Here come the private tax debt collectors … again
Seven things taxpayers and their advisors need to know about the IRS program
Editor’s note: This article has been reviewed for changes following the passage of the 2017 Tax Cuts and Jobs Act. The information provided in this article was not affected by the 2017 TCJA. This article has been updated to reflect the recently implemented IRS private debt collector program.
There are almost 19 million people who owe more than $400 billion in back taxes to the U.S. Treasury.
Right now, four million taxpayers are paying the IRS through installment agreements, and the IRS is chasing 7 million more taxpayers for payment.
In late 2015, Section 32102 of the Fixing America’s Surface Transportation (FAST) Act was put into law, requiring the IRS to use private debt collectors for delinquent tax debts.
The details of how the IRS implements this program will determine how successful it is – and how it will impact taxpayers and their advisors.
Two previous attempts to use private debt collectors were scrapped
This is the not the first time the IRS has been instructed to use private debt collectors.
The first attempt started in 1996 and lasted a little more than a year. The second lasted from 2006 to 2009. The first program collected about $3 million, at a cost of more than $1 million. The 2006-2009 program yielded $98 million, at a cost of $47 million.
During these initial attempts, there was widespread concern about how private debt collectors treated taxpayers and their personal information. The private debt collectors didn’t necessarily explain all the available payment options to taxpayers facing economic hardships. Those options include alternatives to full payment, such as installment agreements and penalty abatement. Many taxpayers were also concerned that private debt collectors would share their tax information.
Ultimately, the government scrapped both programs because they weren’t cost-effective and were fraught with potential risks to taxpayer rights and privacy.
Taxpayers will be more suspicious this time around
Enter the third wave of private debt collectors, set to begin in the next few months. This time, the IRS faces new challenges in implementing the program, because the information security landscape has changed a great deal since 2009.
Today, taxpayers are increasingly wary of IRS imposter phone schemes that are prevalent during tax season and all year long. When private debt collectors call taxpayers this year, collectors will face skeptical individuals, wary of IRS imposters trying to scam them into paying “taxes” over the phone.
Seven facts you need to know
1. Private debt collectors are here.
The IRS has selected its authorized private debt collectors and began using them in early 2017. The IRS published the names of these collectors on IRS.gov.
2. Private debt collectors will try to pursue the old, uncollectible accounts.
The IRS wants private debt collectors to go after cases the IRS would never pursue – that is, outstanding, inactive receivables. The case criteria for private debt collectors are:
- More than one-third of the 10-year collection statute has expired,
- No IRS employee is assigned to collect the debt, and
- The IRS hasn’t contacted the taxpayer in a year, and the taxpayer isn’t requesting a payment alternative or relief (such as innocent spouse relief, a collection due process hearing, an offer in compromise, an installment agreement, etc.).
Private debt collectors won’t pursue taxpayers younger than 18, those who have been a victim of tax identity theft, or taxpayers in a federally declared disaster area or combat zone.
3. The private debt collectors will try to locate “missing” taxpayers.
When the IRS can’t locate taxpayers, it removes them from active collection. In the FAST act, private debt collectors will pursue those accounts. As the National Taxpayer Advocate has pointed out, the methods these collectors might use to find and collect from these taxpayers could conjure up fears about how the IRS will protect taxpayer rights, information, and privacy.
4. Private debt collectors won’t have enforcement authority.
Private debt collectors won’t be able to file liens or issue levies. Keep in mind, however, that the IRS may have already filed a tax lien on some taxpayers before the private debt collector ever calls. Collectors also won’t be able to help taxpayers get liens removed. To address enforcement actions, taxpayers or their advisors will need to contact the IRS directly.
5. Collection alternatives are still available through the IRS.
If taxpayers need a payment alternative, such as an installment agreement, currently not collectible status, or an offer in compromise, they should contact the IRS.
6. The IRS will notify taxpayers if a private debt collector is assigned to their case.
Before starting the private collection process, the IRS and the collector will send two letters:
- First, the IRS will send a letter notifying the taxpayer that the IRS has assigned his or her case to a private debt collector.
- Second, after assignment and before contacting the taxpayer, the private debt collector will send a letter.
According to the IRS, these notices will also go to the taxpayer’s representative on file, if any. The IRS hopes that these steps will notify taxpayers of the impending collection and relieve their fears about IRS imposter schemes.
7. Taxpayers experiencing economic hardship aren’t included.
Taxpayers who are experiencing severe economic hardship and have an outstanding tax debt can apply for a special status that suspends their obligation to pay (referred to as currently not collectible status). Taxpayers who have negotiated this status with the IRS appear to be excluded from the private debt collection program. The IRS has not finalized this exclusion, but it appears likely that these taxpayers would be treated similarly to those who have requested a payment agreement with the IRS on their outstanding debt.
Third time’s a charm?
Navigating the IRS can be difficult. With imposter schemes running rampant, adding a third-party collector to the mix could add to taxpayer confusion.
According to IRS plans, taxpayers and their advisors should expect two letters to come before a private debt collector calls. And if a legitimate collector calls for payment, taxpayers and their advisors should first consider whether the client qualifies for a payment alternative with the IRS.
Congress hopes that the third private debt collector program will work better than the previous two initiatives. Time will tell, because the third round has begun.
Editor's note: This article originally appeared in Accounting Today.