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Outsourcing Tax Collection: A Bad Idea We’ve Seen Before

Posted on May 29, 2014

Congress figured out 140 years ago that privatized tax collection was a bad idea.

Bad ideas are like bad pennies — they keep turning up. That’s especially true in Washington, where lawmakers cling to terrible ideas even after they’ve failed repeatedly.

Congress is now pondering an especially bad idea: outsourcing tax collection to private debt collectors. It’s been tried before (at least three times), and it’s never worked.

Privatized collection is a complex solution to a simple problem. “The IRS has significant volumes of collection cases in its inventory,” noted National Taxpayer Advocate Nina Olson in a recent letter to Congress.“Near the end of April, there were just over five million taxpayers with delinquent accounts.”

That’s a lot of accounts, and presumably a lot of money. But the IRS doesn’t need help collecting it; it already operates the most powerful collection agency on the planet. As Olson went on to explain:

The IRS may, without judicial approval, serve a levy against a taxpayer’s bank account, serve a levy against a taxpayer’s Social Security benefits, garnish a taxpayer’s wages, or file a notice of federal tax lien against a taxpayer’s property. In rare cases, it may even seize a taxpayer’s property, including a car, a boat, a residence, or business assets.

Private debt collectors can’t compete with that sort of firepower. But they can compete when it comes to staff. Thanks to budget cuts, the IRS doesn’t have enough employees to function effectively.

But that points to a different and altogether simpler solution: Give the IRS enough money to get the job done.

Congress doesn’t like that idea. Instead, lawmakers like to cut the IRS budget, presumably because the IRS is unpopular and it’s fun to pander to constituents. But it’s also expensive to pander, since every dollar invested in IRS collection can return up to $20 in new revenue (according to estimates from Olson’s office).

Critics of private collection have made that point repeatedly. They’ve also recounted the disappointing history of this bad idea. Twice in the last two decades, Congress has forced the IRS to hire private collectors. Both times the experiment failed.

The failures of the 1990s and 2000s, however, are only the most recent disappointments. Private collection actually had its first flop in the 1870s.

In 1872 lawmakers instructed Treasury to hire a few private collectors to assist in dunning deadbeats. But just two years later, Congress ended the program and panned the concept as ill conceived.

“The committee are of the opinion that any system of farming the collection of any portion of the revenues of the Government is fundamentally wrong,” explained a House investigating panel. 

The Internal Revenue Bureau is possessed of full knowledge of the laws relating to the collection of the revenue; has all the machinery necessary for their full and complete enforcement, and has full authority in extraordinary cases to pay at discretion, for information, Congress actually making appropriations therefor.

In other words, the official tax collectors of 1874, like those of 2014, didn’t need any help getting the job done. They had all the tools they needed.

In fact, outsourcing had created new problems instead of solving old ones. By introducing a profit motive into the collection function, it led to all sorts of shady behavior by the hired guns. Eventually, that behavior brought an end to the program – and the resignation of a Treasury secretary.

Critics weren’t surprised by the failure of private collection. “If there is anything on earth that seems to me apparent,” declared Rep. James Burney Beck, D-Ky., on the floor of the House,” it is that these contracts, from their inception to the present time, are reeking and buoyant with corruption.”

The 1870s, of course, are ancient history, at least in Washington. So perhaps it’s understandable that Congress ignored this 19th-century failure when it repeated the experiment with privatized collection in the 1990s and again in the 2000s.

But those experiments also failed. If lawmakers go down this road for a fourth experiment with failure, they will have only themselves to blame.

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