Internal Revenue Service sign with a traffic signal in the foreground indicating a red light.getty
One of my least favorite ideas is hiring private collection companies to collect federal taxes. So I was really intrigued by the second biannual report by the Treasury Inspector General For Tax Administration (TIGTA) on the program.
Is IRS Bluffing?
The report and the IRS response to it are very disturbing. If you have an outstanding tax assessment, there is no doubt in my mind that the right thing to do is to proactively address it and make paying it a priority. I used to think that was also the prudent thing to do, even if you are of the “taxation is theft” school of thought.
I fear that waiting out the ten year statute of limitations on collections is becoming a reasonable strategy and that many “taxpayers” have caught on and that the IRS, when it comes to collection, is to a significant degree bluffing.
Let’s look at the report first.
How Are They Doing?
Congress required the IRS to hire private collection agencies as part of the Fixing America’s Surface Transportation Act (FAST) in 2015. In September 2016 IRS announced that it had selected Performant Recovery, Pioneer Credit Recovery (a subsidiary of Navient), CBE Group and ConServe Accounts Receivable Management.
The IRS started turning accounts over to the companies in April 2017. Through May 14, 2020 IRS has turned over 3,289,720 accounts totaling $30,148,188,287. The companies did not get exactly the same amount of accounts and dollars, but on a percentage basis it is very close.
The performance of the four companies was also remarkably similar. The collected $539,242,253 - 1.79% of the dollars assigned to them. Performant, as the lowest performer collected $129 million (1.71%) and Pioneer led with $138 million (1.84%).
For what it is worth, the report notes that 45% of the amount collected came in the last three quarters measured. So the program may be picking up steam. On the other hand, collecting less than 2% of the receivables strikes me as an underwhelming result.
TIGTA compared that to the 9.1% that the IRS achieves. IRS management responded that that is not the right benchmark. I am not going to get into all the details in the report just the high points that I think are significant.
In most TIGTA reports that I have read, the IRS usually agrees with most of the recommendations. They are giving a lot of pushback on this report and it is in that discussion that somewhat disturbing details come out.
The average age of PCA inventory has increased from 4.75 years, reported in the previous TIGTA biannual performance review report, to 5.31 years. We continue to believe that the IRS should work to identify cases earlier in the collection process that it will not work due to resources, designate them as inactive, and assign them to PCAs.
What disturbs me about that comment is that TIGTA assumes that the IRS has collection cases that it knows it will never work due to “resources”.
In prior reports, we recommended that the IRS establish a referral unit that could receive the taxpayer accounts back from PCAs when those taxpayers want to pay something on their accounts but cannot afford to fully pay the liability. Referral unit personnel could offer those taxpayers partial-pay installment agreements or offers in compromise. Although we do not make the recommendation again since the IRS previously rejected it, we continue to believe that ignoring a taxpayer’s desire to pay something does not promote tax compliance and is unfavorable to effective tax administration.
My overall takeaway from the report is that the IRS has a lot of outstanding receivables that it does nothing about. That made me want to look more closely at the numbers.
What The IRS Says About Its Collection Efforts
If you go Topic No. 201 The Collection Process on irs.gov, you will find that the IRS tells you right from the outset that there is light at the end of the tunnel.
If you don't pay your tax in full when you file your tax return, you'll receive a bill for the amount you owe. This bill starts the collection process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax; for example, when the time or period for collection expires.
After several paragraphs about option you have including convincing them to classify you as uncollectible, they get down to business.
It's important to contact us and make arrangements to pay the tax due voluntarily. If you don't contact us, we may take action to collect the taxes. For example:Filing a Notice of Federal Tax Lien Serving a Notice of Levy, or Offsetting a refund to which you're entitled
They may take action. And those actions can make your life kind of miserable. Before they take those actions they have to send you a notice that informs you of your right to request a collection due process hearing by filing Form 12153. You can appeal the result of the hearing to Tax Court. If it goes that far, you should probably get some help. Make sure it is somebody who understands the collection process.
What we are looking at here though is how likely is it to go that far.
IRS provides data in its collection activity. It is Table 25 in the IRS Data Book. Working with the spreadsheets is a little frustrating. They don’t answer all the questions I would like answered, but it does give a pretty clear idea that the IRS is something of a shadow of its former self.
At the end of the 2010 Fiscal Year, the balance of assessed tax, penalties and interest (ATPI) was $114.2 billion spread among 10.4 million accounts. In that year IRS filed 1,096,376 notices of federal tax lien and requested 3,606,818 levies on third party. IRS wrote off $14.6 billion that had expired due to the ten year statute.
At the end of the 2019 Fiscal Year ATPI was $125.8 billion spread among 11.2 million accounts. There were 543,604 liens and 782,735 levies. $34.2 billion expired due to the ten year statute.
There is a funny thing that happened though. The passive aggressive approach actually yielded more dollars and a larger percentage of the opening receivable balance $44 billion (34.3% of the opening balance) as compared to $30 billion which was 28.9% of the 2010 opening balance.
What Is The Practical Take Away?
It is important to remember that when we are talking about collections, we are talking about tax that has already been assessed. This has nothing to do with people who have not filed or who underreported income and have not gotten caught. That is an entirely different kettle of fish.
Through my decades of tax practice, the notion of flat out not paying assessed tax was not something that was in my bag of tricks. It has slowly dawned on me that this is a thing. I at least look at every Tax Court decision and read most of them in full. A remarkable proportion are appeals of collection due process hearings.
So I am really torn. I imagine somebody calling me up and telling me that seven years ago they forgot to include some income on their return. Five years ago they got a notice from the IRS saying that they owed $4,000 and they kind of forgot about it. They might have gotten a couple of more notices but it has been quiet for a couple of years.
Recently they got a call from one of the collection companies. What should they do?
After five years penalties are maxed and interest really isn’t that high. So the most practical thing for them to do is to tell the collection company that they want to deal directly with the IRS. Unless things change that will be the end of it as the collection company will send it back to the IRS and the IRS will most likely let the clock run out.
It Should Not Work That Way
At the end of the 2019 Fiscal Year there 74,369 people working for the IRS. That compares to 94,711 in 2o1o. In 1995 there were 113,643. That is why liens and levies are down and waiting out the ten year statute is now a viable strategy.
The thing to do is to staff up dramatically. But here is the icing on the cake. While the new crop of agents is in training, have an amnesty program. Pay the tax and interest and the penalties are forgiven. Catch up on delinquent returns and amend returns where you were maybe a little too aggressive or kind of forgot something. Penalties waived. CI will find some place else to fight crime.
It would bring a more than a few people out of the shadows.