The Internal Revenue Service (IRS) has hired private debt collectors to retrieve unpaid taxes, which consumer advocates warned could come with a host of problems—from mistreatment to profit incentives to exploitation by scammers.
Real IRS agents are generally not permitted to phone delinquent tax payers. But now the IRS-contracted private debt collection companies will be able to do just that. One of these firms, Pioneer Credit Recovery is a subsidiary of Navient, which was sued this past January by the Consumer Financial Protection Bureau for failing at nearly every stage of the student loan collection process. The consumer agency’s lawsuit asserts that Pioneer misled troubled borrowers about the benefits of resuming payments on lapsed accounts. Navient is fighting the lawsuit and has denied any wrongdoing.
Pioneer itself was terminated two years ago by the Education Department from its contract to collect delinquent debt for misleading borrowers about their loans at what the department called “unacceptably high rates.”
ABUSE AND FRAUD COULD BE RAMPANT
“This is like putting out barrels of honey for scammers,” said David C. Vladeck, a professor at Georgetown Law School and the former director of the Federal Trade Commission’s consumer protection bureau. “What is the IRS thinking?” Mr. Vladeck said. “There’s a very dark cloud hanging over Pioneer. The idea that the IRS would engage it nonetheless to be its agent in debt collection is just stunning.”
In February, the IRS put out its annual list of the biggest tax frauds. Phone calls from criminals posing as IRS agents were the top problem. “During filing season, the IRS generally sees a surge in scam phone calls that threaten police arrest, deportation, license revocation and other things,” the report said.
More than two dozen groups sent a letter last year to IRS Commissioner John Koskinen urging the agency to adopt additional safeguards, such as excluding debtors whose incomes are less than 250 percent of the poverty level.
At the time, Commissioner Koskinen, was quoted in a news release saying: “If you’re surprised to get a call from the IRS, it almost certainly isn’t the real IRS. We generally initially contact taxpayers by mail.” Now that private companies are authorized to call taxpayers on behalf of the agency, that advice may no longer hold.
LOWER INCOME TAXPAYERS MAY BE MAJOR TARGET
Nina E. Olson, IRS Consumer Advocate, warned that the program appeared “to place a bull’s-eye on the backs of low income taxpayers.”
The IRS does not try to collect from those who make only enough to afford basic living expenses. Some 1.8 million taxpayers have debts that the agency deems uncollectable because of economic hardship.
But there are no legal protections to keep those taxpayers out of the private collection program. Ms. Olson’s office analyzed 360,000 delinquent accounts that could be turned over for private collection; among those who filed recent tax returns, more than a third had income of less than $20,000.
“You don’t want to be going after folks like that,” said Chi Chi Wu, a lawyer with the National Consumer Law Center. “If you turn the screws on them to the point where they can’t afford their rent, that’s not good for anyone.”
The New York Times reported that twice before, in 1996 and 2006, the IRS tried to farm out some of its collection duties. Both times, the programs were shut down and deemed failures. The most recent attempt cost millions more than it took in. It also generated thousands of complaints, including one oft-repeated horror story about an older couple who received more than 150 phone calls in less than a month.
According to a study by the IRS’s Taxpayer Advocate Service, which Ms. Olson runs, the last time the agency used outside collectors — from 2006 to 2009 — the companies collected a net amount of around $86 million while pursuing $1.6 billion in debt. After the remaining debt was returned to the IRS for renewed collection attempts, real IRS agents brought in another $139 million — 62 percent more than their private counterparts. With the administrative cost of running the program factored in, the IRS lost $4.4 million, an agency analysis found.
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Both the IRS and the debt collectors say they will be mindful of taxpayers’ rights. Pioneer will “comply with debt collection rules and consumer protections,” the company said in a statement posted on its website. If so, consumers who invite the private debt collectors to communicate and negotiate with them through the SettleiTsoft platform, should find ready acceptance by these companies.
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