Who'll collect your back taxes now?

Buried in the $388 billion, 3,646-page omnibus spending bill is a provision that would let a few congressmen examine income-tax returns.

What! Congress looking at individuals' tax returns? That invasion of privacy seemed so odious to both Democrats and Republicans that Congress reconvenes Monday in order to remove the provision and pass the bill.

But in a strange twist, many congressmen are mum about a provision in another bill, passed several weeks ago, which raises far broader privacy issues.

Under it, private debt collectors - instead of Internal Revenue Service staff - will start collecting unpaid taxes from some 2.6 million Americans.

Tax returns are among the most sensitive documents the United States government holds on an individual - and it guards them closely. IRS agents face firing, five years in jail, and big fines for "willful disclosure" of tax information. Even the CIA and FBI have to get court approval to see individuals' returns.

Now, the IRS is preparing to assign late next year $13 billion in owed taxes to private companies for collection.

Proponents see several advantages in the plan. But privacy advocates are worried, especially by a clause that allows the firms to negotiate installment payments of taxes owed. Since repayment could stretch over five years, collectors will probably have to ask taxpayers for numerous financial details to figure out how much they can afford to pay.

That's troubling because private firms already doing business with the IRS don't exactly have a stellar record in safeguarding taxpayer data. A review by the Treasury's Inspector General of more than 900 IRS contracts - obtained by a Freedom of Information Act request this past spring - stated that "contractor's employees committed numerous security violations" that placed "taxpayer data at risk" and that in some cases, "contractors blatantly circumvented IRS policies and procedures" even when told about it.

"I'm very concerned about people's personal and private records going to private collectors," says US Rep. Shelley Moore Capito (R) of West Virginia. Last month, she offered an amendment to the omnibus bill that prohibited the IRS from giving tax-collection duties to private agencies. The amendment passed in the House with a solid bipartisan majority. But there was no such amendment in the Senate version. When Senate-House conferees reconciled their bills in a closed-door session, the amendment was taken out.

That's the same bill, incidentally, that is forcing Congress to reconvene to take out the other provision about congressmen looking at taxpayer data.

Taxpayers will still have numerous protections, proponents point out. For example, the IRS will provide only phone numbers, addresses, tax year, and the amount of taxes due to the private collection agencies - not the full tax forms. And these collectors will be subject to the Fair Debt Collection Practices Act, a host of other measures, and IRS rules for protecting debtors from harassment.

Also, the IRS plans to select cases where the individual taxpayer has no dispute about the taxes owed and is not involved in tax litigation. Those cases, about 2.6 million, will be turned over to 12 tax collection agencies by the end of 2005, if all goes well, says Richard Morgante, the IRS official in charge of the project.

Under the law, the agencies could be rewarded by keeping up to 25 percent of the amount they collect. But Mr. Morgante suspects that as a result of the bidding, the percentage may drop to 13 to 15 percent.

IRS Commissioner Mark Everson backs privatization as a way to free IRS agents to focus on more difficult enforcement and collection activities. The plan is to turn over "low-hanging fruit" - relatively easy-to-collect unpaid taxes that could bring in an estimated $1.2 billion for Uncle Sam over 10 years. The job would swell the business of successful tax-collection agencies. The more than 6,500 agencies in the nation serviced $135 billion in delinquent consumer debt in 2000, bringing in about $13 billion for their business customers. The Association of Credit and Collection Professionals (ACA) lobbied Congress to win approval of the privatization measure.

Private debt collection is "far more effective than government workers doing the job," adds Scott Hodge, president of the Tax Foundation. The federal government has already sold to private collectors bad debt resulting from the student loan program, farm loans, and Small Business Administration loans. "It's a sound business-collection practice."

In 1996, the IRS tried a small experiment using private firms to collect back taxes. It failed. The IRS spent as much as it collected. But if Congress gave the IRS sufficient funds to pursue the $350 billion or so that taxpayers should pay but haven't, the IRS would collect much more money at lower cost than private debt collectors could - and significantly reduce the budget deficit, argues Donald Alexander, an IRS commissioner during the 1970s.

Of course, beefing up IRS enforcement is not politically popular, points out Mortimer Caplin, an IRS commissioner in the 1960s. Members of Congress have been "playing to their audience by curtailing the activities of the IRS." During the Clinton presidency, for example, Congress stopped the IRS from rewarding agents on the basis of how much they collected. The idea was to discourage rough collection techniques.

Will private collection agencies be any less rough? Critics note that these agencies usually pay employees a base salary plus a bonus based on the amount they have collected. The commission on average is 12 percent. Last year, the Federal Trade Commission received 34,543 complaints about third-party debt collectors - more than from any other industry.

The IRS is striving to avoid such problems. The firms will be scored not only on the amount collected, but also on the "quality" of how they deal with taxpayers. IRS officials will be able to listen in on calls to delinquent taxpayers. Also private debt collectors will not have the power to garnish wages or seize assets.

Nor would they deal with complex tax matters involving bankruptcy, for example, or make "an offer in compromise" that reduces the tax owed. Taxpayers with a grievance about a private collection agency will have access to the IRS Taxpayer Advocate Service. But the law says they cannot sue the IRS. So they will have to go to a civil court to seek redress from a private collector.

Privacy will have "top priority" for successful bidders, says Jennifer Loon of the ACA, the private tax-collection body. "We can't afford to have problems."

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