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Privatizing the IRS

Here are two idioms that have no applicability to the United States Congress: “Once bitten, twice shy;” “The third time’s a charm.”

It was all brought to mind upon seeing the headline in the New York Times on January 10, 2018, a few short days before Congress decided it was easier to shut down the government than to legislate.  The headline announced that the I.R.S.  “paid $20 million to collect $6.7 million in Tax Debts.” At first blush the reader assumed this was a story that had somehow crept into the newspaper by mistake and escaped the attention of the articles editor.  The reader who thought that could be forgiven for being surprised at seeing the story.  That is because that story had appeared in the New York Times and other publications on two earlier occasions.

In 1996 Congress decided that the Internal Revenue Service could be assisted in collecting unpaid taxes by hiring Private Collection Agencies known as PCAs.  Their task was to undertake collections from delinquent taxpayers.  The program lasted one year before it was terminated.  It was terminated because instead of making money for the government by collecting back taxes, it cost the government $17 million.   In addition, it was learned that the PCAs had regularly violated the terms of the Fair Debt Collection Practices Act.

Those interested in collecting past due debts might find themselves leery of giving such a failed effort a second chance.  Proving that “once bitten, twice shy” does not apply to Congress, however, the program was re-introduced again in 2004 as part of the American Jobs Creation Act. According to projections at the time that Act was passed, and contrary to empirical evidence from less than 10 years earlier, its Congressional supporters said that the PCAs would collect $1.3 billion and receive commissions of $350 million. It was, so the Congress believed, a sure fire winner.

In 2008 the House Ways and Means Committee held hearings to determine how well the program was working.  Here is what it learned.  It learned that 85 percent of the people contacted by the PCAs did not owe any back taxes.  It learned that, whereas it cost the IRS $.07 for every dollar it collected, it cost the PCAs $.24 to collect the same amount.  The IRS had an 11 percent success rate whereas the PCAs had a 4 percent success rate.  The PCAs did not collect the promised $1.3 billion.  They collected $4.5 million.  By most measures that would not be considered a success.  Nonetheless, the program continued until it was ended in 2009 by President Obama, who looked at the statistics and came to the conclusion that the program was not working as advertised by its proponents in 2004.  Ending the program infuriated Senator Chuck Grassley (R. IA) who had always been a strong supporter of the program and believed that notwithstanding its obvious failures, the fact that the collections were handled by the private sector rather than the public sector was reason enough to continue the program. (Senator Grassley also observed that 60 people in his home state of Iowa would lose their jobs as a result of termination of the program.) And that brings us to the present when we learn that “the third time’s a charm” has no applicability to congressional actions.

In December 2015, Congress enacted a law that required the IRS to use PSAs yet again, in order to collect a part of the $138 billion delinquent taxpayers owed the government. On September 26, 2016, the IRS announced that, following the Congressional mandate, it planned “to begin private collection of certain overdue federal tax debts [in 2016] and has selected four contractors.” The program was in effect during 2017.  It was not only Congress that thought the idea of private debt collection was a great idea. Treasury Secretary Steven Mnuchin, (whose name suggests his ancestors came from the land of Oz) was asked about the program during his confirmation hearing and said: “it seems like a very obvious thing to do.”  It may have been obvious.  It was not successful. According to the I.R.S.’s taxpayer advocate, in 2017 the I.R.S. received $6.7 million in taxes collected by the PSAs whereas the PSAs received $20 million in commissions. In addition, in some cases, the PSAs received 25% commissions on collections that they had no role in obtaining. As of this writing, there is no suggestion that Congress intends to end this program.  Instead, Congress has been cutting the I.R.S.’ budget.

When John Koskinen ended his tenure as commissioner of the IRS in early November 2016, he was open in his criticism of how Congress was funding the IRS. Among other things, he observed that the agency has lost 20,000 full time staffers since 2010.  It has lost one-third of its compliance officers. (They are the ones who make the recalcitrant tax payer pay and the ones whose tasks are now being be supplemented by the PSAs.) Things are not all bleak for the PSAs, however.  If Congress continues to cut the IRS’s budget, as it seems certain to do, and if, as a result, the agency continues to lose compliance officers, its ability to collect delinquent taxes will get even worse than it now is, and if its budget is cut far enough, the PSAs will look good by comparison, thus justifying their continued employment. Go figure.

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