In September 2016, the Internal Revenue Service (IRS) issued Information Release (I.R.) 2016-125, which states its plans to use private debt collectors to actively assist in the collection of certain overdue federal tax debts beginning in spring 2017. This new program is authorized by §32102 and §32103 of the Fixing America’s Surface Transportation (FAST) Act of 2015 (P.L. 114-94).
Although the program is referred to as new, the IRS had the authority to enlist the services of private debt collection agencies prior to FAST. IRC §6306, enacted as part of the American Jobs Creation Act (P.L. 108-357) in 2004, authorized the IRS to contract with private collection agencies (PCAs) to assist in the collection of overdue federal tax liabilities. The IRS attempted to utilize collection agencies prior to 2015 but abandoned the project after a few years.
Under the FAST Act, the IRS is required to enter into contracts and agreements for the services of PCAs in the collection of past-due federal taxes within three months of the enacted legislation. Thus, the issuing of I.R. 2016-125 to begin the outsourcing of inactive tax receivables isn’t surprising.
INACTIVE TAX RECEIVABLES
What is (and isn’t) considered an “inactive tax receivable” that can (and can’t) be transferred to a PCA? Pursuant to IRC §6306(c), an inactive tax receivable means any tax receivable that satisfies one of three criteria:
- The IRS has removed the receivable from the active inventory for lack of resources or inability to locate the taxpayer.
- More than one-third of the period of the applicable statute of limitation for the receivable has lapsed, and the receivable hasn’t been assigned for collection to any employee of the IRS.
- A receivable has been assigned for collection, and more than 365 days have passed without any interaction with the taxpayer or a third party toward its collection.
Some inactive receivables aren’t eligible to be outsourced under this tax provision. Specifically, that includes inactive receivables from a taxpayer who is subject to a pending or active offer-in-compromise or installment agreement; is classified as an innocent spouse case; is currently under examination, litigation, criminal investigation, or levy; or is currently subject to a proper exercise of a right of appeal under the Internal Revenue Code. Other inactive receivables not eligible for outsourcing are those involving taxpayers identified by the Secretary of State as being deceased, under age 18, in a designated combat zone, or a victim of tax-related identity theft.
PCAs
Who are the PCAs, and what are their responsibilities? According to I.R 2016-125, the IRS has selected four contractors to implement the new program: CBE Group (Cedar Falls, Iowa), Conserve (Fairport, N.Y.), Performant (Livermore, Calif.), and Pioneer (Horseheads, N.Y.).
The IRC restricts the responsibilities of the contractors to specific services: A contractor is expected to locate and contact any taxpayer specified by the Secretary and may request full payment from such taxpayer for the amount of federal tax specified by the Secretary. If the taxpayer is unable to pay the debt, the PCA can offer the taxpayer an installment agreement providing for full payment of the amount during a period not to exceed five years. Finally, the contractor is expected to obtain financial information specified by the Secretary with respect to the taxpayer.
Contractors may identify themselves as contractors of the IRS collecting taxes. But employees of these collection agencies are required to follow the provisions of the Fair Debt Collection Practices Act (15 U.S.C. 1692 et seq.) and must be courteous and respect taxpayer rights. More importantly, these contractors aren’t permitted to ask for payment on a prepaid debit card. Rather, contractors must inform taxpayers about the options to use electronic payment method for taxpayers on www.irs.gov/payments or to make a payment by check payable to the U.S. Treasury and send directly to the IRS, not to the PCA.
The IRS has recognized that protecting taxpayers is a critical issue at this point. The Service has indicated that it plans to do everything possible to help taxpayers avoid confusion and to understand their rights and tax responsibilities. This is particularly critical given the current climate of phone scams where callers impersonate IRS agents and request immediate payment.
To this end, the IRS has proposed the following protocol. Each taxpayer and his or her representative will receive written notice from the IRS that their account is being transferred to a private collection agency. The PCA will then send a second, separate letter to the taxpayer and the representative confirming this transfer. On the surface, this protocol appears reasonable. But considering the success of the latest tax scam and the public’s reaction to the IRS impersonators, it’s unclear whether the public will know the difference between a scammer and a private collection agency.
REPORTING REQUIREMENTS
What are the IRS’s reporting requirements for this program? FAST Act §32102(f) repeals the reporting requirements under the American Jobs Creation Act and replaces them with new ones. The Secretary of the Treasury is now required to give two reports about the program’s performance to the House Committee on Ways and Means and the Senate Committee on Finance. The first report is given annually by the 90th day after each fiscal year. This report provides Congress with the total number and amount of tax receivables provided to each contractor for collection; the total amounts collected by and installment agreements resulting from the collection efforts of each contractor and the collection costs incurred by the IRS; the impact of such contacts on the total number and amount of unpaid assessments, and on the number and amount of assessments collected by IRS personnel after initial contact by a contractor, the amount of fees retained by the Secretary under subsection (e) and a description of the use of such funds; and a disclosure safeguard report in a form similar to that required under IRC §6103(p)(5) regarding the confidentiality and disclosure of returns and return information.
The second report, to be given biannually, provides an independent evaluation of contractor performance and a measurement plan. The measurement plan must include a comparison of the best practices used by private collectors to the collection techniques used by the IRS and mechanisms to identify and capture information on successful collection techniques used by the contractors that could be adopted by the IRS.
Overall, the program appears to have merit for the collection of overdue tax liabilities. The concern is that the protocol looks good on paper but may instead increase the opportunity for taxpayers to be duped by IRS scammers. The effectiveness of this new program will be known very soon. As the IRS noted recently in I.R. 2017-74 (April 5, 2017), it will shortly begin the process of notifying certain taxpayers by letter that their overdue federal tax accounts are being assigned to private collection agencies.
© 2017 A.P. Curatola
May 2017
