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Privatizing the IRS?

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It was as true as turnips is . . . It was as true . . .  as taxes is.  And nothing is truer than them.

— Charles Dickens, David Copperfield

This week’s column is a quiz.

For purposes of the quiz, assume that you are in charge of running a business. Your business makes money by providing services to your customers for which the customers are expected to pay.  Most of your customers pay as they are billed but, as in almost all businesses, there are a few people, known as deadbeats, who do not want to pay, and sometimes there are customers who need help in understanding how to calculate what they owe.  One of your tasks is to decide how to deal with people who don’t pay for services they have received and as you analyze the situation, you realize that you have two choices.

Choice number one is to turn over the accounts of people who owe you money to a collection agency.  It agrees to keep one-third of all the amounts it collects and to turn over the rest to you.  Choice number two is to hire additional employees whose job is to collect the money your customers owe. Although you have to pay salaries to those employees, you keep all the money they collect and their salaries are not affected by their success rate. You know from past experience that for every dollar you invest in the in house collection process,  your return is almost $5.00. What do you do?

Now an additional element is added to the quiz. Some years ago you hired an outside collection agency to collect the money you were owed. You were owed $1.4 billion. The collection agency led you to believe it would be able to collect that entire amount.  Instead, it collected only $49 million, missing the goal you had set for it by $900,551,000.  Do you keep working with the collection agency or bring the business in house?

Here is the next question. When the board of directors reviews the foregoing statistic one member of the board says: “the real choice is whether we use private collection agencies or let these tax debts go uncollected.  I hope we don’t take an enormous step backward in our efforts to close the tax gap by eliminating a program that’s working.” Do you ask the board member what he means by “working” or do you just ignore him?

Now we introduce another factor. A majority of your board agrees that debt collection should remain in house and should not be farmed out to outside firms because of the very poor performance by the outside firm used in the past.  But some members of the board are unhappy with a high ranking employee. That employee has tenure and has engaged in some activities that have nothing to do with the company’s collection efforts since they do not fall under the disliked employee’s jurisdiction. Since you lack the ability to fire the employee described above, do you express your displeasure with the activities of that employee by cutting funding for the collection department?

Here are your last two questions. Because the product you are selling is complicated, similar to, for example, a furniture product sold by Ikea, those dealing with your product frequently have questions as to how to assemble the information they have to provide you so you can tell them the cost of the services they have received.  In order to make the process simpler you have historically hired people to answer questions on the telephone. In a typical year you got as many as 110 million calls from people wanting to pay their bills and needing help.  Some of your board members are still unhappy with the above described employee. Do you reduce funding for the collection department so it can only answer 43 percent of the calls you receive each year?  That is the end of the quiz. Here are the answers according to the Center on Budget and Policy Priorities:

“The Internal Revenue Service (IRS) budget has been cut by 17 percent since 2010, after adjusting for inflation, forcing the IRS to reduce its workforce, severely scale back employee training, and delay much-needed upgrades to information technology systems.  These steps, in turn, have weakened the IRS’s ability to enforce the nation’s tax laws and serve taxpayers efficiently . . . . As seven former IRS commissioners from both Republican and Democratic administrations have written:  “Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.”

Here is an additional bit of information: ignoring past experience Congress has decided that in some circumstances the IRS can once again use private debt collection agencies.

Go figure.

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