IRS Refuses to Stop Using Private Debt Collectors

Critics say the program is prone to abuse and violates the rights of taxpayers.

July 11, 2008— -- Despite repeated reports by the IRS's own independent review service that recommend dropping the use of contracted, private debt collectors for its delinquent collections, the IRS is continuing its Private Debt Collection (PDC) program.

The latest in-house IRS report issued this week reemphasizes the on-going concerns about the IRS's PDC program, which critics say is prone to abuse and violates taxpayers' rights by giving out their confidential information to private companies.

This is the third year in a row that the IRS's independent Taxpayer Advocate Service has recommended the 'repeal of the IRS's authority to use private collection agencies to collect delinquent taxes."

Private collection agencies contracted by the IRS collected more than $31 million in actual late payments in fiscal year 2007, but national watchdog groups warn there is potential for abuse when private companies have taxpayers' confidential information.

"Debt collection, universally, is based on fear," says Bud Hibbs, member of the National Association of Consumer Advocates. "When you turn debt collection over to outside agencies, you put people in a position where they're paid out of commission, and they tend to abuse the system."

The Taxpayer Advocate's report also states concerns about 'potential taxpayer rights violations and the transparency of PCA [private collection agencies] procedures to the public and to congressional oversight."

The Advocate's office is not only concerned about taxpayers' rights, but also about taxpayers' bottom line. The report states that if the PDC program did not exist the "return on investment would be vastly greater."

According to data in the report, "the PDC initiative probably results in reduced Federal revenue overall" because an automated system of collection could collect nearly six times more than the PDC program.

The IRS issued a statement to saying that the use of private debt collectors was encouraged by Congress.

"As part of HR 4520, the American Jobs Creation Act (2004), Congress requested that the IRS engage private collection agencies (PCAs) to assist in collecting outstanding taxes," the statement said. "In setting up the program, it was determined that PCAs would work less complex outstanding balances which are not being worked due to lack of resources. These cases would not be worked in the IRS as we do not have sufficient resources to reach these lower priority cases. The IRS continues to monitor and assess the program's progress."

ABC News 20/20 and Nightline ran a series of reports about the private debt collection industry and abusive and ruthless debt collectors.

Click here to listen to a series of audio recordings from abusive debt collectors, and read their transcripts. (Audios courtesy of John Fugate)

Former debt collector Mike Flannagan told ABC News, "Mean works better than nice," and many collectors prey on consumers' ignorance of the law.

According to Flannagan, "If I call you every day, and I bust your chops every day, and I progressively threaten you, and I progressively get meaner...the more likely you're going to pay me." Flannagan says he eventually quit the industry in disgust with himself.

Rozanne Andersen of ACA International, the trade group for the collection industry, says the vast majority of debt collectors follow the law and that the image of the bullying, abusive collector is an old stereotype. According to Anderson, "A debt collector is not the enemy of the consumer. His or her job is to help find a solution and help the person figure out a way to pay the debt."

Though many critics and other consumer advocates say that the IRS is doing a better job than years past over all, Hibbs warns, "You're putting information out there and the tendency to abuse the system, abuse the law is gonna be great. That's why everybody on this side of the fence says don't even go there because you're opening up a can of worms that will never close."

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