the IRS or to
the Taxpayer Advocate Service. If Congress authorizes the Secretary to
contract out the collection of federal tax debt, my office will be
closely monitoring the performance, evaluation, and compensation of
PCAs.
Monitoring and Supervision of PCAs. During the development of this
proposal, the IRS team (which included a representative of the Taxpayer
Advocate Service) studied and visited several private collection
agencies, including those that collected state tax debts and other
federal agency debts. I, too, discussed this issue with tax
professionals and advocates who represented individuals before private
collection agencies. The IRS learned a great deal from all of these
contacts and has designed what I think is a commendable approach to
monitoring and supervising the PCAs.
Unlike many other agencies, the IRS intends to conduct live call
monitoring in addition to taping calls to ensure that taxpayers are
treated appropriately. The IRS will also have an on-site presence at
each private collection agency. Cases referred from a PCA to the IRS
for resolution will go to a dedicated unit, so that the IRS can monitor
the effectiveness of referrals and quickly resolve open issues.
The Office of the Taxpayer Advocate will actively monitor the
implementation of this initiative. Referrals from PCAs to the Taxpayer
Advocate Service will go to one or two locations so that my office can
quickly analyze and identify trends. My office will independently
review all of this information and make recommendations for improvement
of protections, oversight, training and other issues. An analyst from
my office will work routinely and directly with the IRS to discuss and
share any suggestions and trends. Finally, I will include regular
reports on this initiative in my annual reports to Congress under IRC
section 7803.
Fair Debt Collection Practices Act. It is my understanding that the
Fair Debt Collection Practices Act <SUP>[11]</SUP> will apply, without
exemption or exception, to all private collection agencies under this
proposal. I believe that this is an important distinguishing feature
between the IRS proposal and other federal or state agencies' use of
private debt collectors. That is, other government agencies either do
not apply the provisions of the FDCPA to their private collection
contractors or exempt these contractors from some provisions of the
Act.
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\[11]\ 15 USC 1692.
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PCA Use of Subcontractors. The use of subcontractors or leased
employees by private collection agencies in the course of collecting
federal taxes raises several difficult issues. Since protecting the
confidentiality of taxpayer information is paramount, the use of
subcontractors to collect taxes, or to process taxpayer correspondence,
or even to prepare and mail notices to taxpayers will impose additional
oversight burdens on the IRS, essentially forcing it to monitor two
entities for conformity with taxpayer protections. The use of a
subcontractor may be thought to be a means to dilute the liability of a
contractor for violation of taxpayer rights or other provisions. On the
other hand, it may be industry practice to contract out certain
activities, such as skip-tracing.
In light of these concerns, my office recommends that PCAs be
prohibited from using subcontractors or leased employees in any
activities that involve (1) direct taxpayer contact or (2) direct
contact with or handling of taxpayer information in activities other
than skip-tracing. The legislation should specifically address this
issue, and should clarify that employees of permitted subcontractors
are subject to the same restrictions and to the same liability as PCA
employees with respect to federal tax collection. In fact, where a
subcontractor has violated one of the contract provisions, it may be
appropriate to impose a penalty on the contractor as well. This penalty
regime would reinforce the need for serious oversight of subcontractor
activities.
Correspondence with Taxpayers. The reporting, filing and payment of
taxes is the primary contact most taxpayers have with the Federal
Government on a routine basis. Since our tax system depends on the
willingness of taxpayers to come forward and voluntarily report, file
and pay taxes, the IRS must take every step necessary to reassure
taxpayers that their rights and their tax information are secure. I
believe that taxpayers may be alarmed if they receive a letter, direct
from a PCA, requesting payment of their federal tax debt. I believe
this is true even where those same taxpayers are accustomed to dealing
with PCAs for collection of student loans or state taxes. I attribute
this to the unique nature of federal tax debt, discussed above, and to
the fact that Congress has afforded federal taxpayers with rights and
protections that exceed those available with respect to other federal
agency or state tax debts.
Thus I believe that the first communication with a taxpayer whose
account will be handled by a PCA should come from the IRS. This letter
should clearly inform the taxpayer that a PCA will be contacting the
taxpayer; it should outline what the taxpayer has the right to expect
of the PCA, both in terms of PCA conduct and case resolution, and it
should provide the taxpayer with a toll-free number for reporting PCA
misconduct or grievances. The IRS letter would then be followed by the
PCA's initial contact letter, which would include Publication 1. This
sequence of letters would clearly inform the taxpayer of this new
program and his or her rights thereunder (a communication that should
come directly from the tax agency itself) while minimizing the
possibility that the taxpayer will call the IRS directly to resolve the
debt.
Conclusion
The use of private collection agencies to collect federal tax debt
is a complex issue. There is a clear need to work the tax debt that is
languishing in our inactive but potentially collectible inventory--a
need not just based on revenue but also on fairness to all other
taxpayers who are dutifully paying their tax debts. Moreover, the IRS
has many other demands on its use of limited resources and personnel;
indeed, some of these demands, such as stemming various abusive tax
schemes, threaten to undermine the very confidence in the tax system we
are seeking to protect. In light of these competing concerns, PCAs
appear a limited but reasonable option.
However, I represented taxpayers in state tax collections by PCAs
when I was in private practice. I witnessed first-hand many of the
abuses that the IRS proposal tries hard to avoid. Because of these
experiences, and the concerns expressed by many practitioners, IRS
employees, consumer groups, and taxpayers, I have worked with the IRS
and Treasury to structure a proposal that, if Congress so authorizes,
will be a model for federal debt collection in terms of the protection
of taxpayer rights. My office will be watching closely to ensure that,
if authorized and implemented, this initiative succeeds in meeting its
constitutional requirements, creates a level playing field between IRS
and PCA employees, protects taxpayer rights and confidential
information, and actually collects the correct amount of tax due.
<F-dash>
Chairman HOUGHTON. Thank you very much. Now, Ms. Gardiner.
STATEMENT OF PAMELA J. GARDINER, ACTING TREASURY INSPECTOR
GENERAL FOR TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY
Ms. GARDINER. Mr. Chairman, Ranking Member Pomeroy, I
appreciate the opportunity to appear before you today to
discuss the IRS's progress regarding the use of collection
agencies and my office's work in assessing this progress.
The use of collection agencies to assist in the collection
of Federal tax debt is not a new concept. In 1996, the IRS
piloted the use of collection agencies and after a detailed
internal evaluation concluded that their use was not
economically viable.
The IRS's current approach, however, differs significantly
from the prior methodology. Most importantly, in 1996, the
collection companies were compensated with moneys from the
IRS's appropriated funds. In contrast, as part of its 2004
budget submission, the IRS has requested authority to fund the
use of collection companies directly from the moneys collected
by those companies from taxpayers.
The IRS plans to eventually place 2.6 million cases
annually with collection companies. The Treasury Department
projects that this initiative will produce revenue of as much
as $1 billion through 2013. While this amount is significant,
it represents a small portion of the $280 billion accounts
receivable that were due at the end of fiscal year 2002.
In a recent audit report, TIGTA identified that the IRS's
preliminary planning efforts for using collection companies
were extensive. The IRS carefully evaluated similar programs at
other Federal and State government entities such as the
Education Department and the State of Virginia, contacted
subject matter experts regarding industry best practices,
issued a draft request for quotation on February 14, 2003, and
subsequently held an informational conference to solicit
feedback and answer questions from potential contractors
regarding the IRS's requirements.
Although these efforts were good, TIGTA identified several
areas where IRS planning could be enhanced: additional focus on
the development of management information to improve the IRS's
ability to oversee the program; better development of detailed
requirements to help ensure taxpayer rights and privacy are
protected; and a more measured initial release of cases to
collection companies to provide IRS more data to determine
staffing needed to effectively support this initiative.
The IRS management agreed with all of these recommendations
and indicated that they have already implemented corrective
actions to address the findings in our report.
One issue warranting future attention which is critical to
the success of the program is the process of selecting which
cases are given to the contractors. In the 1996 IRS pilot, most
of the cases delivered to the collection agencies were small
dollar delinquencies normally collected by the IRS at a minimal
cost.
However, the case selection process has changed over time
at the IRS. In fact, the IRS has recently changed the methods
used to determine which cases it works internally. These
changes will affect the types of cases that the contractors
receive, but the IRS has not yet officially finalized the
method for selecting cases for this new initiative.
We are also concerned generally with IRS's contract
administration and oversight of contractors. The TIGTA has
issued several audit reports and conducted investigations of
alleged criminal or civil misconduct in the procurement area in
the last 3 years, finding such things as:
Employees at one lockbox bank lost or destroyed more than
70,000 taxpayer remittances worth more than $1.2 billion, and
another 71 investigations identified 14 instances of thefts of
receipts valued at close to $2 million; an IRS employee ensured
certain companies received contracts in exchange for illegal
payments; and, a contractor was not in compliance with the
terms of its contract resulting in increased security risk at
some IRS locations.
The IRS proposal to contract out the collection of
delinquent accounts to private collection companies has the
potential to recover a significant amount of IRS accounts
receivable. Nonetheless, we will want to watch the effort
closely to ensure the dual risks of protecting taxpayer rights
and effective contract administration are addressed. This
concludes my statement.
[The prepared statement of Ms. Gardiner follows:]
Statement of Pamela J. Gardiner, Acting Treasury Inspector General for
Tax Administration, U.S. Department of the Treasury
Mr. Chairman, Ranking Member Pomeroy, and Members of the
Subcommittee, I appreciate the opportunity to appear before you today
to discuss the IRS's progress regarding the use of collection agencies
and my office's work in assessing this progress.
The use of collection agencies to assist in the collection of
federal tax debt is not a new concept. In 1996 the IRS piloted the use
of collection agencies, and after a detailed internal evaluation,
concluded that their use was not economically viable. The IRS' current
approach, however, differs significantly from the prior methodology.
Most importantly, in 1996 the collection companies were compensated
with monies from the IRS's appropriated funds. In contrast, as part of
its 2004 budget submission, the IRS has requested authority to fund the
use of collection companies directly from the revenues collected by
those companies.
The IRS plans to eventually place 2.6 million cases annually with
collection companies. Treasury projects that this initiative will
produce revenue of as much as $1 billion through 2013. While this
amount is significant, it represents a small portion of the $280
billion in accounts receivable that were due at the end of FY 2002.
In a recent audit report, TIGTA identified that the IRS's
preliminary planning efforts for using collection companies were
extensive. The IRS carefully evaluated similar programs at other
federal and state government entities, such as the U.S. Department of
Education and the State of Virginia, contacted subject matter experts
regarding industry best practices, issued a draft Request for Quotation
on February 14, 2003, and subsequently held an informational conference
to solicit feedback and answer questions from potential contractors
regarding the IRS's requirements.
Although these efforts were good, TIGTA identified several areas
where IRS planning could be enhanced:
<bullet> LAdditional focus on the development of management
information to improve the IRS's ability to oversee the program.
<bullet> LBetter development of detailed requirements to help
ensure taxpayer rights and privacy are protected.
<bullet> LA more measured initial release of cases to collection
companies to provide IRS more data to determine staffing needed to
effectively support this initiative.
IRS management agreed with all of these recommendations and
indicated that they have already implemented corrective actions to
address the findings in our report.
One issue warranting future attention, which is critical to the
success of the program, is the process of selecting which cases are
given to the contractors. In the 1996 IRS pilot, most of the cases
delivered to the collection agencies were small dollar delinquencies
normally collected by the IRS at a minimal cost. However, the
collection case selection process has changed over time at the IRS. In
fact, the IRS has recently changed the methods used to determine which
cases it works internally. These changes will affect the types of cases
that the contractors receive, but the IRS has not yet officially
finalized the method for selecting cases for this new initiative.
We are also concerned generally with IRS's contract administration
and oversight of contractors. TIGTA has issued several audit reports
and conducted investigations of alleged criminal or civil misconduct in
the procurement area in the last three years, finding such things as:
<bullet> LEmployees at one lockbox bank lost or destroyed more than
70,000 taxpayer remittances worth more than $1.2 billion, and another
71 investigations identified 14 instances of thefts of receipts valued
at close to $2 million.
<bullet> LAn IRS employee ensured certain companies received
contracts in exchange for illegal payments.
<bullet> LA contractor was not in compliance with the terms of its
contract resulting in increased security risk at some IRS locations.
The IRS's proposal to contract out the collection of delinquent
accounts to private collection companies has the potential to recover a
significant amount of IRS accounts receivable. Nonetheless, we will
want to watch the effort closely to ensure the dual risks of protecting
taxpayer rights and effective contract administration are addressed.
This concludes my statement. For further information on the Treasury
Inspector General for Tax Administration's (TIGTA) work related to the
use of debt collection agencies, see:
Management Advisory Report:
Additional Options to Collect Tax Debts Need To Be Explored
July 2001
Reference Number: 2001-40-122
http://www.treas.gov/tigta/2001reports/200140122fr.pdf
Efforts to Develop a Successful Collection Contract Support Program
Could Be Enhanced
March 2003
Reference Number: 2003-30-075
http://web.tigta.treas.gov/aci-ia/03-AuditProgram/03-AuditReports/
FY03AuditReports/06Mar03/200330075fr.html
<F-dash>
Chairman HOUGHTON. All right. Well, thank you very much.
Ms. Kelley.
STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL
TREASURY EMPLOYEES UNION
Ms. KELLEY. Chairman Houghton, Ranking Member Pomeroy, I
very much appreciate the opportunity to share the view of
frontline IRS employees on turning over IRS tax collection
responsibilities to private debt collectors.
The NTEU strongly opposes hiring private tax collection
agencies on a commission basis to collect tax debt. This
proposal will cost the taxpayers more money than having this
work done by IRS employees, and it will jeopardize the rights
and the privacy of thousands of taxpayers by putting private
taxpayer files in the hands of private companies.
I urge the Subcommittee to reject this. If given the
appropriate resources, IRS employees could collect outstanding
tax debt at significantly less cost than contractors and avoid
subjecting taxpayers to the unknown impact of providing their
confidential tax information to private collection companies.
In a report submitted to the IRS Oversight Board last
September, former Commissioner Charles Rossotti made clear that
with more resources to increase IRS staffing, the IRS would be
able to close the compliance gap. Commissioner Rossotti stated
that the IRS is simply outnumbered when it comes to dealing
with the compliance risks.
The Rossotti report found that while workload had increased
16 percent over the last 10 years, the number of full-time
employees dropped from 115,000 in 1992 to 95,000 in 2001. A
disproportionate reduction occurred in field compliance
personnel falling 28 percent from 29,000 in 1992 to 21,000 in
fiscal year 2002.
The Rossotti report quantified the workload gap noting that
the majority of the workload gap is in compliance. It found
that if Congress were to appropriate an additional $296 million
to hire additional IRS compliance employees to focus on field
and phone accounts receivable, the IRS could collect an
additional $9.47 billion in known tax debts per year.
In other words, for every dollar spent on implementing
Commissioner Rossotti's plan, a net of $31 will be collected.
Compare that to the administration's 25 percent commission
scheme, $3.25 billion to collect $13 billion, that under the
best case scenario nets only $3 for every taxpayer dollar spent
versus the $31 if IRS employees were doing this work.
According to the Joint Committee on Taxation, the
administration's tax collection privatization proposal would
bring in less than $1 billion over 10 years. The IRS could
bring in that amount in 1 year with the appropriate resources.
Steadily increasing compliance staffing levels at the IRS will
give the taxpayers a return on their tax dollar that is 10
times better than the privatization initiative being proposed.
I would note that in a report issued just last week on May
7 by the U.S. General Accounting Office (GAO), they noted that
the IRS has not done a cost analysis on implementing the PCA
initiative versus expanding the traditional use of IRS
collection activities, and GAO noted we have not seen any plans
to do so in the future.
Tax collection has historically been defined as an
inherently governmental function. As a result, legislation is
necessary to allow contractors to perform this function. Two
pilot projects were authorized by Congress to test the private
collection of tax debt in 1996 and 1997.
The 1996 pilot was so unsuccessful that the 1997 project
was canceled. Contractors violated the FDCPA and did not
protect the security of sensitive taxpayer information. An IRS
internal audit report found that contractors made hundreds of
calls to taxpayers outside of the time restrictions of the
FDCPA, and calls were placed as early as 4:19 a.m.
In addition, the contractors did not bring in anywhere near
the dollars they projected and millions were spent by the IRS
to train the contractors instead of doing their IRS work.
The IRS has said that it has learned from the 1996 project
and can now address the problems. The IRS has not shown,
however, that it has contractor oversight systems or personnel
in place to ensure that contractors comply with the laws and
regulations that are in place to protect the taxpayers.
The Mellon Bank lockbox program has already been mentioned
as an example of the failure of contractor oversight by the IRS
on this project.
Section 1204 of the IRS Restructuring and Reform Act (RRA)
1998 (P.L. 105-206) also specifically prevents IRS employees or
supervisors from being evaluated on the amount of tax
collections they bring in. This was done to eliminate
incentives for overly aggressive tax collection techniques.
Paying a contractor a percentage of what they collect
clearly flies in the face of this policy and ensures that the
employees of the contractors will do what they need to do to
produce, knowing that they won't have a job if they do not.
The NTEU is not alone in opposition to this proposal.
Earlier this month, the National Association of Enrolled Agents
testified about the risk of taxpayer information being
released, and the Tax Section of the American Bar Association
pointed out paying vendors a percentage of collections is
inconsistent with RRA 1998.
The risk of paying contractors commissions to collect taxes
are great. Instead, the IRS should increase compliance staffing
levels at the IRS so that the IRS employees can do the work
that they do very well, and if funded to do so, there is no one
who could do this work better on behalf of America's taxpayers.
Thank you.
[The prepared statement of Ms. Kelley follows:]
Statement of Colleen M. Kelley, National President, National Treasury
Employees Union
Chairman Houghton, Ranking Member Pomeroy, and other distinguished
Members of this subcommittee, my name is Colleen Kelley and I am the
National President of the National Treasury Employees Union (NTEU).
NTEU represents 150,000 federal employees in 28 federal agencies and
departments, including the men and women who work at the Internal
Revenue Service (IRS). I appreciate you giving me the opportunity to
share the views of frontline IRS employees on turning over IRS tax
collection responsibilities to private debt collectors.
Let me be very clear: NTEU strongly opposes hiring private tax
collection agencies on a commission basis to collect tax debt. This
proposal will cost the taxpayers more money than having this work done
by IRS employees, and will jeopardize the rights and privacy of
thousands of taxpayers by putting millions of taxpayer files in the
hands of private companies. There are also serious questions regarding
the government's liability and taxpayer remedies should such
information be misused and whether the IRS has the needed technology to
select appropriate cases. This scheme is costly, risky, and would lead
to a gross invasion of the privacy of American taxpayers. I urge this
subcommittee to reject it.
Spending Taxpayer Dollars Wisely
Even the IRS will acknowledge that if given the appropriate
resources, IRS employees could collect outstanding tax debt at
significantly less cost than contractors and avoid subjecting taxpayers
to the unknown impact of providing their confidential tax information
to private collection companies. In a report submitted to the IRS
Oversight Board last September, titled ``Assessment of the IRS and the
Tax System,'' former Commissioner Charles Rossotti made clear that with
more resources to increase IRS staffing, the IRS will be able to close
the compliance gap. Commissioner Rossotti stated that ``the IRS is
simply out-numbered when it comes to dealing with the compliance
risks.''
The Rossotti report found that while workload had increased 16% the
number of full time employees dropped from 115,205 in FY 1992 to 95,511
in FY 2001. A disproportionate reduction occurred in Field Compliance
personnel, falling 28% from 29,730 in FY 1992 to 21,421 in FY 2002.
From 1997 through 2002 the IRS has lost an additional 2,952 employees.
The Rossotti report quantified the workload gap, noting ``the
majority of the workload gap is in compliance.'' (See attached charts.)
It found that if Congress were to appropriate an additional $296
million to hire more IRS compliance employees to focus on Field and
Phone Accounts Receivable, the IRS could collect an additional $9.47
billion in known tax debts per year. This would be a $31 dollar return
for every dollar spent. Compare that to the Administration's 25%
commission scheme--$3.25 billion to collect $13 billion or a $3 dollar
return for every dollar spent. According to the Joint Committee on
Taxation, the Administration's tax collection privatization proposal
would bring in less than $1 billion over ten years. The IRS could bring
in that amount in one year with just over $30 million in additional in-
house enforcement resources.
Plain and simple, we can avoid putting taxpayer information in the
hands of private collectors by steadily increasing compliance staffing
levels at the IRS and, in the process, give the taxpayers a return on
their tax dollar that is ten times better than the privatization
initiative being proposed. Yes, I am a certified public accountant, but
this is math my six year old nephew understands.
Privatization of Tax Collection Was Tried and It Failed
Tax collection has historically been defined as an inherently
governmental function, and therefore private contractors have been
prevented from bidding for this work. As a result, legislation is
necessary to allow contractors to perform this inherently governmental
function. Two pilot projects were authorized by Congress to test
private collection of tax debt for 1996 and 1997. The 1996 pilot was so
unsuccessful that the 1997 project was cancelled. Contractors violated
the Fair Debt Collection Practices Act (FDCPA) and did not protect the
security of sensitive taxpayer information and the IRS officials
charged with oversight of the contracts were ill-informed of the law
and lax in their duties, failing to cancel the contracts of those in
violation even though they had the authority to do so.
An IRS Internal Audit Report (Reference No. 080805, 12/19/97) found
that reviews of only a small number (18 to 40 days) of telephone
records for three contractors found 294 instances of completed calls
placed before 8 a.m. or after 9 p.m., the times prohibited by the act.
Calls were placed as early as 4:19 a.m. (p. 15). The audit found that
IRS ``Collection officials were unaware that phone calls to third
parties to locate debtor taxpayers were subject to the time frames of
the FDCPA.'' (p. 15). It found that required weekly reviews of
contractor telephone reports were not being done. (p. 16). And the
audit found that contractors did not adequately protect sensitive
taxpayer information. ``System security at some contractor sites did
not meet contractual requirements or did not provide adequate
protection over sensitive taxpayer data.'' (p. 20)
In addition to using prohibited collection techniques and not
safeguarding confidential taxpayer information, the contractors did not
bring in anywhere near the dollars they projected, and millions were
spent by the IRS to train the contractors and millions were not
collected by IRS employees because they were training the contractors
instead of doing their jobs. (See GAO/GGD-97-129R and IRS Private Debt
Collection Pilot Project, Final Report, Oct. 1997)
Some supporters of private tax collection say the pilot was flawed
due to the kind of cases given to the contractors. But technology to do
the kind of analysis of what kind of cases might be successful, as both
the GAO and the Taxpayer Advocate have said would be necessary, is not
in place and, in fact, such proposals were dropped from the President's
FY '04 budget submission.
The Inability of the IRS to Manage its Contractors
The IRS has said that it has learned from the 1996 project and can
now address the problems raised. However, even very recent evidence is
to the contrary. As this subcommittee is well aware, the contractor-led
IRS Business System Modernization continues to have cost overruns and
delivery delays. For example, A Treasury Inspector General for Tax
Administration (TIGTA) report issued in September 2002 (Ref. #2002-20-
189) criticized the PRIME contractor, stating, ``progress has been
slower and more costly than expected. Project dates were delayed from 4
to 9 months, while cost increases ranged from nearly $700,000 to over
$13 million from original estimates.''
Another example of poor IRS management of contractors came to light
recently when an IRS contractor who provided bomb detection dogs and
services to patrol the perimeters at the IRS Service Center in Fresno
was indicted on 28 charges after he lied about the qualifications of
his dogs, then faked the dogs' certifications to keep his business with
the IRS and other federal agencies.
And members of this subcommittee may be familiar with the troubling
case of Mellon Bank, a contractor hired by the IRS as part of its
``lockbox program.'' Mellon Bank lost 78,000 taxpayer checks worth more
than $1.2 billion in revenues for the U.S. Treasury. In response to the
Mellon Bank contracting fiasco, GAO issued a report in January 2003 on
the IRS lockbox program titled, ``IRS Lockbox Banks: More Effective
Oversight, Stronger Controls, and Further Study of Costs and Benefits
Are Needed'' (GAO-03-299). The report highlighted a number of
deficiencies of the lockbox program that are very relevant to the
proposal to privatize tax collection. Here is a sampling of some of the
report's findings:
1.
L``Oversight of lockbox banks was not fully effective for fiscal
year 2002 to ensure that taxpayer data and receipts were adequately
safeguarded and properly processed. The weaknesses in oversight
resulted largely from key oversight functions not being performed'' (p.
3)
2.
L``Tax receipts and data were unnecessarily exposed to an
increased risk of theft.'' (p. 21)
3.
LThere were ``deficiencies in processing controls designed to
account for or protect tax data and receipts.'' (p. 27)
4.
LContract ``employees were given access to taxpayer data and
receipts before bank management received results of their FBI
fingerprint checks.'' (p. 29)
The IRS will likely testify that lessons have been learned from
cleaning up after the Mellon contracting mess, and that contracts with
tax collection contractors will be written in a way to protect the
taxpayers. Yet even though the GAO found all of these flaws in the poor
oversight and management of the lockbox contracts, GAO ``found nothing
inherent in the new 2002 lockbox bank contractual agreements or the
prior agreements that would necessarily contribute to mishandling of
taxpayer receipts'' (p. 12). So in other words, thousands of privacy
and security provisions designed to protect the taxpayers can be
written into each and every one of these contracts with private
collection agencies, but the bottom line is that the IRS cannot and
will not be able to ensure taxpayers are protected. The IRS simply does
not have the staffing or systems in place to monitor the work of
contractors.
Failure to Safeguard Confidential Taxpayer Information From Criminals
Another problem that continues to threaten taxpayer confidentiality
and will pose an even greater threat under this privatization proposal
is the inability of the IRS to conduct background checks on
contractors. A February 2003 report from the Treasury Inspector General
for Taxpayer Administration (TIGTA) found that the IRS failed to
conduct background checks on its contract employees. The report found
that the IRS did not perform required background checks on more than
2,100 contract employees working in IRS offices in New Carrolton,
Maryland who have access to sensitive taxpayer information.
Additionally, background checks that have been conducted on IRS
contract employees are incomplete at best. Employees who work for the
IRS must be U.S. citizens. However, there is no such requirement that
government contractors hire only U.S. citizens, even if they will be
reviewing sensitive private taxpayer information. While the IRS has
indicated all employees working for the tax collection contractors will
undergo background checks, GAO's January report on the lockbox program
found criminal investigation controls to be inadequate. ``This hiring
practice may pose unnecessary risks to IRS materials because the FBI
fingerprint check, which is national in scope, may have very little
information to disclose if these individuals lived in this country for
only a short period of time.'' GAO raised concerns that lockbox
contractors could hire ``individuals with criminal histories which, in
turn, increases the risk of theft of receipts or misuse of tax data.''
How much can even the FBI learn about an individual who has only lived
in the U.S. for less than two years? The arrangement for the tax
collection privatization initiative is even more suspect than the
lockbox initiative, especially since some of the companies bidding for
the work are not even based here in the United States.
Incentives for Private Debt Collectors to Harass Taxpayers
Allowing private collection agencies to collect tax debt on a
commission basis flies in the face of the tenets of the IRS
Restructuring and Reform Act of 1998 (RRA 98). Section 1204 of RRA 98
specifically prevents employees or supervisors at the IRS from being
evaluated on the amount of collections they bring in. Yet despite RRA
98's clear mandate to ensure fair enforcement of the tax laws, the
Administration is now proposing incentives for contractors to use
aggressive collection techniques. Even if individual contract employees
were not to be evaluated on the basis of their individual collection
amounts, surely they will know that if they do not produce, they will
not have a job. Paying a contractor out of its tax collection proceeds
clearly encourages overly aggressive tax collection techniques, the
exact dynamic RRA 98 sought to avoid.
Additionally, RRA 98 allows a taxpayer to recover damages from the
Federal Government if an IRS employee is found to have inappropriately
accessed or misused confidential taxpayer information. However, under
H.R. 1169, such a taxpayer could only seek damages against the
collection company, so if a contractor cannot pay a judgment the
taxpayer is out of luck.
Poor Experience with Private Debt Collectors
The contractors will say that state and non-tax federal efforts
have been wildly successful, but independent sources have a different
view. On April 15, 2002, at a hearing before the House Government
Reform Committee, National Taxpayer Advocate Nina Olson testified on
private tax collection. She said ``Few state and private creditors are
subject to the significant due process protections enjoyed by Federal
taxpayers in the post RRA 98 era. My own personal experience with
private contractors attempting to collect State tax debt has not been
positive. In my former tax practice, which included a large number of
collection cases, I continually struggled with private collection
employees of different skill levels and expertise. It was difficult to
get a case out of the hands of the collection agency and back into the
tax authority for issue resolution.'' She went on further to state
``Contractors resisted revising inappropriate collection terms and
agreements.''
And the Department of Education's experience with using contractors
to help prevent and collect defaulted student loans has been heavily
criticized. A GAO report (GAO-03-531T) dated March 12, 2003, found that
``neither Congress nor the public can determine whether FSA's (Office
of Federal Student Aid) default management goals have been met.'' And a
Department Inspector General Report (ED-OIG/A07-B0008) issued in
November 2002, focused on FSA's Modernization Partner Agreement with
its contractor. This IG report found that the performance measures to
review the work of the contractor ``did not provide sufficient
quantifiable or qualitative information to determine if the
contractor's performance was in accordance with the terms of the
contract.'' The IG also criticized the Department for using inaccurate
baseline information used to calculate payments to the contractor,
which resulted in larger payments to the contractor than what should
have been actually earned. No wonder contractors think this is a great
program.
Widespread Opposition to Privatization of Tax Collection
NTEU is not alone in its opposition to this proposal. At a hearing
on April 8, 2003 before this subcommittee, the Tax Executives
Institute, an association of business tax professionals, testified that
``using outside, for-profit contractors could impede taxpayer privacy
and undermine the perception of fairness. Such concerns are even more
acute if the companies are compensated on a contingency basis, which
raises significant due process issues.''
At that same hearing, the National Association of Enrolled Agents,
testified in opposition to the tax collection privatization initiative,
stating that ``the opportunities for disclosure of taxpayer information
combined with the potential for aggressive collection approaches
inherent in a bounty-incentive approach runs counter to the protection
of taxpayer rights.''
And a representative of the Tax Section of the American Bar
Association at the April 8th hearing urged caution, and pointed out
that ``paying vendors a percentage of collections appears to be
inconsistent with the prohibition of collection statistics in the 1998
Revenue Reconciliation Act.''
IRS employees were demoralized by the 1997 Congressional hearings
and have worked hard to repair the damage to their image, much of which
was due to inaccurate information. However, the American public rating
of the IRS is significantly higher than what it was in 1997. Now, the
Administration is going to turn around and tell the IRS workforce that
private collection agencies will be let loose to recover unpaid tax
debt? And if the contractors are overly aggressive and it turns out to
be a repeat of the 1996 pilot project disaster, it will be the IRS
employees labeled again as the jack booted thugs when the contractors
are long gone.
The risks of privatizing tax collection are enormous. It is a
disservice to the taxpayers, and a disservice to IRS employees to pay
contractors a bounty to collect taxes. Instead of rushing to privatize,
the IRS should make the necessary investments today in increased agency
staffing, resources, and better training, so that the compliance gap
can be closed without compromising taxpayer rights. When supported with
the tools and resources they need to do their jobs, there is no one who
is more reliable and who can do the work of the IRS better than IRS
employees.
Thank you for giving me the opportunity to testify today.
<F-dash>
Chairman HOUGHTON. Thank you very much, Ms. Kelley. Mr.
Felton.
STATEMENT OF ALAN FELTON, ASSISTANT SECRETARY FOR EXAMINATION
AND COLLECTION, NORTH CAROLINA DEPARTMENT OF REVENUE, RALEIGH,
NORTH CAROLINA
Mr. FELTON. North Carolina began outsourcing collection
cases to private contractors in late 2000. Currently, we have
four collection agencies on contract, but only actively use two
of the four--National Coordination Office Financial Services
and Open Source Initiative outsourcing. We consider use of the
contractors one strategy in a multifaceted collection program.
North Carolina uses PCAs to work lower value but high
volume collection accounts. At the time we began the
outsourcing program, we found that accounts with a $500 balance
or less comprised two-thirds of our caseload, but only 10
percent of the value of our receivable inventory.
Outsourcing these low-yield cases and other low priority
accounts allows the Department of Revenue to focus our internal
resources on the remaining one-third of our cases that comprise
90 percent of the value of our receivable inventory.
By employing a comprehensive collection program, including
the use of collection contractors, we have been able to
increase delinquent tax collections by nearly $150 million
between July 1, 2001 and April 30, 2003. This represents more
than a 40-percent increase over previous years.
From our experience with PCAs, there are several lessons
learned that may be helpful to keep in mind. Administration of
the collection outsourcing program should be as simple as
possible. Simplicity allows taxing agency administrators more
time to focus on ensuring quality service and productivity and
less time performing unnecessary administrative tasks.
North Carolina places its accounts on a contingency basis
and only owes fees to the contractor after collections are
processed and posted to the Department of Revenue system. This
contingency arrangement creates a real partnership between the
Department of Revenue and the collection contractors.
We also recommend resisting the urge to micromanage the
contractors' collection process. Providing clear goals and
objectives, then allowing the contractor to determine the best
way of accomplishing them seems to have been the best way to do
this business.
Evaluation of contractor performance is essential. The
evaluation methods should be consistent, simple and tough.
Since December 2002, North Carolina has issued a scorecard that
evaluates collection agency performance using both objective
collection criteria and more subjective ratings for quality of
service including the level of taxpayer complaints.
This month, we will begin changing account placement ratios
for the two collection agencies the State uses based on the
performance rating on these scorecards.
Last, our contract with private agencies allows the
Department of Revenue to pull a single case or every case
assigned to the contractors at any time and for any reason.
Pulling cases and returning them to our internal case inventory
is as simple as making a telephone call. We believe this
ensures that the contractor does business in a way that
guarantees taxpayer rights and privacy while at the same time
ensures maximum quality effort is exerted from the collection
agency.
The use of contract collection agencies has been of great
benefit to the Department of Revenue, and more importantly to
the citizens of North Carolina. The program has received no
significant opposition from the State Legislature, the tax
practitioner community, the departmental staff, or the general
public. A solid comprehensive collection program that includes
PCAs is an effective way to do business.
Again, I appreciate this opportunity to share information
on North Carolina's collection outsourcing program with the
Committee. This concludes my remarks.
[The prepared statement of Mr. Felton follows:]
Statement of Alan Felton, Assistant Secretary for Examination and
Collection, North Carolina Department of Revenue, Raleigh, North
Carolina
Mr. Chairman and Members of the Committee:
Thank you for inviting me to present the North Carolina Department
of Revenue's experience with outsourcing delinquent tax accounts to
private collection agencies. I am Alan Felton and I serve as the
Assistant Secretary of Revenue for Examination and Collection.
Accompanying me is Charlie Helms, Assistant Director of the Collection
Division and contract administrator of our collection-outsourcing
program.
North Carolina began outsourcing collection cases to private
contractors in late 2000. Currently, we have four collection agencies
on contract, but only actively use two of the four--NCO Financial
Services and OSI Outsourcing. We consider use of the contractors one
strategy in a multifaceted collection program. North Carolina uses
private collection agencies to work lower value, but high volume,
collection accounts. At the time we began the outsourcing program, we
found that accounts with a $500 balance or less comprised two-thirds of
our case load but only 10% of the value of our receivable inventory.
Outsourcing these low yield cases and other low priority accounts
allows the Department to focus our internal resources on the remaining
one-third of our cases that comprise 90% of the value of our receivable
inventory. By employing a comprehensive collection program, including
the use of collection contractors, we have been able to increase
delinquent tax collections by nearly $150 million between July 1, 2001
and April 30, 2003. This represents more than a 40% increase over
previous years.
From our experience with private collection agencies, there are
several lessons learned that may be helpful to keep in mind.
Administration of the collection-outsourcing program should be as
simple as possible. Simplicity allows taxing agency administrators more
time to focus on ensuring quality service and productivity and less
time performing unnecessary administrative tasks.
North Carolina places its accounts on a contingency basis and only
owes fees to the contractor after collections are processed and posted
to NCDOR's system. This contingency arrangement creates a real
partnership between NCDOR and the collection contractors. We also
recommend that you resist the urge to micromanage the contractors'
collection process. Provide clear goals and objectives then allow the
contractor to determine the best way of accomplishing them.
Evaluation of contractor performance is essential. The evaluation
methods should be consistent, simple, and tough. Since December 2002,
North Carolina has issued a ``scorecard'' that evaluates collection
agency performance using both objective collection criteria and more
subjective ratings for quality of service, including the level of
taxpayer complaints. This month we will begin changing account
placement ratios for the two collection agencies the state uses based
on the performance rating of their scorecards.
Lastly, our contract with the private agencies allows the
Department to pull a single case or every case assigned to the
contractors at any time and for any reason. Pulling cases and returning
them to our internal case inventory is as simple as making a telephone
call. We believe this ensures the contractor does business in a way
that guarantees taxpayer rights and privacy while at the same time
ensures maximum, quality effort is exerted from the collection agency.
The use of contract collection agencies has been of great benefit
to the NC Department of Revenue and, more importantly, to the citizens
of North Carolina. The program has received no significant opposition
from the state legislature, the tax practitioner community, or the
general public. A solid, comprehensive collection program that includes
private collection agencies is an effective way to do business.
Again, I appreciate the opportunity to share information on North
Carolina's collection outsourcing program with the Committee.
<F-dash>
Chairman HOUGHTON. All right. Thank you very much. I will
have a question for each one of you, but let me just briefly go
over them. First of all, we are interested in protection of
taxpayer rights and the safeguarding. Ms. Olson, you could talk
about that.
Ms. Gardiner, I would like to talk a little bit about the
program in 1996, and what is different now. Ms. Kelley, I would
like to ask you a little bit about the Education Department's
program, and then, Mr. Felton, I would like to ask you about
the reaction of State employees and their representatives to
the proposal, and why you started this at $500?
So, maybe we could talk, Ms. Olson, on the safeguarding,
the protection of taxpayers.
Ms. OLSON. Well, I am concerned about the spread of
information from the contract agency from one side of it to
another, to other accounts. I am concerned that the agencies
will pressure taxpayers into accepting arrangements in order to
get a fee. The IRS employees are going to be paid regardless of
whether they literally collect taxes. They may get a poor
evaluation if they don't do their job correctly, but they will
still get their paycheck.
I am concerned that we won't have what I call a level
playing field between the contractors and the IRS, and so, I
have made some proposals about how you could structure that.
Certainly the section 1203 restrictions that are against the
IRS employees which can result in termination and actually are
supposed to result in termination unless the Commissioner
mitigates that effect, there needs to be an identical
arrangement with the PCA employees, so they are operating with
the same kind of brakes that IRS employees have on them.
The balanced measures--I cannot emphasize how important
that is. I know we talk about the contingency fee arrangement.
The IRS has looked at this very carefully. They may not have
come to the level that I am as comfortable about. I would like
to see more emphasis placed on customer satisfaction in the
actual compensation arrangement, not just in a bonus pool or
giving out cases in advance. Those are all brakes, as I would
think about it, that would protect taxpayers.
Chairman HOUGHTON. Okay. Thank you very much. Ms. Gardiner,
compared to the program started in 1996, do you think the IRS
has taken better steps to plan for the proposed use of private
debt collectors?
Ms. GARDINER. Yes, sir, I do. Some of the differences are
in the 1996 pilot, they did not do any kind of benchmarking
like the Education Department or other States. This time they
did extensive benchmarking to find out the good things, the bad
things, the things to be aware of, so they are entering into
the project knowing a whole lot more, and what to be cautious
about.
Other things such as the age of the cases, in the original
1996 pilot, they selected cases to give to the contractors that
were 9 years or less in terms of age. This time they know that
they want to give them cases that are 6 years or less. Six
years still sounds like a long time but it is still better than
9.
The way they would compensate the contractors as Nina had
mentioned, in some cases they might just determine that the
taxpayer is deceased or there might be some other outcome
besides just the collection of taxes and they would still get a
payment for that, so it is not based solely on a flat rate of
how much they would collect.
The other way that the contractor would solicit payment,
they are thinking that they would use some kind of voucher that
was scannable that the taxpayer could send in to the IRS. So,
IRS would still be collecting the tax, but it would be in a
more efficient manner than the way they had done it in the 1996
pilot.
So, those are some of the differences. There is still a lot
to be cautious of, but at least this time I think they have a
better idea of what they need to be cautious of.
Chairman HOUGHTON. Right. Well, thank you very much. Now, I
would like to ask the following question of Ms. Kelley. I think
in an ideal world, we would like all these things to be done
in-house, in the government. The problem, of course, is money.
The IRS has had tremendous demands on it to bring the IRS up to
speed. It was woefully behind speed, and so what happens is
that the collection process and the hiring and recruiting of
good young people go by the boards every single time. That is
really too bad.
I do not know why it is not possible, at least on a
temporary, maybe permanent, but at least on a temporary basis,
to be able to trust outside agencies to try to fill in the gap
while this whole modernization program comes along. Now, for
example, with the Education Department program, don't you think
they have done pretty well there?
Ms. KELLEY. My only knowledge of that is what I have read
about it, Mr. Chairman. I believe there are some on the panel
behind me who may report on some failures and abuses and
problems with that program. I do not have any firsthand
information on that, but what I can say is that I see a
distinction between the Education Department student loan
program and IRS taxes.
There is probably nothing that taxpayers hold more
confidential than their tax information. Even if it is a single
number like the balance due on a tax return and the amount of
taxes owed, they do not have a choice in releasing that
information. Well, they do, if they want to be subject to
criminal action.
The law requires them to submit that information to the
IRS. Those who submit and deal with the Education Department on
student loans have a choice to make as to whether they want to
voluntarily provide the information in an effort to get a loan
and then, of course, whatever the process is for the collection
of that, but I see those as very, very different issues, and I
do believe that you will hear on a subsequent panel of some
first-hand abuses and problems with the Education Department.
Chairman HOUGHTON. Of course the requirement of being
discrete is not selective here. It is for everyone whether you
have a private or a PCA, and I would imagine, according to what
Ms. Olson says and others, that there is rather rigorous
determination on who should be that PCA and the people in it,
and if they do not fulfill their obligations, the wheels go
under them pretty fast.
So, it is really, you see, if you look at it from the
standpoint of the Federal Government, we are trying to solve a
problem. We do not have enough money to do it right now with
the accounting system being what it is.
Ms. KELLEY. I would suggest if there is money to pay
contractors to do this work, then a way should be found to find
the money to give the IRS to do it, especially when the cost to
do it produces so many better benefits for taxpayers as $31 for
every dollar spent as set out in the numbers that we have from
Commissioner Rossotti's report.
Chairman HOUGHTON. The difference, I think, there is that
the IRS is doing a whole range of income, and from what I
understand, and I think I was wrong when I made that comment
with you, Earl, that the whole focus is on the lower-income
people. So, that when you get the payback, you are talking
about a different universe of taxpayers.
Ms. KELLEY. Well, I think those are some of the things that
the IRS has said about the kind of work that will be given to
the PCAs. However, there has not been a model yet developed by
the IRS to identify those cases. I believe the IRS will
acknowledge that and GAO's report, again, just issued last week
says that the IRS realizes identifying appropriate cases for
referral to PCAs is a key issue. The GAO report says: ``While
IRS proposes using `case selection analytics' to identify
appropriate cases. That model has not yet been developed.''
So, I would question the specificity with which they think
they can possibly do this in a manner that will be successful.
There are many trained committed, career IRS employees, who are
not just committed to doing this work as a part of their job.
They are committed to the mission of the agency which is
collecting the appropriate tax and respecting taxpayers'
rights.
Chairman HOUGHTON. Sure. Well, now let us move for a moment
on to Mr. Felton. Mr. Felton, what has been the reaction of
State employees and the representatives to the proposal?
Mr. FELTON. The reaction, Mr. Chairman, has been quite
positive. We have received no negative comments or complaints
from our employees. There has been no resulting job reductions
from the use of PCAs at the Department of Revenue in North
Carolina.
Chairman HOUGHTON. Thank you very much. Sir.
Mr. POMEROY. Mr. Chairman, it is a delight to be your
Ranking Member. I have been in Congress now I am going on 11
years, and I have never heard a Chairman ever self-correct
himself before.
[Laughter.]
Mr. POMEROY. You are so refreshing in your leadership. Let
me begin by following up on this point of who is going to be
the universe targeted with this new initiative. Ms. Olson, we
are talking about people that have made some payments and then
dropped off a payment, have not fulfilled the payment reflected
on their tax return. Just based on your own expertise as the
Nation's taxpayer advocate, what proportion in this category
would have over $200,000 adjusted gross income compared to
those that would have under $75,000 adjusted gross income?
Ms. OLSON. Congressman Pomeroy, it varies all over the
United States. I think when we talk about the $278 billion that
is in the known tax gap, and we narrow it down to $78 billion
in what we call potentially collectible inventory, and my
understanding is that 38 percent of that is cases that we are
not working because we can't find the taxpayer, we don't have
the resources to work them, et cetera.
Some of them are people who do have high adjusted gross
incomes. It may be over $100,000 or $200,000. They are out
perhaps in a queue in the field. They are in line to be worked
by a revenue officer. A classic story that I have sort of held
in my mind as I have gone through this process is a husband and
wife and they were married and they have a joint tax debt, and
they split. The wife is the wage earner. Well, we have got her
in the system.
We can do all sorts of things by computer with her without
sending collections of the account out to a human being. We can
identify her wages, we can garnish her wages, whereas her ex-
husband may be a small businessman and files a Schedule C and
makes over $100,000. He is in a queue somewhere. So, as every
week we are collecting out of that one person's paycheck, but
we are not doing a thing to that other person's because we do
not have the resources.
It is entirely possible that that person, if we actually
made our presence known, would get nervous, because we could
shut down his business. We could levy his business accounts and
things like that, and he would start talking to us. As long as
we are not there there is the ostrich effect. If I stick my
head in the sand, they will not see me. That happens a lot.
I do not know what is going to be in this population of
cases. I know that eventually the IRS intends to select from
all different categories of taxpayers, and so the way they
described it is----
Mr. POMEROY. Although, reclaiming my time, basically I did
not hear the Commissioner saying about any effort to make
certain this kind of evenly fell across income distribution
points. It was a matter of what was the activity on behalf of
the taxpayer that lent itself to collectibility. So, it was
this kind of partial performance and then falling off, which I
believe--in fact, I think the Commissioner gave us some
evidence--is going to fall disproportionately on middle and
moderate.
I think if cobbled with the tax bill, you could have the
ironic situation where $200,000 and up get a tax break; under
$75,000, get a tax collector. It is just not fair,
fundamentally not fair.
I agree that student loan collection has been done very
efficiently in the private sector, and I used to be very
familiar with the program run by the State of North Dakota
through the Bank of North Dakota, where they had a collection
function. I do think that there are some things to distinguish
student loan debt and that whole genre of activity versus tax
collection, although in raising my doubts, I certainly do not
mean to discredit either the Bank of North Dakota's efforts or
Sallie Mae's efforts or any other student loan collector's
effort. I do think that has been done pretty effectively.
What I think we need to do is be sensitive and raise to the
public's attention the relative cost of using private vendors
to collect taxes. The whole outcry about the $600 toilet seat
or whatever it was in U.S. Department of Defense procurement
was because we were getting a bad deal. We were spending
dollars that we otherwise would not have had to spend. Same
thing here.
We staff this internally and collect, we get a whole
different measure of return than if we outsource it and pay a
significant margin to the private collector. This is the $600
toilet seat of tax collection. I would like your reflection on
that, Ms. Olson, if you would.
Ms. OLSON. I viewed my role in this as certainly not the
person making the decision about whether this initiative was
going to go forward or not. I have expressed my preference that
we not contract out debt for the reasons in my testimony, one
of which is that Federal tax debts are different from student
loan debts, and taxes are the life blood of our government, and
it is a contract between the taxpayer and the government how we
manage this.
Once the decision has been made, at least internally, that
we might think to use this and look at it, then my job becomes
to look at this proposal and make sure that taxpayers are
protected in that contract, and that is how I have approached
it.
Mr. POMEROY. I understand that. I guess I am somewhat----
Ms. OLSON. It is difficult.
Mr. POMEROY. We are not too far apart in our analysis. If
left with the choice, Earl, you get this or you get nothing,
well, then I would have to think long and hard about it. I do
not think we have fully exhausted the staffing model. In North
Dakota, when I was in the State Legislature in 1993, Tax
Commissioner Kent Conrad, now Senator Kent Conrad, brought
forth an initiative titled ``Catch the Tax Cheater'' program,
cleverly named. It was to basically bolster tax collection
efforts, and he promised the legislature $10 dollars for every
$1 spent, and he delivered, and his successor delivered, and
for 10 years in North Dakota, tax collection efforts of this
``Catch the Tax Cheater'' program produced about a 10 to 1
return.
Is it your evaluation that if Congress was really concerned
about collecting back tax debt and doing so in a way that would
yield the highest return to the Treasury Department, that
staffing it up internally would produce better value in terms
of ultimate collections?
Ms. OLSON. Yes.
Mr. POMEROY. Thank you. I yield back, Mr. Chairman.
Chairman HOUGHTON. Of course that gets into the bigger
issue than dynamic scoring, return on your investment, which I
agree with you. If you do that, you take a look if you spend $1
here, do you get $10 dollars back, or do you spend a dollar
here and only record it as a dollar of expense?
Well, listen, thank you very much. You have been very, very
helpful, and we will take your comments under advisement.
Chairman HOUGHTON. I would like to call the next panel
which is Rozanne Andersen, General Counsel, Association of
Credit and Collection Professionals, who comes from
Minneapolis; Dexter Smith, Senior Vice President, Government
Services Division, Allied International Credit Corporation in
Smyrna, Georgia; Jon Shaver, Chief Operating Officer,
Diversified Collection Services (DCS), Incorporated, in San
Leandro, California; and Chi Chi Wu, attorney, National
Consumer Law Center in Boston, Massachusetts.
Okay. Are we ready? Thank you very much for being here. We
appreciate your time, and Ms. Andersen, would you start?
STATEMENT OF ROZANNE M. ANDERSEN, GENERAL COUNSEL AND SENIOR
VICE PRESIDENT, LEGAL AND GOVERNMENT AFFAIRS, ACA
INTERNATIONAL, MINNEAPOLIS, MINNESOTA
Ms. ANDERSEN. Chairman Houghton, Congressman Pomeroy, I am
Rozanne Andersen, General Counsel and Senior Vice President for
Legal and Government Affairs for the Association ACA
International.
Thank you for the opportunity to testify on behalf of the
industry this afternoon. The ACA International is a 64-year-old
trade association composed of 5,300 credit and collection----
Chairman HOUGHTON. Please speak right into the mike. As
Chairman Thomas is fond of pointing out, it is a very
unidirectional, and he is going to get a new sound system, but
he has not yet. So, just have it right up there.
Ms. ANDERSEN. How does this work? Okay. All right. Shall I
begin again? All right. Thank you. Chairman Houghton,
Congressman Pomeroy, I am Rozanne Andersen, General Counsel and
Senior Vice President for Legal and Government Affairs for ACA
International.
Thank you for the opportunity to allow me to testify this
afternoon on behalf of the industry. ACA International is a 64-
year-old trade association composed of 5,300 credit and
collection professionals, headquartered in Minneapolis,
Minnesota. The ACA's membership spans all 50 States. Our
agencies range in size from three-person operations to publicly
held corporations that employ between 5,000 and 15,000
individuals.
The ACA strongly supports H.R. 1169, Mr. Chairman, and the
framework of the IRS outsourcing proposal. This legislation
provides that the power to make decisions that impact the
rights of individual taxpayers would remain solely with the
IRS. Under the program, private collection agents, PCAs, would
be imbedded in the IRS collection scheme, not working outside
or independent of it.
The PCAs would have neither enforcement authority nor
discretion to determine tax liability. They would operate under
the supervision and control of the IRS to perform a strictly
limited function collection activity.
There are a number of Federal agencies that contract with
PCAs for debt collection services with documented success. You
have heard from at least one this afternoon: the Education
Department has used PCAs to collect on delinquent student loans
since the mid-eighties. The Treasury Department began to
contract with PCAs for non-tax collection services in 1998. The
Security and Exchange Commission (SEC) recently revealed that
it too is contemplating a plan to contract with PCAs to enhance
its collection activities.
Yet opponents say that debt collectors will abuse citizens
and that the privacy of taxpayer information will not be
protected. Such talk indicates a lack of understanding of the
many Federal and State laws that strictly regulate the
activities of private debt collectors.
The primary Federal laws governing the practices of debt
collectors include the FDCPA, the Fair Credit Reporting Act
(P.L. 104-208), the Federal Trade Commission Act (1914, Ch.
311, 38 Stat. 717), the Gramm-Leach-Bliley Act (P.L. 106-102)
in certain instances, and the Health Insurance Portability and
Accountability Act (HIPAA) (P.L. 104-191), as well as numerous
State and local statutes.
Collectors winning a contract under the draft Request for
Information (RFI) would also be subject to the Taxpayer Bill of
Rights (P.L. 100-647), the Federal Claims Collection Act (P.L.
89-508), and the Privacy Act 1974 (P.L. 93-579).
A number of these laws impose duties and restrictions on
private sector debt collectors that do not currently apply to
IRS employees. The IRS intends that all Federal tax debt
collection activities performed by the PCAs be subject to the
FDCPA. This is to afford taxpayers additional consumer
protections in addition to those currently governing the IRS
employees.
The ACA suggests H.R. 1169 should clarify that the FDCPA
applies to PCAs collecting on behalf of the IRS. In addition to
the statutory and regulatory framework, ACA members must also
adhere to rigorous ethical standards and guidelines established
by our association.
Collectors have long understood the need to protect
consumer privacy and to maintain rigorous controls to ensure
that private consumer information indeed remains private. In
fact, the Federal Trade Commission's (FTC) 2002 and 2003 annual
reports to Congress made it clear that the number of complaints
against debt collectors is de minimis when compared to the
billions of contacts between debt collectors and consumers that
occur annually.
Health information is arguably as sensitive and as private
of information as any information retained by the IRS for tax
purposes, and in fact medical debts comprise approximately 65
percent of the total number of accounts currently transferred
to third-party debt collectors.
Recent regulations under HIPAA only allow collection agents
access to that information which is minimally necessary to
perform collection functions. These regulations could certainly
serve as a blueprint for resolving taxpayer data privacy
concerns as proposed by H.R. 1169.
Some question the ability of the IRS to ensure that private
debt collectors are operating properly when actually contacting
taxpayers. Advanced technology systems allow the IRS to monitor
phone conversations while they are happening to see how the
collectors are updating their collection records during the
calls.
In addition, the IRS can send staff to audit the collection
activity of any PCAs at any time. Most importantly, through
membership in ACA International, collection agencies receive
training, access to written electronic and web-based collection
training modules, direct access to 5 compliance attorneys,
access to 50 State compliance chairs, agency certification
opportunities as well.
Currently, 34 States have licensing, registration or bond
requirements for debt collectors. Under the IRS proposal, State
attorneys general and the FTC would monitor activities of the
IRS's contracted private debt collectors adding another layer
of protection, as these agencies currently have no role in IRS
collections.
Finally, if H.R. 1169 is properly drafted, the enabling
legislation would also afford private citizens with even
greater protections under the law. I urge the Committee to
ensure that this outsourcing contract is available to small,
minority, persons with disabilities, and women-owned collection
agencies.
The number of contractors contemplated by the IRS is very
limited in scope: 10 agencies with 2 additional contracts set
aside for small business. Available technology affords the IRS
with the ability to expand this number of contractors to as
many as one per State. In order to accomplish such a
distribution of accounts, H.R. 1169 may need to be modified to
specifically authorize the Secretary to enter into both direct
and indirect qualified tax collection contracts.
In keeping with the President's policy of encouraging more
participation by small business in the Federal procurement
process, I suggest the Committee consider this modification to
H.R. 1169.
Mr. Chairman, Congressman Pomeroy, the collection industry
has a great deal to offer the Federal Government and the
taxpayers that support it. H.R. 1169 would bring needed Federal
revenue into the Treasury Department and would make progress in
eliminating the huge backlog of collections on overdue tax
debt.
The ACA is the premier trade association representing the
collection industry with the experience, knowledge, training
and certification credentials to ensure the success of the IRS
outsourcing program. If given the opportunity, our members will
perform exemplary collection services in partnership with the
IRS, while at all times exhibiting great sensitivity toward the
privacy rights of taxpayers. I urge the Subcommittee's support
of this important measure.
[The prepared statement of Ms. Andersen follows:]
Statement of Rozanne M. Andersen, General Counsel and Senior Vice
President, Legal and Governmental Affairs, ACA International,
Minneapolis, Minnesota
Chairman Houghton, Ranking Member Pomeroy, and members of the
Subcommittee, I am Rozanne Andersen, General Counsel and Senior Vice
President for Legal and Government Affairs for ACA International. It is
a pleasure and a privilege for me to present testimony today on behalf
of the nation's premier trade association representing the credit and
collection industry.
ACA International is a 64 year-old trade association composed of
5,300 credit and collection professionals who provide a wide variety of
accounts receivable management services to credit grantors.
Headquartered in Minneapolis, Minnesota, ACA's membership spans all
fifty states and includes 3,400 third-party collection agencies, 750
attorneys, 1,200 credit grantors, and 140 vendors. The third-party
collection agencies that belong to ACA range in size from small 3
person operations to huge, publicly held corporations that employ
between 5,000-15,000 individuals. In short, ACA's membership represents
both the very smallest of businesses that operate within a very limited
geographic radius within a state, and the very largest of multinational
collection agency corporations that operate in all fifty states.
ACA strongly supports H.R. 1169, Mr. Chairman, and the framework of
the proposal put forward by the Internal Revenue Service, to outsource
the collection of past due federal income taxes to private collection
agencies. We commend the leadership you have shown in introducing the
enabling legislation that would allow this worthy and necessary
proposal to move forward, and for holding this hearing today.
I apologize if my testimony sounds a little like `deja vu' all over
again. In 1996, ACA presented testimony before this Subcommittee on the
subject of outsourcing IRS collections. Today we are considering, once
again, a proposal that will allow the IRS to partner with private
collections agencies to bring uncollected federal tax revenue into the
Treasury. The arguments about why this is a good idea--for the
Treasury, for the IRS, for the economy, and most importantly, for the
vast majority of American taxpayers that dutifully pay their fair share
of federal income taxes each year--remain the same. In my observation
what has changed is the Administration's and the IRS's commitment to
this program, with success being the only acceptable outcome.
Commissioner Everson, I commend you for being here today as evidence of
the IRS's commitment to moving this proposal from concept to reality.
Debt Collection and the U.S. Economy
If I may, I'd like to take a moment to talk about the collection
industry, and it's impact on the U.S. economy. As one of our members
said to me recently, ``One of the quickest ways to kill a conversation
at a social gathering is to tell someone you're a debt collector.''
Perhaps IRS employees can relate to this experience. A better way to
explain who we are is to say that this industry really serves as an
extension of your community's businesses, such as the hardware store,
the retailer down the street, or the local hospital. The collection
industry works with these businesses to try to get payment for those
goods and services that have been delivered to the consumer. Unless
someone tries to collect what is owed, the existence of these
businesses may be threatened. Furthermore, the rest of us pay a higher
price for the goods and services we need, to compensate for uncollected
bad debt.
According to the Federal Reserve Board and the U.S. Census Bureau,
total consumer bad debt costs every adult in the United States $683
annually. This translates into a cost for the average non-supervisory
worker of nearly 54 hours (before taxes) in lost salary every year to
pay for the bad debt of other consumers. Collection services, such as
those offered by ACA members, are an essential part of the U.S.
economy. In 1999, more than $216 billion in past due accounts were
referred to collection agencies. Collection on those accounts recovered
approximately $30.4 billion--a massive infusion of money into our
economy.
IRS Compliance Concerns
Mr. Chairman, I cite these statistics to emphasize the importance
of debt collection in our economy. The amount of federal income taxes
owed the government and not paid each year is staggering. The IRS
estimates that $249 billion in federal tax debt is currently past due.
Although estimates vary, between $76 and $112 billion of this
delinquent amount has some collection potential. However, when
considering the topic of today's hearing, much more is at stake than
bringing in much-needed funds to the Treasury. This is really an issue
of fairness. Our tax system is a voluntary one, in which we rely upon
individual citizens to dutifully file their returns and pay their taxes
every year. Nonetheless, I don't believe that the millions of citizens
who file their taxes and pay their fair share view their compliance as
``voluntary,'' anymore than they would consider the decision of some
not to pay the federal taxes they owe an acceptable choice.
As the Government Accounting Office (GAO) noted in it's report to
the Subcommittee in May, 2002, ``Taxpayers' willingness to voluntarily
comply with tax laws depends in part on their confidence that friends,
neighbors and business competitors are paying their fair share of
taxes.'' Law-abiding citizens need to be assured that their government,
which created our federal tax system, will effectively enforce its
requirements. It is a matter of taxpayer equity.
Mr. Chairman, there is a crises in the collection of past due
federal income tax. This crises is well documented in the IRS's own
assessments, and by independent studies by the GAO. In GAO testimony
presented last week before an Appropriations Subcommittee, the IRS's
collection programs were shown to have significant declines in workload
coverage, cases closed, direct staff time used, productivity and
dollars of unpaid taxes collected. This same report cites the IRS's
deferral policy, which had been in place for three and one-half years,
as part of the collection backlog. By the end of FY 2002, the IRS had
deferred taking action--i.e. not pursued--collection on $15 billion in
unpaid taxes, interest, and penalties. In one out of every three cases
requiring collection activity, the IRS has deferred action. The GAO
cites an average of 1.6 years elapsing between the time past due taxes
are established and collections activity is initiated by the IRS. As
staff has been shifted to other priority functions, a 60 percent gap
has grown between the collection workload and work completed. The IRS
staff needs and deserves relief from this overwhelming situation.
Using the Private Sector to Collect Past Due Federal Income Taxes
The former IRS Commissioner reported in September 2002 that 5,450
new full time employees at a cost of $296.4 million would be required
to close this gap.
Alternatively, the IRS collection-related contract support
initiative is a proposal to leverage the resources of private
collection agencies with minimal investment of taxpayer dollars, while
providing maximum protection of taxpayers' rights. It is an important
piece of a comprehensive effort to reorganize, streamline and improve
collection outcomes. Since 1998, the IRS has worked with experts,
including ACA and ACA member companies, to study and design the best
method to implement the program. Under the proposal, private collection
agencies would perform supplemental collection activities, subject to
the oversight and control of the IRS, and in compliance with all
applicable laws and regulations.
Let me be clear, as I know there are those skeptical of the concept
of using private businesses to perform a function that has been
reserved for IRS employees. However, the passage of enabling
legislation, such as H.R. 1169, will not permit the IRS to abdicate its
responsibilities. The power to make decisions that impact the rights of
individual taxpayers shall remain solely with the IRS. Under the
program, private collection agents (PCAs) will be embedded in the IRS
collection scheme, not working outside or independent from it. PCAs
will have neither enforcement authority nor discretion to determine tax
liability. They will operate under the supervision and control of the
IRS to perform a strictly limited function--collection activity, which
is not intimately related to the public interest in a manner that
mandates the use of federal employees.
Mr. Chairman, there are a number of federal agencies that contract
with PCAs for debt collection services, and with documented success.
The Department of Education has utilized PCAs to collect on delinquent
student loans in the mid-1980's. Gary Hopkins, Director of Collections
for Federal Student Aid at the Department of Education stated that,
``From outsourcing we gain expertise and the ability to have continuous
improvement and stay current with technology.'' More recently, the
Department of the Treasury, as part of it's own debt program, began to
contract with PCAs for non-tax collection services. Since the program's
inception in 1998, PCAs have collected $109 million, more than half of
it during the last two years. Richard L. Gregg, Commissioner for
Financial Management Services at the Department of Treasury, recently
testified to Congress that the ``Treasury's debt program is one that is
both robust and effective, one that has consistently met or exceeded
its performance measures.'' The Securities and Exchange Commission
recently revealed that it, too, is contemplating a plan to contract
with PCAs to enhance its collection activities.
Myths Regarding the Outsourcing of Tax Collections
Given the successful track record many federal agencies have had
contracting with professional debt collectors from the private sector,
one would hope that support for the IRS outsourcing initiative would be
unanimous. However, there seem to be a few myths surrounding the
privatization of federal tax collection that need to be dispelled. One
argument I've heard raised against allowing the IRS to contract with
private sector debt collectors stems from concern that debt collectors
will abuse citizens, or that the privacy of taxpayer information will
not be protected. Such assertions indicate a lack of understanding of
the many federal and state laws that strictly regulate the activities
of private debt collectors.
The primary federal laws governing the practices of debt collectors
include the Fair Debt Collection Practices Act, the Fair Credit
Reporting Act, the Federal Trade Commission Act, the Gramm-Leach-Bliley
Act, and the Health Insurance Portability and Accountability Act, as
well as numerous state and local statutes. Collectors winning a
contract under the draft RFI would also be subject to the Taxpayer Bill
of Rights, the Federal Claims Collection Act, and the Privacy Act of
1974. In addition to this statutory and regulatory framework of
consumer protection laws, ACA collection agency members must also
adhere to rigorous ethical standards and guidelines established by our
association. A copy of ACA's Code of Ethics is attached to my testimony
for your review. A number of these laws, and specifically, the Fair
Debt Collection Practices Act, impose duties and restrictions on
private sector debt collectors that do not apply to IRS employees. It
is the intention of the IRS that all federal tax debt collections
activities performed by private contractors be subject to the Fair Debt
Collection Practices Act, to afford taxpayers consumer protections in
addition to those currently governing the collection efforts of IRS
staff.
With regard to the privacy of taxpayer information, I can state
confidently that no other topic has received as much attention by the
IRS in drafting the parameters of an outsourcing project. In addition
to extending the Fair Debt Collection Practices Act to those
contractors who work with the IRS on this project, there are very
stringent contractual requirements pertaining to the contractors'
operations in performing IRS collections. The outsourcing proposal, as
crafted by the IRS, requires that all facilities and data and corporate
systems meet threshold requirements for capacity, encryption, record
retention, and data transfer. Other security requirements include:
registration with the Department of Defense central database; on-site
security measures, including the maintenance of restricted areas and
limited access; background investigations; and reporting and auditing
requirements.
Debt collectors deal responsibly with sensitive information
requiring the utmost care to protect consumer privacy all the time.
Perhaps one of the best examples I can point to right now is the
significant amount of collection of medical debts being done by private
debt collectors. This is because health care providers are among the
very small minority of businesses that offer services on credit, other
than through credit cards. One's health information is arguably as
sensitive and private as that information retained by the IRS for tax
purposes. Recent regulations pursuant to the Health Insurance
Portability and Accountability Act (HIPAA), may serve as a model to the
IRS in finalizing its outsourcing proposal. The HIPAA privacy, security
and electronic transaction rules safeguard confidential medical
information to facilitate the collection of medical debts while
protecting highly sensitive information. As a result of their
compliance with HIPAA, most collection agencies have the type of
safeguards in place to ensure compliance with the proposed privacy
standards for this outsourcing project. In short, the requirement under
HIPAA of only allowing collection agencies access to that information
minimally necessary to perform collection functions could serve as a
blueprint for resolving taxpayer data privacy concerns.
In recent years, privacy requirements for financial information
have also been put into place under the Gramm-Leach-Bliley Act. Debt
collectors are intimately familiar with these requirements because they
service banks and credit card issuers, as well as other entities
governed by Gramm-Leach-Bliley. Even without these regulations,
collectors have long understood the need to protect consumer privacy
and to maintain rigorous controls to ensure that private consumer
information remains private.
Another concern that has been raised is doubt over the ability of
the IRS to ensure that private debt collectors are operating properly
when contacting taxpayers. In these days of advanced technology, it
will be possible for the IRS to monitor most debt collectors in real
time. Most debt collectors who service large clients allow those
clients to monitor phone conversations while they are happening and to
see how collectors are updating computer records during the calls. This
can be accomplished through the telephone and computer technology that
is available today. In addition, the IRS can send auditors to audit
collection activity at any time.
Buttressing the IRS's monitoring will be the panoply of watchdogs
that keep an eye on debt collectors. For example, approximately 34
states have licensing and/or registration requirements for debt
collectors. These state agencies monitor debt collectors to varying
degrees. Some states send examiners to ensure that debt collectors
comply with their laws. Others require debt collectors to provide
consumers with contact information for the state regulatory agency to
make it easier for consumers to file complaints about collectors. Under
the new proposal, State Attorneys General and the Federal Trade
Commission, would be included in the list of those monitoring the
activities of the IRS's contracted private debt collectors. This would
be an added layer of protection as these agencies currently have no
power over IRS collections. Properly drafted, the enabling legislation
would afford private citizens with individual enforcement power
currently unavailable.
Mr. Chairman, I hope this information has helped to persuade those
doubting the wisdom of granting the IRS outsourcing authority for
collections that their concerns are unfounded. Assuming my narrative
has been successful, I would like to end my testimony with a few
thoughts for your consideration.
The IRS has done a commendable job in researching the strengths and
capabilities of the private sector collection industry, and shaping a
proposal whereby the IRS could partner with the private sector for
certain collection activities. Certainly, all possible measures for
protecting taxpayer privacy have been incorporated in the draft RFI.
However, I would remind you that in order for this project to be
successful, the collection agencies must have an opportunity to make
money. The IRS must give collectors accounts for which there is a
reasonable chance for recovery. While collectors can do much to locate
taxpayers for whom there is no current address or phone number, they
should not only be given accounts where the IRS has been unable to
locate the tax debtors. Similarly, collectors should be given newer
accounts in addition to those that have been outstanding for years.
Proper identification of cases that should be placed with the PCAs for
collection will be key to this program's success. The Government
Accounting Office made a similar assessment in its May 7, 2003
testimony before the Appropriations Committee when citing a shortcoming
from the 1996 outsourcing pilot project.
Secondly, I would strongly urge the IRS to take steps to make some
of this outsourcing contract available to small, minority and women-
owned collection agencies. The number of contractors contemplated by
the IRS is very limited in scope--10 agencies with 2 additional
contracts set-aside for small businesses. With the large volume of
collection files needing attention, and the technology available to aid
the IRS in monitoring it's contractors, they should consider expanding
the number of contractors. At the very least, the IRS should reconsider
or clarify its prohibition on subcontracting any ``core functions.'' It
is very common in the private collection industry for certain specific
services, such as the provision of forms and correspondence mailing
services, dialer software, and skiptracing, to be subcontracted to
another business. This subcontracting is routinely done by PCAs, large
and small, without compromising the security of the information shared
with third-party subcontractors.
Prohibiting the subcontracting of any such activities as a ``core
function'' of the contract would be particularly deleterious to small
businesses. Businesses frequently outsource functions such as letter
mailing. This allows them to focus on other aspects of the collection
process and provides cost-effective alternatives to purchasing or
leasing expensive hardware and software. Subcontracting agreements
contain provisions to account for the protection and security of
information shared with third party subcontractors. With some minor
modifications to the RFI, I believe the IRS could satisfy its concern
with diminished control or oversight associated with subcontracting
core functions, without prohibiting the use of subcontractors.
Mr. Chairman, the collection industry has a great deal to offer the
Federal Government and the taxpayers that support it. That fact is well
documented as the expertise of the professional collection industry has
been tapped to enhance federal collections' activities in numerous
agencies. Adoption of H.R. 1169 would be an important next step in
allowing the IRS to similarly harness the debt collection industry's
technology and expertise. While this role would be of a very limited
scope in comparison to the vast responsibilities borne by the IRS and
its dedicated employees, it would assist the IRS in managing their
human resources to increase activity in those areas that can only be
performed by IRS employees. Bringing needed federal revenue into the
Treasury, and making progress in the huge backlog of collections on
overdue tax debt would serve to reinvigorate the IRS. I urge the
Subcommittee's support of this important measure, H.R. 1169, and I
would be happy to answer any questions the members may have at the
appropriate time. Thank you, Mr. Chairman.
<F-dash>
Chairman HOUGHTON. Well, thank you very much. Just as a
note, we have just been joined by a very distinguished Member
of our Committee, Mr. Foley of Florida. We are delighted to
have you here, and we will proceed with the questions, and then
you can chime in when you want. Okay. Now, Mr. Smith.
STATEMENT OF DEXTER SMITH, SENIOR VICE PRESIDENT, ALLIED
INTERNATIONAL CREDIT CORPORATION, ATLANTA, GEORGIA
Mr. SMITH. Mr. Chairman, Congressman Pomeroy, Mr. Foley,
thank you for this opportunity to testify before the
Subcommittee on Oversight. I am Dexter Smith, Senior Vice
President at Allied International Credit Corporation (US), with
our U.S. headquarters in Atlanta, Georgia. As our name implies,
we are an international company with experience collecting
Federal debt in the United States, Canada, and the United
Kingdom.
In 2002, we handled more than 1.6 million collection
accounts valued at over $11.5 billion. Currently, we partner
with the Education Department in collecting defaulted student
loans which is considered to be more similar to the IRS
proposal than any other collections contract in the industry.
Allied International Credit endorses the proposal before
the Subcommittee. We believe it protects taxpayer rights and
privacy, preserves the jobs of current IRS employees, and most
importantly strengthens citizens' faith in the integrity and
fairness of the tax system.
We believe that the substantial resources and private
sector best practices brought to the table by the debt
collection companies will help the IRS advance its goal of
providing top quality service to each taxpayer by bringing
additional resources to bear in each individual case and
ensuring fairness and shortening the resolution time.
The proposal will provide top quality service to all
taxpayers by increasing the number of successfully closed cases
which will increase the level of overall compliance. We believe
that the proposal will support a quality workforce and
ultimately increase employee morale because it will allow IRS
employees to focus on accounts more suited to their training
and tools.
A program that successfully shrinks accounts receivable
will give employees a sense that the agency is better
accomplishing its mission. Under the proposal, in addition to
all the taxpayer rights provisions in the Internal Revenue
Code, the private companies would be subject to all the
requirements of the FDCPA. Failure to comply with these
stringent requirements subjects our company to legal
liabilities and ultimately bankruptcy.
In order to ensure full compliance, the IRS plans to put in
place a strenuous performance measurement program that will
monitor all telephone contacts with taxpayers, conduct taxpayer
surveys, and audit company records. In protecting taxpayer
privacy, the proposal would deputize participating companies
under section 6103, placing a great responsibility on us to
maintain the privacy of taxpayer information.
The private sector companies would not have access to
return information. While the information shared with the
companies would be limited to the name, Social Security Number,
amount of debt, penalties, interest and payment history,
unauthorized disclosure would bear the same dire consequences
as disclosing return information.
All private sector staff working on this contract would be
fingerprinted and undergo a thorough Federal background check.
At Allied International Credit, we ensure a quality work staff
by focusing our recruiting efforts at local colleges, churches
and the military.
It is important to state that under the proposal, not a
single job currently performed by IRS employees would be lost
due to the program. In fact, the business case provides that
the program would result in an additional 70 full-time
employees at the IRS and should be seen as supplementation of
the current IRS resources, not a replacement of current
employees.
On a similar issue, some commentators have stated that
simply hiring additional IRS employees would be cheaper. In the
very narrow field of finding debtors, skip tracing, contacting
them and counseling them through payment procedures, the
private sector brings state-of-the-art practices and tools to
the table. This is our core business and we do it as
efficiently and effectively as anyone. Otherwise, we could not
stay in business very long.
In closing, our recommendation for the Committee is to
provide the IRS guidance and enough flexibility to resolve any
issue arising down the road without mandating a one-size-fits-
all solution.
We would like to state our strong belief that passage of
the proposal allowing private debt collection companies to
partner with the IRS will not only raise billions of dollars in
a fair and equitable manner, but will restore people's
confidence that all taxpayers are paying their fair share.
Thank you once again for affording me this opportunity to
testify before the Subcommittee today.
[The prepared statement of Mr. Smith follows:]
Statement of Dexter Smith, Senior Vice President, Allied International
Credit Corporation, Atlanta, Georgia
Thank you for this opportunity to testify before the Committee on
Ways and Means Subcommittee on Oversight. Over the past few months, I
have appreciated the opportunity to work with the members of this
committee and your staffs to enact legislation clarifying the ability
of the IRS to partner with the private sector to collect debts owed to
the people of this country.
I am Dexter Smith, Senior Vice President at Allied International
Credit Corp. (US) (Allied International Credit) with our U.S.
headquarters in Atlanta, Georgia. As our name implies, we are an
international company with experience collecting debt in the US, Canada
and the United Kingdom. In 2002, we handled more than 1.6 million
collection accounts, valued at over $11.5 billion. Currently, we
partner with the Department of Education in collecting student loan
debts.
If this legislation is enacted, we believe we could bring
internationally recognized business processes, state-of-the-art
technology, and most importantly highly trained and professionally
qualified people to the job of shrinking the currently ballooning
accounts receivable at the Internal Revenue Service.
Allied International Credit endorses the proposal before the
Subcommittee today and believes that the proposal strongly supports the
mission and strategic goals of the Internal Revenue Service as directed
by Congress under the Internal Revenue Service Restructuring and Reform
Act of 1998; while at the same time protecting taxpayer rights and
privacy, preserving the jobs of current IRS employees, and most
importantly strengthening citizen's faith in the integrity and fairness
of the tax system.
Top quality service to each taxpayer--The proposal will support IRS
efforts to provide prompt, professional, and helpful treatment to each
taxpayer, even in cases where additional taxes may be due. We feel that
the substantial resources and private sector best practices brought to
the table by the debt collection companies will help the IRS advance
this important goal by increasing the number of cases resolved and
shortening the resolution time of each case. Further, because the added
resources of the private companies will substantially shorten the cycle
for collecting outstanding debts, penalties and interest will be
reduced in the long run. Finally, because the program will promote a
greater reliance on case management, rather than on harsh collection
activities such as seizures, levies, and garnishments the program will
make the tax compliance system fairer and more tolerable to taxpayers.
Top quality service to all taxpayers--The IRS strives to increase
fairness of compliance and increase overall compliance. We believe
strongly that with this proposal will come a substantial increase in
the number of successfully closed cases, which will increase the
fairness, and level of overall compliance. There will be a strong
message that if you owe, you will not be ignored, increasing the
incentive for taxpayers to meet their obligations sooner rather than
later.
Productivity through a quality work environment--The IRS endeavors
constantly to increase employee job satisfaction. We believe that the
proposal will increase employee morale because it will allow IRS
employees to focus on accounts more suited to their training and
technology tools. The skip tracing skills of the private companies such
as Allied International Credit will present IRS employees with new
contact information that will allow them to focus on cases requiring
their expertise and enforcement powers such as law enforcement and
actions against property. Elimination or a significant reduction of
case backlogs will provide a greater sense of accomplishment. In short,
if every employee along the IRS tax pipeline knows that their efforts
are more effectively resulting in taxpayers meeting their obligations,
they will have a better overall satisfaction in their work.
Protecting Taxpayer Rights--Under the proposal the rules governing
taxpayer rights would provide for the proverbial belt and suspenders.
The private sector employees would be subject to all rules applicable
to IRS employees, plus more. In addition to mandating that all private
sector employees would be subject to rules governing automatic firing
and the taxpayer bill of rights, the private companies would be subject
to all the requirements of the Fair Debt Collection Practices Act
(FDCPA). For instance, under current law, FDCPA prohibits collection
agencies from communications with taxpayers at an unusual or
inconvenient time or place, or any conduct that is harassing,
oppressive or abusive. Failure to comply with these stringent
requirements subjects our company to legal liabilities, and ultimately
bankruptcy if we fail to comply.
In order to ensure full compliance with taxpayer rights
protections, the Internal Revenue Service plans to put in place a
strenuous performance measurement program that will monitor all
contacts with taxpayers, including live monitoring of telephone
contacts, review recorded conversations, taxpayer surveys, audits of
company records and periodic reviews of collection performance.
At Allied International Credit, as with many in the industry, we
consider these requirements to be just a starting point. Our management
objectives go one-step further: we strive to treat the people we
contact like customers. We are deeply aware of the sensitivity of
``public debt'' and have established a solid background and experience
in delivering respectful collections services to taxpayer debtors. We
know that there are many reasons people are unable to meet their
obligations, none of them easy. Our employees are measured and rewarded
for their fair and equitable treatment of everyone we contact in the
course of our business. Each one is well versed in the latest thinking
on debt management and counseling. As just one example of our emphasis
and forward thinking in this area, we have created a special web site,
www.payandrelax.com.
Protecting Taxpayer Privacy--Equally important is the priority the
program places on protecting taxpayer privacy. Confidentiality of
taxpayer data is at the heart of our voluntary system of self-
assessment. In short if people do not believe that the financial
information they provide the IRS is going to be kept from prying eyes,
taxpayers may not be as forthcoming with the data they provide to the
agency.
Once again, we believe the industry is up to the job. The proposal
would deputize participating companies under section 6103, placing a
great responsibility on us to maintain the integrity of taxpayer
information. While the information shared with the companies would be
limited to the name, social security number, amount of debt, penalties
and interest and past history of payment, disclosure would bear the
same dire consequences as disclosing return information. Namely, Allied
International Credit and any company contracting to provide these
services would be subject to private law suits, criminal fines, and
even imprisonment. I can assure you that the shareholders of my company
would take the requirements of section 6103 with the utmost
seriousness.
How do we propose to maintain the strictest compliance with the
spirit as well as the letter of this essential law? Once again, we
start with the quality of our workforce. We focus our recruiting
efforts at local colleges, churches and military bases. People working
this account would undergo a completed and certified background check,
including finger printing. Our training on all statutory and contract
requirements is focused, strenuous and continuous. Finally, we use a
balanced matrix of measurements to reward and advance our employees
similar to the system established under Commissioner Rossotti for all
IRS employees.
Partnering with the current IRS workforce--Allied International
Credit has experience partnering with governmental union and non-union
employees throughout the world. Initially, these workforces have been
understandably reticent about contracting out debt collection. Our
experience shows that in a short time, strong partnerships are formed
that provide greater job satisfaction for all employees involved. Part
of that process is educating employees on the details of the program
and working with their representatives to foster a collaborative, win-
win environment.
It is important to state upfront that under the proposal no jobs
currently performed by IRS employees will be outsourced. Not a single
job would be lost due to the program. In fact, the business case
provides that the program would result in an additional 70 FTEs at the
agency. The program should be seen as a supplementation of current IRS
resources, not a replacement of current employees. In fact, the
Administration's budget provides for 887 additional FTEs to augment
current enforcement and taxpayer service resources. Once the program is
successfully implemented as proposed, all indications from the IRS are
the program should substantially increase the need for additional
revenue officers. Additional revenue officers will be required to work
those cases where, the private collection company has found the
taxpayer and identified his or her assets, had to remit the case back
to the IRS for enforcement actions because the taxpayer refuses to pay
voluntarily.
On a similar issue, some commentators have stated that simply
hiring additional IRS employees would be cheaper. First, it is
important to compare apples to apples and oranges to oranges. The
private sector brings state-of-the-art practices and tools to the table
in the very narrow field of finding debtors (skip tracing), contacting
them and counseling them through payment procedures. This is one of our
core businesses. In this narrow, but very important aspect of debt
collection, the private sector brings the best efficiencies and
practices existing today. The IRS currently employs professionally
trained Revenue Officers with the authority to contact taxpayers and,
if necessary, to seize assets and contact third parties for collection
of the debt. Some could argue that these harsher measures are ``more
efficient'' than entering into payment agreements, but we believe that
it is better policy to provide debt counseling and help taxpayers
voluntarily meet their obligations, saving the harsher property and
wage seizures to only uncooperative debtors.
Finally, this proposal would provide the agency with the resources
of as many as 12 private companies in as short a time as three months.
Even if the funds were available, the IRS would be hard-pressed to
hire, train and provide tools for equivalent number of employees over
many numbers of years. In short, the program will provide the agency
with the maximum flexibility to hire and, frankly, dismiss immense
resources as needed.
Use of Enforcement Results--Opponents of this proposal have pointed
out that the Restructuring and Reform Act prohibits the use of
``enforcement results'' to evaluate employees or the use of production
quotas or goals. It also requires that the Commissioner establish
Balanced Performance Measurements in line with a new IRS Mission
statement. The Conference report states, ``In no case should measures
be used which rank employees or groups of employees based solely on
enforcement results.''
The first level focus of the Restructuring and Reform Act was on
the strong police powers exercised by the IRS to seize property, levy
on bank accounts, and enforce third party garnishments of wages. These
powers, which received the highest scrutiny by Congress, will not be
passed to private collection companies. The private collection
companies under the contract would have no enforcement powers or
ability to contact 3<SUP>rd</SUP> parties for payment. The second level
focus of the Act was on how the IRS interacts with all taxpayers on a
daily basis. Clearly, Congress intended all employees, and consequently
any outside contractors of the agency, to treat taxpayers as customers,
with courtesy and respect. They recognized that, while the employees of
the agency respond strongly to how they are measured on the job, proper
measurements would in most cases result in proper treatment of
taxpayers
With this in mind, former Commissioner Charles Rossotti invested a
substantial amount of time and resources developing, with input from
Congress, a very sophisticated measurement system that properly
balanced efficiency and productivity with fair treatment of taxpayers.
The Draft Request for Quote (RFQ) also sets out very specific
balanced performance measurements that are almost identical to the
measurements developed and used for IRS employees. The performance
measurements in the RFQ would dictate how much the private companies
would make and whether or not their contracts could be terminated for
inadequate performance. The metrics would include overall amounts
collected, customer satisfaction as measured by independent surveys,
and overall quality as measured by phone monitoring. In all regards,
the private debt collection companies would be measured in a similar
fashion to IRS employees not engaged in enforcement actions.
Issue for Review--While we substantially support HR 1169 as
introduced, there are a number of issues that should be reviewed by the
committee and resolved with guidance in either the statutory language
or the committee's report. First, most if not all private debt
collection companies focus on their core business of finding,
contacting and counseling people owing debt. A number of the more
collateral elements of the business are outsourced to other private
companies. These important services include letter and notice writing
and the maintaining of data banks for skip tracing. It is our
understanding based on public meetings with the Internal Revenue
Service that they interpret section 6103(n)--the law governing
disclosure to contractors--as not allowing them the ability to disclose
to a second tier of contractors. They have also voiced concerns about
being able to manage additional layers of contractors even if the law
did allow for a second tier of contractors. We are afraid that not
resolving this issue could add significantly to the cost by eliminating
many able companies from being able to compete for the contract.
In the case of businesses providing letters or notice writing
services, they are often small, many times minority owned, family
businesses. While many companies could bring this activity internally,
most would prefer to continue to concentrate on their core business,
while at the same time supporting local small businesses. This would
have a significant negative impact on the amount of revenue collected.
On the issue of using outside data banks, it would be much more
problematic bringing these services internally. As you can imagine, in
order to keep these data sources updated they must be continuously
refreshed with new information. It would add significantly to the cost
and decrease the efficiency of our business to manage the various data
banks necessary for doing our business.
Our recommendation for the Committee is to provide the IRS with
guidance and enough flexibility to resolve this issue down the road
without mandating a one-size-fits-all solution. For instance, in the
case of letter services, the IRS may want to contract directly with
companies to provide these services to the debt collection companies.
By doing so, they would solve their second-tier contracting problem and
would be able to manage privacy issues directly. On the other hand, the
data bank problem would probably best be resolved by certifying
anonymity of the data run through the systems, similar to what must
occur with data banks used currently by the IRS. Mostly, I raise this
issue for public discussion because ignoring it will only result in
increasing the cost and slowing down implementation of the program.
Finally, many of the private companies interested in working with
the IRS on this project are concerned that the IRS may not be given
enough flexibility to grow and evolve the program over time. While it
is important to focus initially on the collection of a smaller batch of
financial accounts receivable, after a number of years of experience
under their belt the agency may want to expand what they define as
financial receivables. It may want the companies to focus on older,
harder to collect debt. Or, it may choose to have the companies focus
their attention on the newest accounts. My point is that any
restrictions on amounts to be paid or on the type of debt to be
collected will only tie the hands of the agency down the line to shape
the program in the best interest of taxpayers. We urge the Committee to
provide guidance to the Department of Treasury and the IRS to create a
robust program--we believe that $30 billion in the first few years is
quite doable--but also that Congress refrain from placing too many
restrictions on how the ``experts'' at IRS run the program.
After all, the intent of the proposal is to establish an effective
legislative and management framework to support maximum recovery of
outstanding tax debt.
Help Restore faith in the Tax System--In closing, we would like to
state our strong belief that passage of the proposal allowing private
debt collection companies to partner with the IRS, will not only raise
billions of dollars in a fair and equitable manner, but will help
contribute to restoring taxpayers' faith in the integrity of the tax
system. According to the latest annual report of the IRS Oversight
Board, currently 60 percent of identified tax debts are not being
pursued. By collecting these debts in the most humane fashion possible,
while at the same time visibly shrinking the accounts receivable at the
IRS for the first time in history, citizens will have more confidence
in the fairness of the tax system. It will restore people's confidence
that all taxpayers are paying their fair share. Thank you once again
for affording me with this opportunity to testify before the
Subcommittee today.
<F-dash>
Chairman HOUGHTON. Thank you, Mr. Smith. Now, Mr. Shaver.
STATEMENT OF JON D. SHAVER, CHIEF OPERATING OFFICER,
DIVERSIFIED COLLECTION SERVICES, INC., SAN LEANDRO, CALIFORNIA
Mr. SHAVER. Mr. Chairman, Mr. Pomeroy, Mr. Foley, thank you
for the opportunity to be here today. My name is Jon Shaver,
and I am Chief Operating Officer at DCS, headquartered in San
Leandro, California. We have offices in Grants Pass, Oregon;
Lathrop, California; and San Angelo, Texas.
I would like to make a few comments in the time I have
available today. I have submitted more extensive comments in
writing for the record.
The DCS is a debt collection firm that specializes
exclusively in the collection of Federal and State debt. We are
recognized in our industry as the benchmarking standard,
consistently producing the best results for our clients. Our
performance superiority is the result of our state-of-the-art
technology, the professionalism of our staff, and knowledge
gained from a quarter of a century practicing in the government
debt arena.
We served following evaluation and selection in a national
competitive process as a subject matter expert to advise the
IRS with regard to its prospective contact collection services
project.
In our experience, no government agency has ever conducted
such a thorough and comprehensive planning and development
process prior to implementation of a contract collection
services project. The IRS deserves recognition and commendation
for its process, and the results which are reflected in its
draft plan.
We are a Member of a national industry coalition whose
members include the major firms working for Federal and State
governments in recovery of defaulted and delinquent government
debt, including taxes.
We strongly support H.R. 1169. The experience of the
Federal Government in planning and implementing supplemental
contract collection services contracts has been excellent.
Since 1990, for example, we have contracted with the Education
Department for collection of defaulted student loans.
Today, the Education Department oversees a portfolio of
nearly $13 billion and its contractors return hundreds of
millions of dollars to the government each year. Many of the
accounts in this portfolio, by the way, were previously
designated as uncollectible.
The Treasury Department, pursuant to the Debt Collection
Improvement Act (P.L. 104-134), is currently placing about $4.5
billion in non-tax Federal debt with contractors, again with
outstanding results.
Performance-based contracting, strict standards, public
accountability, and a blending of the best capabilities of the
government and private sectors in a partnership pursuing the
public interest is a recipe for success, one which we endorse
for application in the case of the IRS problem with delinquent
tax accounts receivable.
Forty-two States now contact for supplemental collection
services in the collection of delinquent individual and
corporate income taxes. Those conducting well-planned
professional programs are achieving excellent recoveries while
ensuring fair treatment of all taxpayers through careful
attention to privacy protection and due process.
The States have shown that use of contractors in tax
collection, while the States retain the unique enforcement
powers of government, is an effective and useful arrangement.
The private sector specializes in finding and contacting
delinquent taxpayers and debtors, then working out voluntary
repayment arrangements. It has no enforcement power of any kind
nor would it under the provisions of this bill. It is precisely
because of the lack of governmental powers that we are so
successful. We have had to learn to find and work with
taxpayers absent any direct threat of lien, levy, seizure or
other adverse sanction.
Enactment of H.R. 1169 will produce positive results for
the Federal Government. Delinquent taxes will be collected from
individuals and corporations and otherwise unrealized revenue
returned to the government.
A sense of fair play will be restored to the tax system.
Voluntary compliance will likely increase as attention is paid
to delinquent tax accounts receivable.
Thousands of private sector tax-paying jobs will be created
without eliminating any IRS collection jobs. Taxpayer privacy
will be protected. Taxpayer due process will be ensured, indeed
may well be improved, as unresolved, unattended to accounts are
acted upon and resolved either through payment, administrative
resolution or appropriate action taken by IRS.
Working together, the Federal Government and private sector
can truly partner again, as it has for many years in the
Education Department and the Treasury Department, producing
jobs, additional needed revenue, greater fairness in and
compliance with the tax collection and administration system
and confidence by the public that their government is paying
attention to its and their business. We urge the Committee to
act favorably on H.R. 1169. Thank you.
[The prepared statement of Mr. Shaver follows:]
Statement of Jon D. Shaver, Chief Operating Officer, Diversified
Collection Services, Inc., San Leandro, California
Mr. Chairman and Members, good afternoon. My name is Jon Shaver. I
am Chief Operating Officer at Diversified Collection Services, Inc.
(DCS) headquartered in San Leandro, California. We have offices in
Grants Pass, Oregon; Lathrop, California; and San Angelo, Texas.
DIVERSIFIED COLLECTION SERVICES BACKGROUND INFORMATION
DCS specializes in assisting federal and state government agencies
in recovery of delinquent and defaulted debt, both tax and non-tax. In
our industry, we are recognized for producing the best results for our
clients and are considered the benchmarking standard against which the
performance of other firms is measured. Our performance superiority is
a result of our state of the art technology, the professionalism of our
staff, and the knowledge gained from over a quarter century of practice
in the government debt collection arena. For the Federal Government, we
have been effectively collecting defaulted student loans since 1990
pursuant to several contracts managed by the U.S. Department of
Education. Additionally, we are now in our second contract with the
U.S. Department of the Treasury, where our work focuses on recovering
non-tax debts owed the Federal Government.
In addition to our work with the Federal Government, we also
provide collection services for numerous federally chartered state
student loan guarantee agencies. Lastly, we contract with numerous
states to provide supplemental collection services for the recovery of
delinquent tax accounts receivable.
HOW THE PRIVATE COLLECTION INDUSTRY WORKS
The private collection industry, almost exclusively, provides its
services to clients--whether government or private sector--on a
contingent fee basis. That is, we receive payment generally only in
those instances where we produce a successful resolution result. In
most instances, resolutions are in the form of payments but, in the
government debt arena, we are also often compensated for administrative
resolutions as well. An administrative resolution is one that closes a
case without a payment--examples include for reasons of death,
permanent disability, eligible bankruptcy, defunct corporations, and so
on.
FEDERAL CONTRACT COLLECTIONS EXPERIENCE HAS BEEN EXCELLENT
The experience of the Federal Government with contract collection
services has been outstanding. Today, the U.S. Department of Education,
pursuant to the requirements of the Higher Education Act, manages a
nearly $13 billion dollar defaulted student loan portfolio--many of
these loans being previously designated as uncollectible--and is
recovering hundreds of millions of dollars per year from it. The U.S.
Department of the Treasury, pursuant to the Debt Collection Improvement
Act, is currently placing more than $4.5 billion in non-tax federal
debts for collection with outstanding results. These programs encompass
all debt--with some special international exceptions--except delinquent
taxes, owed to the government of the United States. The government's
experience has been positive as these contracted efforts embody best
industry and government collection and contract oversight practices,
along with a very public accounting and accountability process. Strict
standards, performance based contracting, public accountability, and a
blending of the best capabilities of government and the private sector
in a partnership pursuing the public interest is a recipe for success--
one which we endorse for application in the case of the IRS's major
problem with delinquent tax accounts receivable.
WE RESPECT THE DEBTORS AND TAXPAYERS WITH WHOM WE WORK
We are aware that, because of taxpayer abuses by IRS in the past,
there is concern about the application of the industry standard of
contingent fee compensation. We make careful effort here to point out
that private industry has no reputation for taxpayer abuse. We do not
have power to threaten, intimidate, or harass as a result of
enforcement powers. We do not determine debts owed. We are legally
required to work with and assist taxpayers who dispute their tax debts.
Taxpayers with whom we deal have immediate access to remedies that can
strongly sanction improper conduct. The private debt collection
industry has decades of experience in consumer protection and
respecting due process.
TWENTY-FIVE YEARS OF CONSUMER PROTECTION
This year marks the twenty-fifth anniversary of the landmark Fair
Debt Collection Practices Act, the template for today's consumer
protection standards. The private consumer sector has a mature and
robust body of consumer debt protection law in place that the private
collection industry conforms to lock-step. If we were to fail to honor
these laws, we would lose contracts, be subject to civil penalties,
lose our reputations, and ultimately go out of existence. Actual
experience shows that our behavior is just the opposite of the
stereotypical view. Our industry makes literally millions of contacts
per year, with only an occasional compliance problem.
Finally, while many people would prefer that we not contact them
and remind them of their obligations, there are many that have thanked
us for our professionalism and for relieving them of the worry and
adverse effects of having unpaid government obligations hanging over
them.
We are an industry that relies on providing information,
communication, and assistance in the decision-making relating to debt
resolution for both individuals and corporations. We have no power of
any kind, neither to harass or intimidate anyone nor to take any
enforcement action resulting in involuntary surrender of property or
assets. Our effectiveness is achieved because we are better at finding
missing people and corporations than is the government and in
communicating with them in an effort to find ways to assist them in
voluntarily resolving their obligations.
SERVICE AS A SUBJECT MATTER EXPERT TO THE IRS
Because the depth and breadth of our experience, we were selected
through a national competitive review process to consult with the
Internal Revenue Service, along with two other national collection
services firms, regarding its prospective supplemental contract
collection services project. This project, which would require the
authority and provisions contained in H.R. 1169, would involve the
IRS's use of private collection firms to supplement the collection
function of the IRS. More specifically, it would involve limited
collection activities by private firms to recover delinquent tax
accounts receivable in business and corporate cases where the
delinquent tax obligation is undisputed by the taxpayer.
With more than twenty-five years of experience in federal and state
contracting for collection services as context, we can say
unequivocally that the planning and program development process
employed by the IRS staff in developing the contract collections
support program is the best, most thorough, and complete process ever
conducted. Examination of industry and other government best practices,
consultation with industry as to the practicality of certain concepts,
an overarching concern for taxpayer privacy protection, assurance of
taxpayer due process, and a strongly focused sense of fairness and
equity toward all taxpayers are among the highlights of the exemplary
effort of the IRS relating to this project. IRS's preparation and
dissemination for public review and comment of a comprehensive and
detailed draft Request for Information should give Congress and the
public comfort that the IRS has been careful and deliberate in its
planning. The scope and intent of the project is clear and is intended
to use the private sector only on a limited basis to do what it does
best--find and contact delinquent individual and corporate taxpayers
and provide them with information and assistance on how to best
voluntarily resolve their tax delinquencies.
DCS IS A MEMBER OF A NATIONAL INDUSTRY COALITION
DCS is a member of a broad-based national coalition of private
sector collection and debt recovery firms that strongly support the
idea of supplemental contract collection services for the IRS and that,
accordingly, supports H.R. 1169. We in industry have had ample time to
publicly discuss the IRS draft Request For Information, the process by
which it was developed, the effects of placing the volume of delinquent
federal tax accounts receivable on the capacity of the private sector,
and other related issues.
WHAT WILL BE ACCOMPLISHED IF H.R. 1169 IS PASSED?
DCS, consistent with the opinion of others in our industry,
believes firmly that the supplemental contract collection services
program envisioned by the IRS and as reflected in the language of H.R.
1169 will do several things:
<bullet> LRestore a sense of fairness to the tax system--although
some may not like paying taxes, all will be treated fairly and
consistently.
<bullet> LImprove voluntary compliance and disincentivize the
waiting game. No individual or corporation will be rewarded by simply
``outwaiting'' an overburdened IRS until the statute of limitations
runs its course.
<bullet> LFind missing taxpayers--by bringing the technological
superiority and flexibility of the private sector to bear on the
problems of finding and contacting ``skipped'' taxpayers; that is,
those who have moved and are unlocatable by the IRS. Simply put, the
private sector's proprietary tools for finding and working with such
individuals and corporations are unparalleled.
<bullet> LEnhance IRS's level of customer service to all
taxpayers--private contractors will locate and contact each delinquent
individual and corporation and work through the process of achieving a
voluntary financial or administrative resolution where possible.
Additionally, private firms will be readily accessible to taxpayers and
will maintain a continuous relationship with those in repayment
arrangements, assisting them as needed throughout the repayment
process. IRS staff will be able to focus on complex cases requiring
their special training and expertise using tools uniquely available to
them.
<bullet> LProduce revenue for the government, very likely in excess
of the government's current estimates of recovery.
<bullet> LCreate needed jobs--thousands of private sector tax-
paying jobs will be created without transferring or eliminating
existing or authorized federal tax collector positions--our private
sector effort will be limited to resolving the backlog of delinquent
tax receivables and will in no way be involved with current year
receivables. Moreover, the private sector will only have authority to
work out voluntary arrangements with taxpayers as no enforcement
authority will be conveyed whatsoever.
LKEY ASPECTS OF TAX COLLECTION ARE NOT INHERENTLY GOVERNMENTAL
We have occasionally encountered, during our many discussions with
members of Congress concerning H.R. 1169, the notion that tax
collection is an ``inherently governmental'' function that ought not be
contracted for. While we would agree that seizing an individual's or
corporation's assets, implementing a lien or levy, or conducting a
criminal investigation are clearly functions that ought to be limited
to the role of government, we are unconvinced that finding and talking
to taxpayers about tax debt owed the government is the exclusive domain
of government. Our view in this regard is held by forty-states in the
United States, all of whom contract for supplemental collection
services in the recovery of delinquent individual and corporate tax
debt.
THE EXPERIENCE OF FORTY-TWO STATES IS INSTRUCTIVE
The states recognize, from long experience, that the private sector
has an important and useful contribution to make in the recovery of
delinquent tax debt, even though the scope of engagement of private
collection firms in the service of the states is limited to the same
role that the IRS envisions for its program--that is, finding and
contacting delinquent taxpayers and working through voluntary repayment
plans with them or referring back to the IRS for an appropriate
administrative resolution (hardship, death, disability, innocent
spouse, etc.) or other action. The experiences of the states vary based
on what type of supplemental collection support program they conduct
and depending on the extent to which best practices are embedded in
their programs. Those conducting well-planned, professional programs
are achieving excellent recoveries and ensuring that all taxpayers are
treated fairly, with intense focus on ensuring taxpayer privacy and due
process protection. Nearly all of the states have in place well-
developed Taxpayer Bills of Rights and additionally, the fundamental
consumer protections embedded in the federal Fair Debt Collection
Practices Act are made applicable to states' taxpayers by means of
contractual provision.
LTAXPAYER PRIVACY, DUE PROCESS RIGHTS, AND CONFIDENTIALITY WILL BE
PROTECTED
A fundamental concern of Congress with regard to IRS contract
collection services has been and continues to be taxpayer privacy, due
process protection, and data security and confidentiality. These issues
are also of concern to the IRS, as reflected in its draft Request For
Information document, and to the private sector that would be
responsible for compliance. We are confident that the data security and
confidentiality safeguard provisions that the IRS envisions are readily
implementable, auditable, and practical. We are certain that abiding by
the requirements for due process and professional treatment of all
taxpayers is readily achievable. How do we know? We know because we
have been providing similar levels of protection for our other state
and federal customers and their taxpayers, borrowers, and debtors for
many years. While we are particularly sensitive to the issues of
taxpayer abuse that Congress has periodically addressed through the
Taxpayer Bills of Rights and the Restructuring and Reform Act of 1998,
we are nonetheless confident that we can meet the strict standards that
Congress and the IRS will impose through the provisions of H.R. 1169
and contracts issued pursuant to it. Moreover, we will continue to
apply the consumer protection standards that other applicable federal
statutes require while performing tax collection services for the
Federal Government.
THE IRS CONTRACT COLLECTION SUPPORT PROGRAM IS FEASIBLE
Finally, we would offer our view that the supplemental contract
collection support activity envisioned in the bill is practical and
feasible. As noted earlier, the private sector stands ready to assist
the government in this undertaking, having in place the technical and
people capability and capacity as well as the means to quickly expand
both in service to the IRS. The program that H.R. 1169 would authorize
and that is reflected in IRS's publicly vetted plan document is one
that reflects learning from past incomplete efforts, as well as the
very best practices reflected in other successful federal and state
public debt collection work.
RECOMMENDATIONS TO IMPROVE THE CURRENT BILL
While the fundamental provisions of H.R. 1169 are solid, we would
suggest that the Committee consider amending the bill to expand the
scope of the value of tax accounts that would be placed for collection.
The IRS, in its draft Request For Information, has identified at least
$30 billion in receivables that would benefit from the efforts of the
private sector. Extending the scope from $13 to $30 billion would
ensure that a more balanced portfolio, including mid-balance and high-
balance accounts would be placed for collection. Moreover, the
government would receive significantly greater revenues. Our industry
has been consistent on this recommendation and we make it again here,
subject to the provision that implementation would be administratively
feasible and that the implementation would be within a three year
period from date of enactment of H.R. 1169.
We have also suggested some technical changes to ensure that there
is greater clarity with respect to ensuring that existing laws not be
in conflict as a result of contracting procedures or requirements and
that there be an administrative process available to taxpayers, similar
to that in place for the IRS, to resolve disputes quickly and without
litigation. We would note quickly that no taxpayer would be precluded
from litigation under existing federal law; rather, this provision
would simply standardize and harmonize remedies for complaint
resolution.
Our recommended language has been submitted to staff for your
consideration.
H.R. 1169 IS A GOOD GOVERNMENT MEASURE
Good government opportunities may be many, according to some
observers. However, few are as clear as this one. Working together, the
government and private sector can truly partner and produce jobs,
additional revenue, greater fairness in the tax collection and
administration system, and confidence by the public that their
government is paying attention to its business.
Thank you for this opportunity to hear our views on this matter. I
would welcome any questions that you may have.
<F-dash>
Chairman HOUGHTON. Thank you, Mr. Shaver, very much. Ms.
Wu.
STATEMENT OF CHI CHI WU, ATTORNEY, NATIONAL CONSUMER LAW
CENTER, BOSTON, MASSACHUSETTS
Ms. WU. Mr. Chairman, Representative Pomeroy and
Representative Foley, the National Consumer Law Center thanks
you for inviting us today to testify regarding the proposal to
employ private debt collectors to collect IRS tax debts.
As consumer law specialists, we have over 30 years of
experience in debt collection matters, and it is from that
perspective that we raise grave concerns about this proposal.
The debt collection industry has a record of aggressive
members who abuse and harass consumers. While there are many
debt collectors who obey the law, there is a significant
minority who do not. Don't just take our word for it. A FTC
report said the debt collection industry is the FTC's single-
most complained about industry for 4 years running. Over 25,000
complaints in 2002 and the FTC says this is the tip of the
iceberg.
What kind of complaints are we talking about? Threats of
violence, obscenities, racial slurs, midnight calls, lewd
language, threats of immediate arrest and imprisonment and debt
collectors posing as government officials.
Now, we have heard it said that the Education Department's
use of private collectors is a success story and a model for
the IRS. I am sorry to tell you from the consumer perspective
this is not true. There certainly have been abuses in the
student loan context. Private collectors have misrepresented
themselves as the Education Department. They have overcharged
consumers for collection fees, used misleading telegrams,
browbeat borrowers into unaffordable payment plans despite the
protections of the Higher Education Act (P.L. 89-329), and
threatened to offset Supplemental Security Income (SSI)
benefits even though SSI benefits are protected from offset.
Now, some of the abuses in the student loan context have
specifically arisen because of the fact that a Federal
Government program is involved. Student loan borrowers have
many rights such as discharges, exemptions and deferrals,
creating a complex scheme, but many private collector employees
don't know enough about the scheme, resulting in consumers
being deprived of important options that they are entitled to.
Based on this experience, we believe that IRS collection of
its own debts will not only be more cost effective, but it will
ensure that taxpayer rights are better protected. The IRS
employees understand tax law, tax procedure, and taxpayer
rights.
Now, if you insist on going forward with this proposal, it
must be significantly revised to include strict taxpayer
protections in the statutory authorization. I will mention a
few.
First, private collectors cannot be compensated on the
basis of contingency alone, because it creates too potent a
motivation for collectors to engage in aggressive tactics while
ignoring taxpayer rights. That protection must be in the
statute. Financially distressed and low income tax payers
eligible for special IRS protection should not be targeted by
private tax collectors. Studies have shown that many consumers
fall behind on their debts not because they are deadbeats, but
because something unexpected and catastrophic has happened: a
serious illness, a death in the family, the loss of a job. To
sic private collectors on these already vulnerable families is
simply unconscionable.
Let us not be under any illusion that the private
collectors are going to go after the high-flying tax cheats. It
is not the modus operandi of private collectors to handle
complex tax shelters, fraudulent property transfers, or
discover hidden assets.
Private collectors must not be permitted to use the
powerful administrative remedies of levies, liens, and
garnishments. Such protections must be in the statute and there
must be prohibitions against any threats of such administrative
remedies.
Private collectors must be covered by all of the
protections in the FDCPA. H.R. 1169 currently does not do that.
It applies the fair tax collection rights at section 6304 of
the IRS code. This is not adequate because certain critical
protections are missing from the IRS version, and currently the
FDCPA does not apply to tax debts. They are not considered
consumer debts under that act.
Private collectors must be required to return a case to the
IRS if there is contested liability or if the taxpayer seeks a
settlement or a payment plan. That last point is very important
because payment plans involve the exercise of discretion. We
have heard too many horror stories in the student loan context
of borrowers being browbeat into payment plans they cannot
afford, the payment plans fail, and it creates more financial
distress for the taxpayer.
Taxpayers must be given adequate disclosures of their
rights, remedies, and there should be a prominent disclosure
that the collector is not the IRS but a private contractor and
is not entitled to use IRS special administrative remedies.
There must be a strict and meaningful oversight system over
private collections including a toll-free complaint line,
privacy rights of taxpayers must be stringently protected, and
last but not least, there should be a private right of action
for taxpayers to sue private tax collectors who violate their
rights with significant penalties for violations. This will
complement limited IRS resources and oversight.
Use of section 7433 of the IRS code as currently proposed
is inadequate because that provides only for actual damages
which alone will not be enough to deter abuse. Private
collectors will shrug off lawsuits as a slap on the wrist. Only
when we have strong private attorney general enforcement with
public oversight can we even attempt to have a private debt
collection scheme that balances collections with fairness to
taxpayers. Thank you for the opportunity to testify today.
[The prepared statement of Ms. Wu follows:]
Statement of Chi Chi Wu, Attorney, National Consumer Law Center,
Boston, Massachusetts
Mr. Chairman, Representative Pomeroy, and Members of the
Subcommittee, the National Consumer Law Center thanks you for inviting
us to testify today regarding the proposal to employ private debt
collectors to collect IRS tax debts. We offer our testimony here on
behalf of our low income clients, as well as the Consumer Federation of
America.<SUP>(1)</SUP>
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\(1)\ The Consumer Federation of America is a nonprofit association
of almost 300 pro-consumer groups, with a combined membership of 50
million people. CFA was founded in 1968 to advance consumers' interests
through advocacy and education.
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The National Consumer Law Center is a nonprofit organization
specializing in consumer issues on behalf of low-income people. We work
with thousands of legal services, government and private attorneys, as
well as community groups and organizations, from all states who
represent low-income and elderly individuals on consumer issues. As a
result of our daily contact with these advocates, we have seen many
examples of harsh and abusive debt collection practices against low-
income people in almost every state in the union. It is from this
vantage point--many years of observing the harassment against the less
sophisticated and less powerful in our communities--that we supply
these comments.<SUP>(2)</SUP>
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\(2)\ In addition, NCLC publishes and annually supplements sixteen
practice treatises which describe the law currently applicable to all
types of consumer transactions, including Fair Debt Collection (4th ed.
2000 and Supp.) and Student Loan Law (2d ed. 2002).
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The use of private debt collectors to collect tax debt raises a
number of serious concerns. We believe the IRS should not use private
debt collectors, for a number of reasons:
<bullet> LThe debt collection industry has a record of aggressive
members who abuse and harass consumers. The potential of exposing
millions of taxpayers to collector abuse in the name of the United
States will undermine the sense of faith and fairness in our government
and tax administration.
<bullet> LIRS collection of its own debts will be more cost
efficient, and it will ensure that taxpayers rights are better
protected. IRS employees understand tax law, tax procedure, available
payment options, and taxpayer rights and remedies.
If this proposal does go forward and private collectors are used,
the proposal must be significantly revised to include strict taxpayers
protections, such as:
<bullet> LPrivate tax collectors cannot be compensated on the basis
of contingency or commission alone. Financially distressed taxpayers
eligible for special IRS protections should not be targeted by private
tax collectors.
<bullet> LPrivate tax collectors must not be permitted to use the
powerful array of special administrative remedies that Congress has
granted the IRS.
<bullet> LPrivate tax collectors must be covered by all of the
protections in the federal Fair Debt Collection Practices Act,
including the requirement to stop contacting a consumer if a cease
communication letter is sent.
<bullet> LPrivate collectors must be required to return a case to
the IRS if there is contested liability or the taxpayer seeks a
settlement or payment plan.
<bullet> LTaxpayers who are subjected to private tax collection
must be informed of all of their rights, remedies, and available
options.
<bullet> LThe privacy rights of taxpayers must be stringently
protected.
<bullet> LThe IRS must institute a strict and meaningful oversight
system over private collections, including a toll-free complaint line.
<bullet> LThere must be a private right of action for taxpayers to
sue private tax collectors who violate their rights, with significant
penalties for violations.
Debt Collection Industry's Record of Abuse
While there are many debt collectors who obey the law, there is a
significant minority who do not. These collectors pound away at
Americans who've fallen behind on their debts with tactics that can be
both frightening and illegal. In addition to the horror stories we at
the National Consumer Law Center know about, statistics from the
Federal Trade Commission tell a similar story. In 2001, the latest year
available, the FTC received 15,819 consumer complaints about debt
collection agencies--giving debt collectors the impressive title of the
FTC's most complained-about industry for the third year
running.<SUP>(3)</SUP> Furthermore, the FTC report characterizes this
the tip of the iceberg, stating: ``The Commission continues to believe
that the number of consumers who complain to the agency represents a
relatively small percentage of the total number of consumers who
actually encounter problems with debt collectors.''
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\(3)\ Federal Trade Commission, Annual Report: Fair Debt Collection
Practices Act (June 2002)
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What kind of misconduct has been documented in the debt collection
industry? The FTC report cites harassment, threats of violence, racial
slurs, calling consumers' work places, revealing alleged debts to third
parties and demanding excessive payments. At the National Consumer Law
Center, we hear about midnight calls, obscene and lewd language,
threats of immediate arrest and imprisonment, bogus threats to seize
property without judicial process, and debt collectors posing as
government officials.<SUP>(4)</SUP>
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\(4)\ See, e.g. Jean Chatzy, Stop Calling Me!, Time Magazine, March
10, 2003, at 68; Andrea Coombes, Debtor Abuse, CBS Marketwatch.com,
February 20, 2003, available at www.CBSmarketwatch.com.
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History of Collection Abuses for Student Loans
Some have said that the Department of Education's privatization of
collections is a success story and should be a model for the IRS. I'm
sorry to tell you that from the consumer perspective, this is not true.
Many of the debt collection abuses I speak of have occurred in the
student loan context. Private collectors of student loans have
repeatedly deliberately deceived consumers by misrepresenting
themselves as the Department of Education. They've overcharged
consumers for collection fees, used misleading telegrams to trick
borrowers, browbeaten borrowers into unaffordable payment plans,
threatened them with actions that collectors can't take, and pressured
consumers to borrow from relatives.
Moreover, one of the three collection agencies that IRS has chosen
to ask for advice on privatizing tax collections has been the subject
of repeated lawsuits over its student loan collections.<SUP>(5)</SUP>
Another company expected to bid on this proposal has been known to
misrepresent itself to consumers by using the Department of Education's
name on its stationary and to intimidate and confuse consumers with its
claim of affiliation with the IRS.<SUP>(6)</SUP>
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\(5)\ See Romine v. Diversified Collection Services, 155 F.3d 1142
(9th Cir. 1998); Kort v. Diversified Collection Services, 2001 WL
881449 (N.D. Ill. August 2, 2001); Farley v. Diversified Collection
Services, 1999 WL 965496 (N.D. Ill. September 30, 1999).
\(6)\ See Peter v. GC Services, 310 F.3d 344 (5th Cir. 2002);
Gammon v. GC Services, 27 F.3d 1254 (7th Cir. 1994) (debt collector
used its status as IRS software vendor to imply to credit card debtors
that it had special access to IRS).
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Some of the abuses in the student loan context have specifically
arisen because of the fact a Federal Government program is involved.
Student loan borrowers have many important rights, such as discharges,
deferments, different payment options, and exemptions, creating a
complex scheme for collections. Yet many private collectors do not have
enough knowledge about these schemes, which results in consumers being
deprived of important options to which they are legally entitled. Even
worse, some private collectors misrepresent these rights or steer
consumers into options more profitable for the collector. For example,
collectors have been known to strong-arm student loan borrowers into
agreeing to payment plans that the borrowers could not afford and did
not want, despite the consumer's rights under the Higher Education Act
to a reasonable and affordable payment plan.<SUP>(7)</SUP> Collectors
have threatened to offset federal benefits for SSI recipients, even
though SSI benefits are protected. They steer consumers into loan
refinancing options which may not be appropriate for the consumers.
Some collectors aggressively threaten wage garnishments, failing to
inform or misrepresenting the rights of consumers to hearings and
exemptions. Others charge collection fees that exceed the amounts
authorized by Department of Education regulations.<SUP>(8)</SUP>
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\(7)\ See, e.g., Arroyo v. Solomon and Solomon, 2001 WL 1590520
(E.D.N.Y. Nov. 16, 2001).
\(8)\ See, e.g., Padilla v. Payco General American Credits, 161
F.Supp.2d 264 (S.D.N.Y. 2001).
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Tax Debts Will Be Collected More Efficiently and Fairly by IRS
Employees
The administrative scheme and rights of taxpayers under tax law is
just as complicated as that under student loan law, if not more so. The
potential for collectors to misunderstand or misrepresent these rights
or steer taxpayers away from options that do not as richly compensate
the collector is even more worrisome. Of course, the complexity of the
tax scheme raises the simple question--why not give the IRS adequate
resources to do its job. The IRS is uniquely qualified to collect
taxes--its employees understand tax law, tax procedure, available
payment options, and taxpayer rights and remedies. If IRS is not being
given by the Congress the resources it needs to do additional
collections, Congress should provide adequate resources to the IRS, and
not give up precious tax dollars and the well-being of taxpayers to an
aggressive industry well-known for abuses amongst its ranks.
Furthermore, this proposal will not provide more money to Treasury,
or it will do so on the backs of those least able to defend themselves.
Collection agencies will want the easiest, freshest, least complicated
cases. These are the same cases, however, that IRS could easily handle.
Such ``cherry picking'' will ultimately mean fewer, not more, tax
dollars in the coffers of Treasury.
As for those high flying tax cheats, the public should not be under
the illusion that private collectors will solve that problem. It is not
the modus operandi of private collectors to handle complex tax
shelters, fraudulent property transfers, or discover hidden assets.
They will not want to deal with millionaire tax dodgers with phalanxes
of high-priced lawyers. Private debt collectors will want cases
involving middle and working class wage earners, whose salaries are
easily garnishable and who are unable to afford legal representation.
Collector Compensation Should Not Be Based on Contingency Alone
While not perfect, another reason IRS employees are preferable to
private debt collectors is that IRS employees do not have the powerful
incentives that encourage them to pursue measures that are not in the
best interests of both taxpayers and the tax system. The current
proposal to pay collectors 25% is a recipe for abuse and harassment.
Even though the collectors' fees are not added on top of the tax debt,
a 25% contingency system provides a potent motivation to collectors to
engage in aggressive tactics, while ignoring taxpayer rights. After
all, every dollar collected from a taxpayer means 25 cents for the
collector, which inevitably will spur certain collectors to push the
envelope and the law. In addition, collectors will steer taxpayers away
from less profitable options to which the taxpayer is entitled. One
simply cannot have a proposal to use private debt collectors that is
fair to taxpayers if the compensation structure is based on contingency
alone.
LFinancially Distressed Taxpayers Should Not Be Targeted by Private Tax
Collectors
Many taxpayers who owe tax debts are not deadbeats. Studies have
shown that overwhelmingly consumers fall behind on their debts because
something unexpected and catastrophic happened--a serious illness, a
death in the family, the loss of a job. Very few consumers deliberately
avoid their debts when they have the ability to pay them. The majority
of debtors are your friends, relatives, and neighbors--good people who
want to pay their debts but simply can't and still stay afloat, and who
have every intention of paying once they get back on their feet. To let
loose private hired guns on these already vulnerable families will only
cause increased family distress and social costs that can be
substantial.
Thus, if IRS is permitted to farm out its collections to private
debt collectors, a critical issue will be the selection of which
taxpayers will be subject to that collection. Currently, there are
significant protections for low-income and financially-distressed
taxpayers, including the availability of ``currently not collectible''
status. It would undermine the fundamental fairness of tax
administration to permit private debt collectors to target families
that qualify for taxpayer protections based on their sheer poverty.
Without clear safeguards keeping private collectors targeted at higher
income tax delinquents, private collectors will have few scruples about
using strong pressure for payments from financially distressed
households. IRS employees are reputed to be strong collectors but most
will work with families that have fallen on hard times.
Taxpayer's Rights Must Be Protected
Other strict protections must be included in any legislation
permitting private tax collection, to avoid the abuses we've seen in
the student loan area. First, taxpayers must unequivocally, clearly and
conspicuously be informed of all their rights and the types of relief
available to them. As mentioned earlier, student loan private
collectors have an abysmal record of according consumer loan rights,
such as fraudulent school discharges to fraud victims, loan deferments
to returning students. Thus private debt collectors must be required to
provide a copy of IRS Publication 1 (Your Rights as a Taxpayer) and
Publication 594 (The IRS Collection Process) with the first written
communication or within 5 days of the first oral communication.
Private collectors cannot be permitted to use IRS administrative
remedies, such as non-judicial levies, liens, and garnishment. In the
student loan context, the use of administrative garnishments has given
collectors an overwhelming weapon with which to wring submission from
borrowers, using threats to bully those who are entitled to discharges
or other remedies. Imagine what private debt collectors, some of whom
are already known for making bogus threats to seize homes to frighten
consumers, will do if they actually have the power to place non-
judicial liens on a taxpayer's home. Not only should collectors not
have special administrative remedies, there must be strict prohibitions
against collectors representing or implying that they have the right to
use such remedies, with significant penalties for violation. A false
threat is just as devastating for unsophisticated taxpayers.
LPrivate Tax Collectors Must be Covered By ALL of the Protections Under
Federal Debt Collection Law
Private collectors of IRS debt must be covered by Fair Debt
Collection Practices Act (FDCPA).<SUP>(9)</SUP> The FDCPA provides the
most important protection for consumers from abusive or unfair actions
by debt collectors. While a few states have adopted similar statutes,
in the overwhelming majority of states, the FDCPA remains the primary
law specifically delineating the permissible activities of debt
collectors. The finding articulated by Congress in 1978 remains valid
today, in that ``[e]xisting laws and procedures [other than the FDCPA]
for redressing these injuries are inadequate to protect consumers'' 15
U.S.C. 1692(b).
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\(9)\ Private collectors of tax debts are currently mostly likely
not covered under the FDCPA because tax arrears are not considered
consumer ``debts'' under that Act. See Pollice v. National Tax Funding,
225 F.3d 379 (3rd Cir. 2000); Beggs v. Rossi, 145 F.3d 511 (2nd Cir.
1998).
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The FDCPA establishes general standards of proscribed conduct,
defines and restricts abusive collection acts, and provides specific
rights for consumers.
The standards protect a consumer from invasion of privacy,
harassment, abuse, false or deceptive representations, and unfair or
unconscionable collection methods.
<bullet> LSpecific acts that are prohibited include late night or
repetitive phone calls and false threats of legal action.
<bullet> LThe Act gives a consumer the right to require a collector
to stop all collection contacts.
<bullet> LIt requires a collector to deal with a consumer's
attorney when the consumer has one.
<bullet> LIt gives a consumer the right to require a collector to
verify the existence, legality, or amount of a disputed debt it is
attempting to collect.
<bullet> LThe courts require strict adherence to the Act's explicit
terms to accomplish the remedial and preventative goals of Congress.
In fact, the FDCPA was the model for the fair tax collection rights
at 26 U.S.C. 6304. However, certain critical FDCPA protections are
missing from section 6304, and mere application of that section as
currently proposed is not enough to protect consumers.<SUP>(10)</SUP>
In particular, private collectors must be subject to section 1692c(c)
of the FDCPA, which requires that they cease contacting a consumer,
with certain exceptions, if the consumer sends a written notification
stating that the consumer wishes the debt collector to cease further
communication with the consumer. This is the single most important
``release valve'' for distressed families to avoid harassment and get
an aggressive collection agency off their backs immediately, without
need to resort to a lawsuit or a cumbersome complaint process. When a
consumer is being harassed by a debt collector, even a few weeks delay
can cause unbelievable stress and anxiety on his or her family. Of
course, the IRS will have the option of taking the case back or
pursuing administrative or legal remedies if the consumer has sent a
cease communication letter.
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\(10)\ The omission of certain requirements in 26 U.S.C. 6304 is
not surprising since that section was intended to apply to IRS
collectors, i.e., the original creditor. Original creditors are usually
subject to fewer requirements than third party collectors. However,
since the IRS is proposing to use third party collectors, all of the
requirements of the FDCPA must apply to those entities.
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LPrivate Tax Collectors Should Not Be Permitted to Handle Contested
Liability, Offers-in-Compromise, or Payment Plan Negotiation
Another important right not present in 26 U.S.C. 6304 is the
right to validation of a debt. Section 1692g of the FDCPA gives the
consumers the right to dispute a debt or its amount, and requires the
debt collector to go back to the creditor to verify the debt. For tax
debts, we believe there should be a special validation requirement, in
that if the consumer disputes liability or amount, the case must be
returned back to IRS. Private debt collectors cannot be permitted to
handle issues of contested tax liability. Unsophisticated taxpayers
must be protected from paying amounts that are not actually owed--an
accurate determination of tax liability is beyond the ability of most
consumers and will not be in the interest or within the skills of the
private tax collector.
Furthermore, the case must be returned to IRS if the taxpayer wants
a payment plan or settlement--these options cannot be negotiated by
collector. As discussed earlier, private collectors have a history of
browbeating consumers into payment plans they cannot afford. Not only
will an unrealistic payment plan result in more taxpayer distress and
ultimately prove a failure, but it will undermine the ability of the
taxpayer to ensure that she can pay this year's tax obligation, thus
subverting current tax compliance to line the private collector's
pockets.
Under the FDCPA, consumers must be given certain notices, including
information about the right to have the debt validated. Because of the
unique nature of tax debts and the options available to taxpayers,
taxpayers must be given additional information in plain language so
that they are informed of their taxpayer rights. This notice must
inform taxpayers of the right to return the case to IRS if the
consumer: 1) disputes liability or amount of liability; 2) wants to
apply for an Offer-in-Compromise; or 3) wants a payment plan. In
addition, the written communication should include notice of the
taxpayer's FDCPA rights, including the right to send a cease
communication letter. It should include a prominent disclosure that the
collector is not the IRS, but a private contractor and is not entitled
to use special IRS administrative remedies. Finally, as discussed
above, copies of IRS Publication 1 and 594 should accompany the written
communication.
Taxpayer Privacy Must Be Protected
Another concern is the privacy rights of taxpayers. The IRS treats
personal tax information as confidential and private. There must be
strict prohibitions against use or sharing of IRS data for purposes
other than collection of federal tax debt. This prohibition must
include sharing of information internally within a private collection
agency and with affiliates or credit bureaus. The current proposal
would impose on private collectors the same restrictions against
dissemination of taxpayer information as IRS employees are currently
subject to. However, even when privacy protections exist, private
contractors have an abysmal record of protecting the confidentiality of
taxpayer information.<SUP>(11)</SUP> It is not difficult to posit that
taxpayer privacy will be compromised as tax returns are shared with
increasing number of collectors, many of whom may have other debts they
are pursuing against the taxpayer, such as state tax
debts<SUP>(12)</SUP> or consumer credit debts. After all, if a taxpayer
is unable to pay his federal tax debts, it is likely he cannot pay his
state tax debts or his credit cards debts--and the information in the
IRS database will be temptingly available for the private collector to
use to collect those debts as well.
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\(11)\ See, e.g., Office of the Inspector General, Social Security
Administration, Federal Agencies' Control over the Access, Disclosure
and Use of Social Security Numbers by External Entities, February 2003.
\(12)\ An unanswered issue is how federal-state information sharing
agreements on tax collection will play out when private debt collectors
are involved.
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LThe IRS Must Establish a Strict Oversight Program and a Meaningful
Complaint Process
Private debt collectors have never been completely successful with
clamping down on the bullying culture within their ranks. If there are
those debt collectors who have no compunction against violating the
FDCPA and other laws, even official IRS prohibitions may not be
adequate. This is a risky experiment, at best, that the IRS is
proposing. Thus, the IRS must establish a stringent oversight and
monitoring program for its private collection program. There must be
frequent audits and compliance reviews with real penalties for poor
performance in respecting taxpayer rights. Employees of private debt
collectors must be required to give out their real names and some sort
of identifying information, so that rogue employees can be identified.
One tactic used in the debt collection industry is that employees will
refuse to give their names or will give false names so that consumers
and their attorneys cannot track down the employee who actually
perpetrated abuse. This permits the debt collection agency to disclaim
responsibility for and knowledge of abusive employees.
There must be a toll-free complaint line and staff assigned
specifically to deal with complaints. Furthermore, taxpayer complaints
must be weighted seriously against a private collector. Many debt
collection complaints are based on oral communications. The IRS must
not be permitted to discount taxpayer complaints on the basis that
``it's just your word against theirs.''
LTaxpayers Must Have the Right to Take Legal Action Against Private
Collectors Who Violate Their Rights
In conjunction with a stringent IRS oversight program, there must
be a private right of action for private collector violations, with
significant penalties. To use the current scheme under IRC, 26 U.S.C.
7433 is inadequate. Section 7433 only provides for actual damages; it
does not provide for any statutory damages or the right to file class
actions. The primary ``actual damages'' suffered by most victims of
abusive debt collectors are those that flow from mental distress. Loss
of sleep, anxiety, stress, and worry may be very hard to prove months
and years later, and are always difficult to place a monetary value on.
Also the cost and discomfort to the injured consumer of getting on the
witness stand and reliving the collector's abuse during a former period
of financial distress in order to prove actual damages deters many
consumers. Without statutory damages or class actions, actual damages
will not be adequate to deter abuse. Private collectors will shrug off
lawsuits as a slap on the wrist or a cost of business. Only strong
public oversight with private enforcement can ensure that we will have
a private debt collection scheme that balances collections with
fairness to taxpayers.
Conclusion
Based upon over 30 years of experience on behalf of consumers in
debt collection matters, we at NCLC have grave concerns about the
current proposal to permit IRS use of private debt collectors. The
experience in the student loan context would predict, not a shining
success as some have promised, but a legacy of taxpayers being
harassed, deprived of their lawful rights and options, and mislead.
Taxpayer abuse by private tax debt collectors will not reflect well on
the IRS, our tax administration, or our government.
If this proposal is to go forward, it must be significantly revised
to include strict taxpayers protections and a meaningful oversight
system. Private debt collectors must not be permitted to use the
special collection powers of the IRS, negotiate payment plans or
settlements, deal with contested liability, or even hint that they can
do any of the above. Private debt collectors should never be sicced on
financially distressed low-income taxpayers. Private debt collectors
must be bound by ALL of the requirements of the federal Fair Debt
Collection Practices Act. Taxpayers must be informed of all of their
rights and options in dealing with tax debt. Taxpayer privacy must be
respected. Private tax collectors who violate the law must be subject
to both meaningful sanctions by IRS as well as private enforcement.
Only with all of these protections will we have a chance of avoiding
the abuses that have plagued student loan collections as well as debt
collection in the private sector.
Thank you for the opportunity to testify today.
<F-dash>
Chairman HOUGHTON. Well, thank you very much, Ms. Wu. I
have just got a couple of questions, one really to the three
people, the head of the association and Mr. Smith and Mr.
Shaver, and then I would like to ask one of you, Ms. Wu.
When you embark on a program like this, you are looking at
three things. You are looking at costs, you are looking at
return, and you are looking at service. So, really what
abilities do your agencies have that the IRS does not have in
this particular process of collections?
Mr. SMITH. Are you addressing that to me, sir?
Chairman HOUGHTON. Sure. Anybody, because you are
representing the industry.
Mr. SHAVER. Mr. Chairman, the private sector has, as I
commented, at least in my oral remarks, superiority in the
technological field. Our primary capability that separates us
from government in the arena of collection and specifically
those accounts that are difficult to find and collect is our
ability to locate individuals. That is number one.
Number two, I also commented that we have no enforcement
capability. We have no ability to threaten people into
submission. We do not adjudicate the tax determination. We do
not initiate any enforcement activities, and so consequently
whether it is in the area of tax collection or student loan or
in any other area of debt collection, we have had to learn how
to talk to people, communicate with them about their options,
and our success only comes about when there is a voluntary plan
to either make a payment in full or partial payment, an
installment program or something of that sort. Those I think
are two exceptional hallmarks of the private debt collection
sector.
Chairman HOUGHTON. Okay. Thank you. Do you have any
comments, Mr. Smith or Ms. Andersen?
Mr. SMITH. I would like to add that in the private sector,
the collection agencies create a culture of success amongst its
employees by beyond just the fact of compensation from a
commission structure, and that in and of itself helps to create
a more superior product when it comes to servicing our
customers.
For example, we have employees share option plans that we
bring to bear in respect to rewarding employees in the overall
good of the performance of the agency under the particular
contracting question. So, for example, we do not believe that
there would be an issue, as Ms. Wu has already touched on, in
respect to just being paid commission. This is a balanced
matrix approach, and that is very important that we keep that
in mind, and we think that the PCAs could do a superior job
because of that balanced matrix performance measurement.
Chairman HOUGHTON. Good. Well, I assume that you agree with
that; is that right, Ms. Andersen?
Ms. ANDERSEN. I certainly agree with their testimony. I
would also like to add that there are several other motivators
for collection agencies in terms of compliance with the law.
One obvious one, I suppose, is the desire to perform adequately
on any contract for any creditor. It also is to decrease any
potential litigation against the agency.
My point is that an optimally run collection agency will
have weekly appraisals performed internally where they
literally look at any complaints, any disputes, any
nonconformities with their collection activities, and what this
results in is immediate remedial action in terms of correcting
any problems with the messages left on machines, with the
communications shared with consumers, with the collectors'
tactics, with any actual communication deficiencies, whether
it's in the written communication or the oral communication.
I would like to underscore that, in the modern collection
agency, the goal is to understand the needs of the consumer and
to collect debt based on that understanding--as opposed to a
more traditional approach as has been suggested, where
collection is done under threat.
Chairman HOUGHTON. All right. Well, thank you very much.
Just very quickly, because my time has run out, Ms. Wu, you are
worried about collectors being compensated solely on the basis
of the amount they collect. If I understand it, there is a
process there which sort of insulates that type of individual
impetus to try to collect more and more and more and hurt the
taxpayer, this thing called a balanced scorecard.
Also, when the results come in and the collections are
made, they go directly to the IRS and then come back to the
company. They don't go to the individual. The company decides
what portion the individual will get.
Now, you can say that if somebody is very effective, he
will get a different bonus, or he might get opportunities for
advancement in the company, but basically my impression is
there is a pretty good immunization that goes on here.
Ms. WU. Well, from what I understood from the National
Taxpayer Advocate's comments, and I may be wrong, I just heard
them for the first time, is that there would be this balanced
scorecard, but compensation would be on the basis of
contingency. So, that there might be incentives for customer
service, but when it comes down to the bottom line, it is
contingency and contingency only, and that is risky for
consumer, for taxpayer rights. That really creates incentives.
It creates incentives not just for the agency but for the
individual employees, because the individual employees are paid
on the basis of commissions, and so they have the incentive to
be as aggressive as possible. So, you may have an agency where
not every single employee is engaged in aggressive tactics but
some are, and the issue is if you have enough of those, if you
have thousands out of the millions of taxpayers being contacted
who have horror stories about aggressive tactics, that will
undermine the sense of fairness in our government and our tax
administration.
Also, even with a balanced scorecard approach to
compensation, I believe it should be in the statute. The
statutory formulation right now is contingency.
Chairman HOUGHTON. All right. Thank you very much. Mr.
Pomeroy.
Mr. POMEROY. I congratulate the panel. It has been very
interesting. Let me begin by just affirming for you my own
support of your industry. Now whether or not your industry
ought to be doing public debt collection, that is the question
before us. Whether your industry ought to be doing private debt
collection, I believe you play a critical part in the
marketplace. People ought to pay what they owe.
Specialized techniques and infrastructure of developing
debt collections obviously is a very important part of making
the whole commercial world work, and so make no mistake about
where I am coming from. I think you are an integral part of the
marketplace. I commend you for what you do.
The question before us: should the IRS start just taking
over debt over here? First, let us talk about student loan debt
just for a minute as whether it offers any precedential value
or not. To me it's not as surprising that the Federal
Government has enlisted private collectors for student loan
debt as it is that the Federal Government is writing student
loans in the first place. The Federal Government is basically
discharging a private function: loans and loan administration.
So, the fact that in the exercise of that function, it
would outsource debt collection seems to me entirely
reasonable. Basically it's a private life function the Federal
Government is doing in the first place, as opposed to tax
collection.
Let us talk for a minute about that. I am not very familiar
with this industry. Mr. Smith, you indicate that you are have
operations in three countries with your company.
Mr. SMITH. Yes, Congressman.
Mr. POMEROY. Is it a U.S. domiciled company?
Mr. SMITH. We are a Toronto-based company from a global
perspective. However, 100 percent of all of our business for
the Federal Government student loan contract is operated out of
the United States, and we are incorporated in the State of
Delaware, and 100 percent of all the employees staffed are U.S.
citizens.
Mr. POMEROY. How about other debt? Do you get across
border, outsourced, you know you locate call centers wherever,
within the United States, outside the United States?
Mr. SMITH. Yes, many organizations within our industry have
multiple sites throughout the country as well as the world. As
you know, of course, we are becoming more of a global economy,
and it is just best practices to do so. In respect to the
United States, we have Atlanta and Phoenix.
Mr. POMEROY. Things we might want to keep an eye on is this
might not just involve then discharging debt collection or tax
collection over to the private sector, but U.S. tax collection
to outside of the border, other nationalities, other countries,
could be, unless we tighten it up within the contract.
Mr. SMITH. No, that is not what we would include in our
proposal, Congressman, and that is not the tact that we have
taken with the Education Department, as well we have been
awarded the contract by the Education Department with full
understanding that we are a global organization.
Mr. POMEROY. These things have a----
Mr. SMITH. As well as approved by the U.S. General Services
Administration.
Mr. POMEROY. The public perception matters. I hate the
thought of a town meeting back in Bismarck where I am talking
about this Canadian firm that we have hired to collect U.S.
taxpayer debt. It just doesn't sit well with me somehow.
These techniques are quite interesting, and Mr. Shaver, you
indicate that the lack of government powers is why you are so
successful. I suppose you mean you have had to become more
creative. How would you exercise your authority on behalf of
the Federal Government? How would your firm in collecting debt?
Would you have your private employees identify themselves as
private employees or would there be an inference that they are
working for the Federal Government or the IRS in their
collection calls?
Mr. SHAVER. Typically we identify that we are a private
firm under contract to whoever the client may be. We are
contacting whoever the individual is with respect to either a
specific student loan obligation or a Treasury Department
obligation, tax debt, this type of thing.
Mr. POMEROY. Would there be mailings that you would
incorporate as part of your collection effort?
Mr. SHAVER. I would think so, yes.
Mr. POMEROY. Would they be also similarly identified making
it very clear that it was a private contracting entity, or
would this private firm be providing mailing that appeared to
be public?
Mr. SHAVER. Our understanding is clear at this point that
it is the intent of the IRS to provide us with a specific
language that would be conveyed to taxpayers, but it would be
on our letterhead as a contractor in the service of government.
Mr. POMEROY. My early days as an insurance regulator, I was
often cracking down on agents that would send things looking
like they were a Medicare offer.
Mr. SHAVER. I understand. We do not do that, and do not
misrepresent our position.
Mr. POMEROY. You also indicate, Mr. Shaver, and this is a
point that really my gripe is not with you on this, but you
indicate this is going to restore a sense of fair play to the
U.S. taxpayer. I don't think so if basically the only new
enforcement effort that we are talking about is this private
outsourced activity involving that pool of taxpayer debt that
is not fully collected but has been partially paid.
Again, not the difficult tax collection issues, not the tax
shelters, not these other things. In my opinion, this is going
to whack the middle-income taxpayer disproportionately to any
other income segments of the taxpaying public.
Mr. SHAVER. I absolutely understand your concern, and let
me say this about complex cases. We resolve some fairly complex
commercial debt cases for the Treasury Department on a regular
basis, and we are prepared to take on the caseload that IRS is
given authority to assign to us to resolve.
My comments with regard to restoring a sense of tax
fairness may just simply be the opinion of me and several other
people with whom I work and discuss these matters. I pay my
taxes. It may be impolitic in this house to say I don't always
like to do that, but nonetheless I pay my taxes.
I want my neighbors to pay their share of the taxes and in
cases where there are economic hardships, innocent spouse
issues, those kinds of things, those matters ought to be
resolved and not left lingering. There are resolution means
administratively available for those kinds of cases to be
resolved.
Mr. POMEROY. I totally agree with you. I really do. I think
your industry helps people deal with that which they must do:
pay what they owe. In the end they sleep better at night for
it. It is the right thing to do.
Now, again, whether or not that effort by the Federal
Government through its IRS ought to be given to others or
whether we ought to staff up and do it, that is the question
before us. I believe we ought to staff up and do it, as you
obviously have been able to gauge from my comments today. I
understand, however, your significant contribution and helping
people accept their accountability for their responsibilities.
Ms. Wu, I don't have a question for you. My time is up, but
I think that you play a very important role as well, because in
the tension that is in the marketplace in terms of collection
activities, we need to have a pushback to make sure we are
doing this within the bounds of acceptable play, so I commend
you for your efforts as well.
Ms. WU. Thank you, sir.
Mr. POMEROY. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you very much. Mr. Foley.
Mr. FOLEY. Thank you, Mr. Chairman. I am very encouraged
about the conversations. There are some obvious levels of
concern. I have had my identity stolen, and credit run up on my
account, and despite my best efforts with a collection agency--
I repeatedly told them the story that I wasn't the person that
they were trying to pursue. Each time they said fill out forms
and send in the information; 3 or 4 days later, I would get
someone else calling who was new to the case, and so I was
browbeat day after day after day for a $786 charge that was
made out in my name from Target.
So, I am somewhat sensitive to Ms. Wu's concerns, because I
want to make certain as we are establishing a system by which
we can forcefully get people to comply with the laws, but in
cases like mine where I consistently was able to advocate the
person who applied for this credit is not me, they stole my
Social Security, they have a different address in Pompano, I
have never lived there, and yet I went through probably a year
and a half of what I considered unmitigated harassment, calling
the house, calling different and sundry people.
So, there are points in time when you start getting
concerned are overzealous people trying to collect their wages
or their debts when they have the wrong person? Will they ever
give into the fact that they have made a mistake or somebody
has made a mistake, there is fraud?
After a year and a half, I finally got it off my record,
but I thought to myself, here I am a Member of Congress, I have
the capabilities of calling people, I have the capabilities of
talking. I could not imagine if I was a poor guy working all
day, trying to raise a family, coming home at night, having to
deal with this now, considering it is the fraudulent start.
So, I think we have got to establish that those provisions
are, in fact, in this documentation. I would not mind if you
would submit for the record your employment applications as to
what you consider important when you hire somebody for debt
collection, if you would supply that for us, criteria for
employment, the actual application, educational requirements.
Things of that nature I think would be helpful to see exactly
how you pursue employees.
I assume we are not talking Wharton grads here that are
going to be on the phone?
Ms. ANDERSEN. Might you also be interested in written
testimony in response to your question about some
characteristics of an optimum collection agency?
Mr. FOLEY. Yes.
Ms. ANDERSEN. Factors that may be considered?
Mr. FOLEY. Yes.
Ms. ANDERSEN. Okay.
[The information is being retained in the Committee files.]
Mr. FOLEY. These are important because the IRS, as you will
remember, in Philadelphia recently had a firm that they had
retained who was supposed to be processing IRS tax returns, and
they apparently stuck them in a drawer and never quite got to
them. So, in addition to collecting, we obviously ought to be
processing these things. So, we are very, very cognizant of the
fact.
Ms. Wu, you raised some questions, too, and I understood
those, but they are part of the bill. Many of the concerns that
you laid out are part of the bill, but you seem to be
strenuously opposing the measure even with the safeguards that
you ask be in here. They are here, so I am curious whether you
like the proposal at all?
Ms. WU. Well, first of all, I would like to say that not
all the safeguard I have proposed are in the bill. As I
mentioned, there are some distinctions between application of
the fair tax rights at 6403 of the IRS code and application of
the FDCPA itself. There are some critical distinctions, as
there should be, because the FDCPA applies to third-party debt
collectors, whereas section 6403 applies to the IRS.
The IRS is the original creditor. Original creditors are
subject to fewer requirements than third-party debt collectors,
but when you are talking about third-party debt collectors, you
need all of the protections of the FDCPA. You need all of the
remedies in the FDCPA including statutory damages and class
actions.
Right now the proposal is to impose the remedies of section
7433 of the IRS code which only provide for actual damages.
There are other points, too. I think, contingency based
compensation alone, it should not exist, and it should be
prohibited in the statute.
Even with those protections, I have grave concerns about
the use of private tax collectors to collect tax debts. Even
with all of the protections of Federal laws, there are
collection agencies and collection employees that engage in
abusive tactics and as I said before, if you start getting
those, even if it just a percentage of the actual collections
that go on, it will undermine the sense of fairness in our
government if a collector in the name of the United States
starts screaming obscenities or calls at 4 a.m. in the morning,
that reflects on the Federal Government.
So, yes, I have serious doubts about the bill even if
everything that I suggest in my testimony were to be in place.
Mr. FOLEY. You do agree that those of us who pay our taxes
should expect others to pay them as well?
Ms. WU. I agree, of course, everyone should pay their
taxes. I think collection is best done by IRS employees who
understand the collection process. They understand tax law.
They understand tax procedure. They understand the different
rights and remedies available to taxpayers. This has been one
of the big problems in the student loan area, where folks who
are entitled to special remedies, because, for example, they
have been the victim of some sort of fraud. In this case, it
would be trade school fraud schools that open up, don't really
provide an education, and shut down, and the borrowers are left
holding the bag. You know Congress recognized this; the
department recognized this. There are discharges available.
These students or these borrowers don't always get informed
of their rights to a discharge. Instead, they get steered into
private loan consolidations because the private loan
consolidations frankly benefit the collector, and so, that
borrower who had certain rights didn't know about their rights,
was not informed of their rights, and ended up paying money
that they should not have.
Mr. FOLEY. Let me ask you, though, a fundamental question.
Would you assume, though, then if we had a government employee,
an IRS employee making the phone call for collection purpose,
you are assuming though that that IRS person, that employee,
would understand the full complexities of the Tax Code.
Ms. WU. Well, they would have a better chance of it. The
IRS is in the shoes of the original creditor. Original
creditors certainly have been known to commit abuses, too, but
it does not mean the situation is going to get better placed in
the hands of a third-party debt collector.
Mr. FOLEY. Well, just to dispel the notion, one of our
colleagues on the Committee, Clay Shaw, is a Certified Public
Accountant and a lawyer, and he has somebody else do his taxes.
That is pretty much what is happening in the complexities of
the Code, so I am not sure the employees of the IRS are more
capable of defining or understanding. That is why I am not so
reluctant to look at a private vendor for purposes of
collecting.
Ms. WU. I think an IRS employee has a better chance of
understanding all the complexities or at least they will have
more training and experience. One of the things I might suggest
that you ask for is not only the employment qualifications for
employees, but also their salaries and the turnover rate,
because from what I understand some agencies have a fair amount
of turnover and so even with training when you have a lot of
turnover, you lose experience and especially with something as
complicated as tax laws and procedures, losing that experience
will mean less knowledge, and that will ultimately not be to
the benefit of the taxpayer.
Mr. FOLEY. Mr. Chairman, could you indulge me one further?
Chairman HOUGHTON. Go ahead.
Mr. FOLEY. Thank you. In regards to the accusation of
somebody swearing on the phone, yelling and harassing, that is
something of interest to me having gone through this. I almost
now wish I would have paid the person's bill, the $785, because
it may have been far cheaper than putting up with the
harassment that I received.
How do you screen people and how do you monitor their
calling activities? If a person obviously is arrear in their
payments, I guess you automatically assume to some degree they
are a bad person. So, if they call and complain about
harassment, would you accept that as a fact or would you assume
that it is just this person once again trying to skirt their
responsibilities? How do you determine your employees?
Ms. ANDERSEN. First of all, I am with the trade association
so I do not actually perform debt collection services. I am the
general counsel of the association that really provides
training opportunities for companies.
Mr. FOLEY. If Mr. Shaver would like, whoever would like?
Ms. ANDERSEN. No, but I would not like to lose my chance to
respond because it is absolutely critical for you to understand
that in the training that we do provide, there is a script,
which includes a strong message to the debt collectors that
there is not a presumption that consumers are deadbeats. There
is, in fact, an understanding that many people are literally
strapped with resources. I would say that if I can offer
nothing else to this testimony; I do want to dispel the notion
that debt collectors come to work, licensed in as many as 34
States thinking that the people they are going to communicate
with are either bad people or deadbeats or any of the
stereotypes that you would like to overlay on those
individuals, because that is not the current formula for
success, if you will, in terms of collecting debts.
I would say that it is because of the beauty of the FDCPA
that Ms. Wu is able to talk about certain abuses that have come
to light. I would suggest that that is because there is a
complaint resolution process for consumers to access, and there
is a private cause of action under the FDCPA afforded to
consumers. When you take those opportunities/protections away,
perhaps we will not know about those abuses, and to me that
would be the real loss for the American public.
Mr. FOLEY. Mr. Shaver.
Mr. SHAVER. We have an extensive training program that
begins the day a person comes in the door and is hired and
continues for the first 2 years of their employment. Quite
literally every single day that that person is on the job in
the first 2 years is structured.
We have supervisors who routinely and regularly and daily
monitor the performance and the dialog that collectors have
with debtors and taxpayers. In our particular company, I can
tell you, the behavior that you described that was directed to
you would result in an immediate termination, period. We do not
tolerate that behavior in our agency.
I would suggest if there were a contractor and there were
repeated incidents, meaning it was a cultural problem with the
contractor, that they should not work for the government, they
should not be in this business. This is not a business where
people are threatened, intimidated, harassed, and abused into
repaying their obligations.
Mr. FOLEY. They have to have some script like that? It
cannot be, hey, how are you doing, hope you are well.
Mr. SHAVER. Mr. Foley, I invite you and the Members of the
Committee, your staff, to come and visit any of our locations
at any time unannounced, walk in and see what these folks do.
They are professional. They are more in what I would call a
sales kind of approach or counseling approach where information
is provided. I do not want to dismiss the experiences that Ms.
Wu has reported to you.
What I do want to say is that I think she made the
distinction between a minority of collection agencies that
behave that way. They should not be tolerated. We have no
tolerance for that behavior in our industry.
Mr. FOLEY. I think that is what we need to get at. We have
to make certain as we pursue this thought process.
Mr. SHAVER. Absolutely.
Mr. FOLEY. It is the minority that always gets us in
trouble. It is that one or two outside the norm that causes
everyone to have a blemish. As we are bringing this bill
forward, I want these things to be mindful, because if you are
one of the 5 or 10 percent that have had a horrific experience,
then you are somewhat loathe to place this opportunity on
someone else because it does sting and it is painful and it is
argumentative and it is debilitating, and particularly when it
is not your fault, it is even more of this.
You are thinking to yourself that poor person who really
went and charged on my Target or--not even on my Target--they
went and charged and got the merchandise. They are scot free.
They are enjoying the goods that they have stolen virtually
from Target and nobody is chasing them. The police do not have
time for it. There is no opportunity to go after those bad
people.
The poor person in my end of the world who is wrongly used
as the victim ends up having to deal with it. So, I guess my
caveat is I am willing to pursue and proceed, but Ms. Wu brings
some very important cogent points to bear, and I hope we all
use those as we move this legislation forward.
Chairman HOUGHTON. Okay. Thanks, Mr. Foley. Mr. Pomeroy.
Mr. POMEROY. Mr. Shaver, I am aware of some prior
litigation involving some of your business practices,
specifically involving Western Union. I believe the practice
would be people would get a Western Union telegram, they call
back in, because the message was to respond by calling, and
then that would provide a telephone number for the individual,
otherwise unlisted telephone number, and that your firm
provided these numbers to other debt collection services, and
there was some litigation about that practice. Is that a fair
or grossly unfair characterization of what occurred?
Mr. SHAVER. I think it is a characterization that is more
or less accurate. Let me say two things. We like every business
in America today are litigated and I literally know of no
business acquaintance in a private firm that does not deal with
litigation as a means of dispute resolution. Having said that--
--
Mr. POMEROY. I agree with you, and I would expect that your
business is inherently at highest risk for this kind of
litigation.
Mr. SHAVER. Well, we do, as you can imagine, deal with
people that would rather that we do not talk to them, and
occasionally they will use a variety of means to discourage us
from doing so including litigating.
There are a couple kinds of problems that occur under FDCPA
protections. There are errors of commission where someone does
something wrong and it is a violation of a specific
requirement, and it is done by an individual, and there are
errors that are systemic, meaning that every collection
business today relies and has to rely on some form of
technology.
There can be instances, not in our particular case, but
there have been instances where technology failures lead to
multiple letters being sent to someone, or a call being made
outside of the scope of the time restrictions on making calls
to individuals and so on.
Where we find that there are any violations or problems
systemically with any aspect of FDCPA, we seek to correct those
as quickly as possible, simply to avoid any future exposure and
risk.
Mr. POMEROY. It is kind of like I think that you are an
excellent panel, and that you are articulate representatives of
a very legitimate, indeed an important industry. Whether or not
we ought to enlist this industry for collecting taxes owed by
U.S. taxpayers, the panel itself does I think give rise to some
question.
Mr. Smith's company is Canadian owned. Your prior business
practice involved eliciting telephone numbers under certainly
less than disclosing if not misrepresenting circumstances, and
then providing those to others.
Mr. SHAVER. Can I offer a clarification, Mr. Pomeroy?
Mr. POMEROY. Sure.
Mr. SHAVER. We were sued in that particular litigation as a
customer of Western Union, buying a service that they offered.
The matter was resolved and they neither offer the service nor
do we participate in it.
Mr. POMEROY. Right. I do understand that. I am worried
about misrepresentation of the Federal Government and the
relationship with the Federal Government by private parties. I
appreciate your clarification. It does allay a bit of the
concern that I had from just looking at the case. It does go to
show you if we go down this road, we had better write in
protections that make it very clear with our private partners
what the safeguards must be.
We need to oversee it vigorously. I believe it was Mr.
Smith that mentioned additional 70 IRS people might be required
to do this. Well, if they are on average collecting $900
million, close to a billion dollars each if we put those 70
people to collecting debt, we would maybe get the best return
for the value for the taxpayer.
Well, it is not a discussion we are going to conclude
today, but I think that we have had a fair opportunity to raise
the questions that I have had. Thank you, Mr. Chairman. Thank
you, panel.
Chairman HOUGHTON. Okay. Thanks, Mr. Pomeroy. Thanks very
much for coming.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of COLLECTCORP, Inc.
Company Background
COLLECTCORP, Inc. has been in the business of debt collection since
1978, specifically with respect to accounts receivable outsourcing,
early-out programs, and third party collection recoveries. The company
has enjoyed the respect of those in the industry for a number of years
as a result of its long history, reputation, and management style. We
hold to a philosophy of working with the largest debt grantors in North
America, which affords us a unique opportunity to maximize collectible
debt while keeping our client base small. This mind-set has proven to
be tremendously successful. With fewer than 30 clients, we have
accepted over $2.5 billion for collection in the past 12 months. Our
work is exclusively limited to the banking and finance industry, as
well we work with government agencies throughout North America. In
fact, 41% of our collections work over the past 12 months was derived
from government clients, making government collections and banking/
finance collections our largest areas of business activity. COLLECTCORP
has established itself to be an undisputed leader with respect to third
party collection recoveries for both the private and public sector.
The IRS and Debt Collection
The IRS knows how lengthy and difficult the collection process can
be. It is estimated that within the past three years, the amount of
uncollected individual IRS tax revenue has risen from $7 billion to
approximately $13 billion. The IRS is not able to recover this amount
without additional resources and new approaches to collections.
While the outstanding tax money comes from taxpayers of all income
brackets, the majority of the backlogged cases account for a small
percentage of revenue outstanding. It is estimated that approximately
\2/3\ of the backlogged cases account for 10% of the missing revenue
while the remaining \1/3\ account for 90% of outstanding revenue. The
IRS needs to be able to focus on the \1/3\ of their cases that account
for most of the revenue, which requires an amount of time and effort
that the IRS does not have when it is saddled with the other \2/3\.
Furthermore, the number of backlogged cases and uncollected revenue is
continuing to increase at an alarming rate.
Private Collection Agencies
Private collection agencies can be used to support the IRS's
collection efforts. The IRS has an opportunity to free up resources
through outsourcing to focus the remaining resources on the most
important backlogged cases. The private collection agencies would focus
their resources on collecting the debts that reap the smallest returns,
which would allow the IRS to aggressively pursue the smaller number of
cases that yield much higher returns. In other words, the IRS would
direct its attention to the more high profile cases, such as tax
shelters, while leaving the agencies to the lower profile cases, such
as people who just chose not to pay their taxes. COLLECTCORP fully
supports the Administration's initiative and believes that the use of
private collection companies is a reasonable addition to the IRS's
collection efforts.
Our main concern, however, lies in the selection process: the IRS
needs to closely scrutinize those agencies it is considering for
collection work. Each collection agency employs different collection
strategies for individual client needs and utilizes different
approaches to maximize net collections with differing cost structures
and commission rates. Consequently, in order to better assess the
ultimate performance of an agency, a greater emphasis in the evaluation
criteria should be placed on ``how the work will be done'' rather than
``how much it will cost''. The criteria for selection must be rigid in
order to maintain a sense of stability, increase consumer confidence,
and allay fears of privacy invasion. Particular to privacy, all
employees should be made to sign both a Confidentiality Agreement and a
Notice and Acknowledgement of Federal Tax Information and
Confidentiality of Child Support Information. COLLECTCORP has a full
time Security Officer that ensures full compliance on all security
matters including licensing, security clearances, facilities, and
database. The application of these security requirements is verified by
our Quality Assurance Department prior to the commencement of the
contract. The Project Manager then signs off on the project after
having reviewed a report from the Security Officer and verification
from the Quality Assurance team. Such privacy measures need to be
considered when choosing a private collection agency.
Moreover, there is always a danger of putting one's eggs in too few
baskets. COLLECTCORP believes that the key to the success of the IRS
collection outsourcing initiative is to spread the case load amongst a
large enough pool to be diverse. It has been our experience in working
with government clients that fiscal and operational objectives can be
more readily achieved when more than one agency is employed. The
benefit achieved by using a multiple number of agencies is enhanced
competition. With more competition, greater returns are realized as
each agency strives to outperform its competitor. Furthermore, the IRS
can maximize results by assigning more accounts to those firms that
perform well and fewer accounts to those that perform poorly. In the
end, the IRS would benefit from the use of the maximum number of
agencies your system could administer.
Conclusion
Many states and other government agencies have used private
collection companies in the past with much success. The use of such
agencies would allow the IRS to focus its resources where they are most
needed while making valuable progress in increasing debt collection and
decreasing IRS case workloads. If implemented properly through the use
of multiple agencies that are selected based on how they plan to
achieve the IRS's objectives and not based on cost, private collection
agencies would be a practical and efficient addition to the IRS's
current collection process.
<F-dash>
Statement of U.S. Army Brigadier General Ret. Robert S. Young, GC
Services, LP, Houston, Texas
Good morning, Mr. Chairman. My name is General Robert Young. I
served in the United States Army from 1943 to 1982, the last seven
years of that time as a Brigadier General. Currently, as Senior Vice
President of GC Services LP, I run the Washington, DC operations of one
of the largest private collection companies in the United States. I
have been associated with GC since 1982.
Chairman Houghton, I want to thank you for introducing H.R. 1169.
This legislation addresses an important and growing problem in the
United States--the increasing backlog of taxes that have not been paid
to the U.S. Internal Revenue Service.
GC has a long history with the IRS and its collection of taxes. GC
has worked with the IRS for more than twenty years. In fact, GC was the
general contractor for IRS's Automated Collection System, was the
principal subcontractor for the IRS Integrated Collection System, and
was one of five collection companies hired by the IRS to participate in
its outsourcing pilot project in 1996-1997. GC has a history of
completing projects for the IRS on time and within budget--a rarity
among IRS contractors. GC also has an extensive history collecting
state taxes since the mid-1980s and currently collects taxes for the
states of: Colorado, Illinois, Kansas, Louisiana, Massachusetts,
Michigan, Missouri, Oklahoma, Ohio, South Carolina, Utah, and Virginia.
The use of private collection companies to collect delinquent tax
debts would be a sound addition to the IRS's current collection
efforts. The IRS needs private collectors. Since 1999, the IRS has not
even attempted to collect approximately $13 billion per year in
delinquent taxes. The General Accounting Office reported last year that
the IRS has had ``dramatic'' declines in collection programs since
1996. For example, coverage by telephone and field collection programs
declined by 15% and 45% between 1996 and 2001. By 2001, according to
GAO, the IRS was deferring collection action on 1 out of 3 assigned
delinquencies.
Other government agencies have had success using private collection
companies. Numerous states use private collectors. My company alone
collects taxes for twelve states. One of our longest-running tax
collection contracts is with the State of Michigan and that effort has
been tremendously successful from day one. In fact, Michigan recovered
its initial development cost on the Michigan Automated Collection
System in 1986 within the first four months of the system's operation.
Since then, GC has collected a total of $1.7 billion for Michigan.
We also perform collection work for other state debts and for
municipalities. One of the areas in which private collectors have shown
particularly good results is in the area of child support collections.
GAO reviewed private child support collection efforts in 1996 and found
that for all eleven private contracts it reviewed (covering nine
states), the states had net revenues from their privatized child
support collection efforts. In fact, in every state GAO studied that
fully privatized child support collections, privatized offices
performed as well as, or better than, public offices in locating
noncustodial parents, establishing paternity and support orders, and
collecting support owed.
One issue that is raised when states consider using private
companies to collect taxes is privacy. Taxpayer privacy is important
and we take it very seriously. Private collectors can and do protect
taxpayer privacy. For example, the IRS will require private collectors
to adhere to the same privacy protections as public collectors
including all prohibitions against the disclosure of information in tax
returns. Private collectors will be required to undergo background
checks just like public employees and private collectors will be
subject to penalties if they violate privacy provisions. I was the
Project Manager for GC during the IRS outsourcing pilot in 1996-1997
and I can tell you that the IRS thoroughly and successfully tested its
system of privacy protections during the pilot. It is important to
protect privacy, but privacy concerns are not a reason to keep the IRS
from using this necessary tool--private collectors--to address its
backlog of delinquent taxes.
It should also be recognized that giving private collectors IRS
information is not a novel concept. Private child support collectors in
the states already have access to IRS information as authorized by the
Personal Responsibility and Work Opportunity Reconciliation Act of
1996. The IRS also has employed other types of contractors over the
years--such as computer and technical support people--who have the
potential to access IRS data and have the responsibility to protect
such data. Privately employed individuals have access to IRS
information and protect it.
By allowing the backlog of delinquent taxes to grow, we not only
lose the uncollected funds, but reduce the incentives for taxpayers to
do the right thing and pay their taxes on time. Perceptions that other
people get away with not paying taxes undermines our entire tax system.
When that happens we all suffer because we have a larger and larger
deficit to overcome. Private collectors also would take some of the
workload off of current IRS employees allowing the IRS to focus on the
most egregious cases of illegal tax avoidance such as off shore tax
shelters and the like. Passing H.R. 1169 is a good way to help reverse
the growing backlog of delinquent taxes and make sure everyone pays
what they owe.
I thank the Committee for holding this hearing to consider this
important issue and I urge you to support H.R. 1169.
<F-dash>
Statement of Donald B. Kramer, Esq., Kramer & Frank, PC, Saint Louis,
Missouri
I wish to call to the attention of the Committee that any
legislation relating to the use of ``private collectors'' should
include ``collection law firms''. There are more than 500 collection
law firms in the United States who engage in the collection of
delinquent accounts as a major part of their practice. These firms
employ more than 3,500 skilled collectors. The law firms are controlled
by the ethics and guidelines established by the Supreme Courts in their
states, and by professional ethics. When a ``pilot'' program was
conducted several years ago by the Justice Department, the private
collection law firms were able to recover a greater percentage of the
accounts than the U.S. Attorneys. Congress should not ignore this.
These law firms should be given the leeway to collect accounts for the
IRS as they do for the nation's largest lenders, on a contingent fee
basis. There is an association of retail collection law firms, called
the National Association of Retail Collection Attorneys, which enables
Congress to communicate with the nation's finest collection law firms
in an easy fashion. Thanks for your consideration of this information.
<F-dash>
Statement of the National Society of Accountants, Alexandria, Virginia
The National Society of Accountants (NSA) is pleased to submit
comments on the proposal to allow the Internal Revenue Service (IRS) to
use private debt collection agencies (PCA) to collect outstanding tax
debt. The outsourcing of federal tax debt collection represents a major
change in federal tax administration policy. We congratulate Chairman
Houghton for holding this hearing to facilitate an open dialog on the
merits of the proposal.
NSA and its affiliated state organizations represent approximately
30,000 accountants, tax practitioners, business advisors and financial
planners providing services to more than 19 million individuals and
small businesses. Most NSA members are sole practitioners or partners
in small- to mid-sized firms. NSA members agree to adhere to a strict
code of ethics and professional conduct.
NSA recognizes the need for the IRS to improve its collection
processes to reduce the mounting increase in delinquent tax debt.
Fundamental fairness demands that all taxpayers who meet their tax
obligations be confident that their neighbors are paying their fair
share. While the Administration's proposal to use PCAs to collect a
portion of this debt is innovative, we believe that implementation and
management of such a program is fraught with danger and risk for all
taxpayers. We prefer that Congress increase funding for IRS collection
activities (including added staffing and adequate training) rather than
outsource this vital activity.
First and foremost, we are concerned that the use of PCAs may erode
taxpayer rights and protections. While it is true that H. R. 1169, as
introduced, prohibits individuals while performing services under a
qualified collection contract ``. . . from committing any act or
omission which employees of the Internal Revenue Service are prohibited
from committing in the performance of similar services,'' much of the
actual taxpayer protections would be addressed through IRS management
of the program and in the contracts with the PCAs. Because the IRS
record in contract negotiation and management leaves much to be
desired, we fear that once again good intentions will not translate
into sound contracts.
The testimony of Commissioner Everson and the National Taxpayer
Advocate (NTA) details various steps that the IRS will undertake to
protect taxpayer rights and to provide assurance that oversight of PCAs
will be stringent. The NTA states that this oversight will include live
call monitoring in addition to taping of calls and that IRS will have
an on-sight presence at each PCA.
We believe such safeguards are appropriate but question whether the
IRS will have sufficient commitment and resources to maintain the level
of oversight necessary to protect the public over the long-term. Often
the IRS must divert resources from existing programs to fund emergency
projects and to implement legislative changes (i.e. the generation of
refund checks mandated by the Economic Growth and Tax Relief
Reconciliation Act of 2001) not contemplated in the IRS annual
appropriation. The proposed program must be shielded from any such
reallocation of resources.
NSA feels strongly that to prevent confusion over taxpayer rights,
many of the protections described by the IRS should be incorporated in
the authorizing legislation. To address concerns over IRS contract
negotiation skills, the IRS should be required to develop a model PCA
contract and solicit comments from practitioners and other interested
parties. The actual signed contract between the IRS and a PCA should be
made available for public inspection.
H.R. 1169 absolves the Federal Government from liability for any
act or omission of any person performing services under a qualified
collection contract. We are concerned that this blanket absolution
appears to give the IRS a very large escape hatch. By freeing the IRS
from any responsibility for the program, it sends the wrong signal to
taxpayers and undermines the IRS commitment to protect taxpayer rights.
This provision may also cause harm to low-income taxpayers, and others,
who may lack the resources to sue a PCA for damages caused by improper
collection activities. We believe this provision should be deleted from
the bill.
In an ideal world, the IRS would have the staffing and the funding
to properly manage the collection of outstanding federal tax debt
without resorting to third party collection agencies. Should Congress
decide to allow the use of PCAs, continuing close oversight of this
program by this Committee is vital.
NSA thanks the Chairman for the opportunity to provide our
comments.
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