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| IRS Hires Help to Harvest $1.4 billion in Uncontested Debt |
01-25-2007 |
After several years of playing defense against assaults from all sides, the Internal Revenue Service is stepping up its offense this fall by outsourcing debt collection to three firms it hopes will recover $1.4 billion in uncontested debt during the next 10 years.
The two-year startup phase of the pilot program kicked off this fall. If it goes well, the IRS expects to contract with up to 10 additional private collection agencies (or PCAs) to expand the program beginning in 2008.
Approximately 140 federal agencies refer their delinquent debt to the Department of Treasury, which then contracts with an approved list of PCAs. Among those departments that routinely outsource collections are Labor, Defense, Agriculture, Health and Human Services, the Veterans Administration, the Immigration and Naturalization Service and the Environmental Protection Agency.
Why has the IRS been late to outsource its debt collection? For starters, it was prohibited by law from doing so for years, due in part to fears that taxpayer personal financial information might fall into the wrong hands. Then came an ill-fated 1996 outsourcing pilot program that failed so miserably that Congress not only pulled the plug on it but began to ask uncomfortable questions of the IRS as well.
In 2004, after turning down IRS Commissioner Mark Everson’s request for a funding increase, Congress approved, with President Bush’s endorsement, the American Jobs Creation Act that opened the door for the IRS to outsource its debt collection.
By year’s end, the three contracted agencies - The CBE Group, Inc. of Waterloo, Iowa; Linebarger Goggan Blair & Sampson, LLP of Austin, Texas; and Pioneer Credit Recovery, Inc. of Arcade, New York - will have taken over collection on 40,000 IRS accounts.
Don’t expect any strong-arm tactics however. The IRS will only outsource the simplest cases - “low-hanging fruit” - to the PCAs so that its own agents can focus on collecting more complex, high-dollar debts. That translates into cases where the taxpayers have not contested their tax debt; they simply haven’t paid it.
Both Congress and the IRS have placed strict compliance guidelines on the PCAs. They are only allowed to contact the taxpayer and/or their tax preparer, CPA or lawyer. They are not authorized to negotiate with taxpayers or take enforcement actions such as liens, levies or seizures. And they can neither solicit nor accept payments - those must go to an IRS lockbox.
The collection agencies will be paid on a sliding scale of 21-24 percent of the tax collected: 21 percent for amounts above $10,000; 22 percent for amounts between $5,000-$10,000; 23 percent for amounts from $1,500-$5,000 and 24 percent for amounts under $1,500.
Closing the “Tax Gap”
Debt outsourcing is just part of a renewed focus on tax enforcement by the feds. According to an August report by the Congressional Research Service, the proportion of the IRS budget earmarked for enforcement grew from 39% in fiscal year 2003 to 44% in 2006. During that same time period, funds allotted to taxpayer services fell from 40% to 39%, and funds for modernization dropped from 4% to 2%.
The Bush administration’s 2007 budget would increase funding for enforcement to 45% at the expense of taxpayer services (38%) and modernization (less than 2%).
There’s good reason for the renewed focus on collections: in 2001, the IRS estimated the so-called “tax gap” between what taxpayers owe and what is actually paid at between $257-$298 billion, of which the new hired collectors will collect a very small portion. Then again, without help from the PCAs, the IRS itself admits that that “low-hanging” debt would likely go unharvested.
Of course, the best way to avert a collection action from the taxman is to not fall into debt in the first place. That’s where skilled tax planning becomes vital to the success of your trading business.
Don’t let an unforeseen tax shortfall land you on the IRS’ collection rolls. Call Traders Accounting today. Traders Accounting’s tax professionals can take the worry out of tax time by providing the full range of expertise you need to organize under an appropriate business entity, file promptly and correctly, and preserve and protect your trader tax status.
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