Originally published on Forbes.com.
The news earlier this week that IRS has announced the four private collection companies that will be going to work on old tax debts in the spring did not seem to have a great impact. One public company among them Performant Recovery did see a nice boost in its stock price yesterday – up over 15%, but the reaction was not as quick as I thought it might have been. Pioneer Credit Recovery is a subsidiary of Navient which went up by over 4%. This is not Pioneer’s first try in the IRS rodeo. Along with CBE Group, which was also named yesterday, Pioneer was one of the players the last time this was tried about a decade ago. ConServe Accounts Receivable Management fills out the quartet. Let’s call them the four horsemen.
A Flawed Concept
So the program looks like it might be good for the companies. Is it good for the government and for compliant taxpayers who organize their lives to live on their after-tax income? And is it bad for hardcore dead beats who scorn their legitimate tax obligations?
I think it is possible that the program will look good in its early stages as it harvests some low hanging fruit. People who kind of meant to pay their old tax bill, are capable now of paying it due to changed circumstances and just need a little nudge. It seems to me though that the logic of the program is fundamentally flawed. In business, you turn a receivable over to a collection company, because the collection company can do more than you can to collect it. Here the IRS is being forced to turn receivables over to entities that have less power to collect than the IRS does.
The Irony Of It All
The current IRS scandal now on Day 1237, by TaxProf count is about minions of President Obama inside the IRS persecuting conservative stalwarts forming exempt organizations that were mostly not political that would have won the 2012 election for Romney if they had not been harassed by the IRS. That’s one view anyway. Another view is that the scandal is about nothing at all with some more nuanced views in between. Everybody has an opinion except me, the last IRS Scandal agnostic. Frankly I lean toward the nothing side, but Joe Kristan and George Will, who lean the other way, are weighty reasons to reserve judgment.
The IRS scandal twenty years ago was different. It was about IRS agents being overzealous in trying to get more revenue in the door. After dramatic hearings the result was the Internal Revenue Service Restructuring and Reform Act of 1998. Section 1204 of the Act provided that the IRS could not use records of tax enforcement results to evaluate employees. In other words, people whose job it was to collect overdue taxes cannot be evaluated based on how much they collect in overdue taxes.
When President Clinton signed the bill, he said that it would “give the American people an IRS they deserve”.
That was then and this is now and we have Congress pushing the IRS into using private collectors who will by statute be compensated as much as 25% of what they collect. If it is a bad idea to evaluate government employees who are charged with collecting based on how much they collect, how is it a good idea to compensate a private contractor on a percentage basis?
That’s the ironic part.
Why Pay The IRS?
Back in the day, the anthem of tax planners was a quote by Learned Hand
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
Most of us took this to mean that you would try to get the balance due on the return as low as possible and if there was an audit fight like hell to keep it from going up.
It never really crossed my mind that just not paying could be a valid tax strategy. Sending in your return without the balance due or getting the assessment after the audit and saying “Yeah, whatever”. And I was probably right about that because back in the day those exactions really were enforced.
Waiting Out The Clock
Here is the thing. It is April 15 and you don’t have the money to pay the balance due on your return. There is an incentive to pay the balance due as quickly as possible. There is a late pay penalty of 0.5% per month plus interest (currently 4% per year). That is pretty stiff, although maybe not as much as you are getting charged on your credit card, so you file without paying because the late file penalties are even nastier.
Years go by and you still haven’t paid. The late pay penalty maxes out at 25%, so sometime in year 5, it is just the interest ticking. At this point there is a strong incentive to not pay, because there is a glimmer of light at the end of the tunnel. There is a ten year statute of limitations on collections. But this is the IRS? The incredibly fearsome Al Capone jailing, Tea Party harassing IRS. Can’t they make you pay?
Actually, they can. The IRS can put liens on your property, make seizures, and levy property – telling people that owe you money to pay them instead of you – or else. Thanks to the Restructuring and Reform Act of 1998 they have to warn you before they do that, though with a Notice of Intent to Levy. At that point, you can request a Collection Due Process Hearing, the results of which can be appealed to Tax Court. The hearing is not about the amount of the tax (that was settled long ago). It is about how much you can afford to pay.
In order to take that final step, the IRS needs to have people working your case. And they don’t have enough people to work all the cases. So if you have a five or six-year-old tax debt haunting you should you be concerned about this private collection thing? Actually probably not. As a matter of fact, hearing from a private collector for the IRS (one of the real ones that start working in the spring) may be an indication that you have an even better chance of waiting out the ten year statute. That is a little speculative, but in order to understand why, we need to look at how the program works.
Who Will The Private Collectors Be Calling?
Code Section 6306 says that the four horsemen are engaged to locate and contact taxpayers, ask them to pay or agree to installment agreements that pay in full over five years and to obtains specified financial information. The people that the horsemen will chase are those that the IRS has moved from active inventory because they can’t find them or don’t have resources to pursue, those for whom more than a third of the statute has gone by (generally 3 1/3 years) without being assigned to an IRS employee or one that has been assigned but more than a year has passed without contact.
There are certain classes of people that the horsemen will not be sent chasing. Dead people, people under 18, innocent spouse cases, people in combat zones and victims or identity theft. Also they won’t go after people under examination, in litigation, criminal investigation, levy or currently appealing.
So they will be chasing people like my friend James (not his real name of course). Six years ago, James had a balance due of $15,000 on his 1040 that he didn’t pay. There were flurries of activity here and there over the years, but he hasn’t heard anything in a while. The tab is probably around $24,000 give or take. I’m imagining a conversation I might have with James next year when, after he gets a letter from the IRS telling him his account has been turned over to Performant.
What They Can’t Do
James: So I got a call from Performant, they want me to pay the $24,000 I owe from that return six years ago. What do you think I should do?
Peter: Well can you get the money together?
James: Yeah between this and that I can probably handle it.
Peter: I don’t know how you live the way you do.
James: So should I pay it?
Peter: Of course, you should pay it. You owe it don’t you?
James: Well yeah, but the last time we talked about this three years ago you told me that if I didn’t pay the IRS could do liens and levies, but they had to warn me first. Only nothing ever happened.
Peter: That’s right.
James: So can Performant issue liens and levies and stuff like that?
Peter: Actually they can’t.
James: So you’re telling me that the IRS has turned my account over to a collection agency that can do less than they can.
Peter: Well when you put it that way, I guess you have a point.
James: Now I know that you don’t know the fine points or the inner workings, but it seems to me that as long as Performant has the account, they can’t do anything to me other than try to aggravate me and the longer Performant has the account, the less time there will be left on that ten-year clock when the IRS finally gets it back.
Peter: Well yeah. Only they might have more staff by then because 25% of the money collected goes into a revolving account to hire more collection agents.
James: And Performant gets something?
Peter: Right 25% can go towards the program, although I don’t know how much of that goes to Performant, probably a good chunk.
James: You know what. You made up my mind. I’m definitely not going to pay while Performant has the account. As long as they have it I won’t be levied and the ten-year clock is still ticking. If they throw the account back to the IRS and IRS sends me a levy notice, I’ll pay then, because that would be real aggravation. And besides, I would feel better knowing that the government was getting all the money and not using a chunk of it to hire more IRS collectors.
The Last Time This Was Tried
The last time IRS tried private collectors was from 2006 – 2009. The Taxpayer Advocate did a study of the results. The study covered 357,449 tax modules totaling $1.8 billion. The accounts were worked by the collection agencies for four consecutive six month periods. And then turned back over to IRS to be worked for another four consecutive six month periods. While the collection agencies had them they collected $86 million with $64 million coming in the first six months. Call that the low hanging fruit of people who did not need much encouragement. During the period that the IRS had the accounts now older and with the easy ones already picked over it collected $139 million. It is an interesting report and worth reading but here is what I see as the key observation.
PCAs did not have the authority to conduct certain actions on the cases that IRS collection employees are generally able to undertake. Specifically, because these actions require the exercise of judgment and discretion and therefore are inherently governmental, PCA employees were unable to issue liens and levies or seize property; they were also not able to enter in offers in compromise or lengthy installment agreements.
Another County Heard From
I asked my friend Andy Tieman who used to collect receivables for the regional accounting firm where I was working. He was masterful. He is still in the game. I asked him what he thought about the program.
It is a well known fact that the IRS sends letters and never phones. Is this going to change? There have been dozens of scams of late and this program will definitely promote total confusion and mistrust but even more disturbing will be the criminal copycats that will create absolute havoc. That alone could swamp IRS with thousands of calls asking if this is legitimate.
Unlike the last time this was tried, the scammers who have rushed into the vacuum created by the erosion of the IRS collection division have created an environment in which it is assumed by many, quite rightly, that a phone call about a purported tax liability is not legitimate. This will probably hamper the collection agencies in being taken seriously. Somebody with the sophistication to conclude that the company is legitimate might also calculate that there is really no percentage in dealing with them. The best deal they can approve is a full pay five-year installment plan and they can’t do any of the nasty things that actual IRS employees can do.
I’m thinking that if I was John Koskinen, that I would send out a mailing to everybody about to be turned over to private collection offering them a 20% discount if they pay in full within 45 days. There’s probably a hundred technical reasons why they wouldn’t work, but it would bring in the low hanging fruit and make the private collectors have to work for their money.