Tax & Business Insights

Private (Tax) Collection Agencies

Volume 18 Issue 6 --  November/December 2006

As a tax professional you may be receiving a new and different type of tax collection notice concerning clients for whom you have filed Powers of Attorney.

In 2004, Congress passed legislation authorizing the Internal Revenue Service (“IRS”) to employ a new method for collection of federal tax debts. In September 2006, about 40,000 collection accounts were turned over by the IRS to three Private Collection Agencies (“PCAs”).  Under the new Federal system the IRS will pay the PCAs up to 24% of whatever is collected. 

In some states, such as Virginia , collection cases have been farmed-out to PCAs with little fanfare and very mixed results.  Virginia practitioners have had considerable experience dealing with collection matters assigned to agencies all over the United States .  The results have been quite questionable and the staff members of the PCAs seem to be woefully untrained.

Congress apparently believes that the new system authorized in 2004 will somehow be better and more protective of taxpayer rights than the efforts of the states have been. The work of the PCAs is limited and they are prohibited from doing many enforced collection actions such as seizing assets or garnishing salaries.  Accordingly PCAs will only be given the “easy” cases — cases which do not require enforced collection actions and that can be collected, if at all, based solely upon letters and telephone calls.

Why only the “easy” cases? The restrictions placed on PCAs to protect and safeguard taxpayers and their information and to avoid abuse will limit what PCAs can do.  PCAs cannot:

  1.         Call at unusual times;

  2.         File or threaten to file liens, or threaten levies, garnishments or seizures;

  3.         Recommend collection actions to the IRS;

  4.         Threaten taxpayers by divulging or threatening to divulge information to credit reporting agencies.

How it Should Work

According to the IRS, when a case has been assigned to a PCA, the IRS will first notify the taxpayer that the taxpayer will receive a letter from a PCA.  The IRS letter will inform the taxpayer of the name of the PCA and the fact that the taxpayer has the right to contact Taxpayer Advisory Services, as well as the IRS.  Within 10 days of the initial IRS letter, the taxpayer is supposed to receive a letter from the PCA.  The PCA is also supposed to provide the taxpayer’s representative with a copy of the letter to the taxpayer. 

If a complaint is filed with the IRS by a taxpayer, then the PCA will stop working on the matter until the IRS decides whether there has been a sound basis for the complaint.  In some publications, it has been represented that a collection case will be taken from the PCA whenever requested by a taxpayer.   It appears however that this is not the case.  Upon completion of the IRS examination of the PCA, a complaint may not result in a case being taken away from the PCA, instead it could be sent back to the PCA if the PCA has not acted improperly. 

Adequate Training?

With regard to some fast food outlets, it is often jokingly said that their job applicants take a test and the applicants who fail the test are hired.  Something comparable to that analysis seems to be true with regard to the PCAs used by the state of Virginia , particularly if it is necessary to discuss any substantive or even minor procedural matters with them.

Employees of PCAs will likely be equally vague about most aspects of a given case.  Because PCA employees cannot be compensated based upon how much they collect, the more motivated workers probably will not be hired by the PCAs.

The IRS is supposed to monitor the PCAs for a variety of matters, such as employee testing, confidentiality of tax data, etc., but this seems odd, because many IRS supervisors and employees themselves appear to lack adequate training.  Are IRS employees really equipped to monitor outside collection businesses effectively? 

The Government Accounting Office sensibly suggested that in order to evaluate the new system the IRS should compare what the IRS might have collected had the 24%  paid to PCAs instead been paid to the IRS.  The IRS declined to make such a comparison stating that Congress has not authorized the IRS to receive the 24% therefore no such measurements of the effectiveness of the new PCAs should be considered. 

Will Rogers allegedly said when referring to a politician in the distant past, “They (the voters) didn’t expect much from him and that’s what they got.”  Based on the author’s experience in dealing with PCAs for Virginia , the PCA approach will be satisfactory only if expectations are suitably low.

Copyright 2006
By Tax and Business Professionals, Inc.
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Manassas, VA 20110
(800) 553-6613

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