The estimated tax gap for fiscal 2017 – the difference between the amount owed and the amount collected – was $197 billion. For about two years the IRS has been contracting with private collection agencies in an attempt to narrow it.
Legislation passed in 2015 required the Service to identify certain types of inactive tax debt cases to send to the private debt collection (PDC) program. Since April 2017, the PDC has been pursuing these debts. The Government Accountability Office (GAO) recently reviewed the effectiveness of the PDC.
IRS Collection Process
Three basic avenues exist in the IRS collection process:
- Notice – This first line contact is an auto generated series of letters that list the amount of delinquent tax and how to respond if there is a disagreement or change in situation that makes it difficult to pay.
- Automatic Collection System – This step usually involves a phone call. Frequently, it is when a taxpayer who calls in response to a lien against a property or levy placed on a financial account.
- Field Collection – In-person contact is rare, but can happen when other enforcement tools fail.
From the automation phase to assignment of an IRS revenue officer, the Service prioritizes debts based on the likelihood it can collect (for instance, it considered only 26% of the 2017 tax gap to be collectible). Some of the factors considered when prioritizing cases include the amount of back taxes owed and a taxpayers ability to pay.
How does the PDC fit into the process?
The PDC has gone into effect with a phased approach starting with the simplest cases. Then in March 2018 more complicated cases were added – unfiled returns or disputed tax assessments. This year, business tax debts and unfiled business returns will be added.
Up to 2.4 million cases could be eligible for the PDC program by the end of fiscal 2019.
What results has the PDC achieved?
This was an area of concern identified by the GAO. The IRS has not clearly set objective measures and targets. This makes it hard to evaluate the program.
The private collectors recovered less than 2% of over $5 billion in assigned debts. From what information was available the PDC resulted in a positive balance of $22 million ($89 million was collected at a cost of $67 million).
The GAO identified a number of concerns with the program. Some of these coincide with those raised by the Taxpayer Advocate. We will address these in another post.