By Sam Brunson
You may have heard that the IRS spent $20 million last year on private debt collection, and managed to raise … almost $7 million.[fn1] So what’s up with that? A number of things.
First things first, though: in 2015, Congress mandated that Treasury enter into one or more debt collection contracts with private debt collectors. The IRS missed its initial deadline, but started the program in April 2017.[fn2] Initially, the IRS contracted with four debt collection agencies, assigning them about $920 million of inactive tax receivables.[fn3] (“Inactive tax receivables” basically means tax debt that the IRS has stopped trying to collected, and where it has had no contact with the taxpayer-debtor for at least a year.) The debt collectors receive a fee of up to 25 percent of the amounts they collect. (They seem to be paid additional amounts, too, as I’ll lay out later.)
Those taxpayers assigned to private debt collectors would receive a letter from the IRS notifying them of that fact. The private debt collection agencies can send their first letter to the taxpayers they’ve been assigned ten days after the IRS letters go out.
So how effective were the private debt collectors? Of the $920 million assigned to private debt collectors, $6.7 million—somewhere in the range of 0.7%—in delinquent taxes ended up being paid. That strikes me as remarkably inefficient, a feeling buoyed by the fact that the debt collection industry averages 20 percent. But, of course, “inactive tax receivables” aren’t necessarily average debt; it’s possible that this debt is harder to recover. And it’s possible that this is a great deal for the government—it’s revenue that the IRS otherwise wouldn’t have collected.
Unless it would have. Of the $6.7 million that came in from taxpayer debt assigned to this program, $1.2 million came in within the ten days between the IRS letter and the private debt collectors starting to collect. In other words, 18 percent of the recovery occurred just because the IRS reached out to the taxpayer.
So who were the lucky four private debt collectors? The CBE Group, Performant, Pioneer Credit Recovery, and Continental Service Group (or “ConServe”). And how much were they paid? This gets a little confusing. The IRS paid them commissions of $1.1 million on the $5.5 million they collected (because they didn’t get credit for the amounts paid within the 10-day window). But, according to USAspending.gov, Treasury paid each of them substantially more than the $1.1 million: in fiscal year 2017, Treasury paid CBE Group received $2,355,051,[fn4] it paid Performant $2,277,235, it paid Pioneer Credit Recovery $2,340,455, and it paid ConServe $2,314,133. (I don’t know if those amounts include the $1.1 million in commissions or not—for each agency, the amounts paid in fiscal 2018 have risen substantially, even though we’re only three months into the new fiscal year.)
In total, to raise that $6.7 million (or, maybe, $5.5 million if you don’t want to give the private debt collectors credit for the amounts paid as a result of receiving an IRS letter), the IRS paid $20 million. According to the Taxpayer Advocate, about half of the non-commission costs (or roughly $9.5 million) were one-time startup costs. But even ignoring those costs, using private debt collectors cost the IRS almost twice as much as the private debt collectors were able to raise. Unless private debt collectors can increase their efficiency substantially, private debt collection is a money-losing proposition.[fn5]
So private debt collection looks bad, even without taking into account fairness issues. And it has fairness issues (that I won’t go into in much depth): it looks like it’s targeting lots of poor taxpayers.
The IRS doesn’t have much of a choice here: it has to follow the law enacted by Congress. And that law requires the IRS to engage private debt collectors. But maybe Congress should revisit that law, and explore whether an additional $20 million in the IRS’s budget would raise more than $6 million in additional taxes. (Spoiler alert: it almost certainly would, given that historically every additional dollar appropriated to the IRS produces $4 or more in federal revenue.)
[fn1] Of course, if you’re this guy, you apparently didn’t hear the cost was for private debt collection. Oops.
[fn2] Even if it were profitable, private debt collection is problematic for a number of reasons, one of which we talked about at Surly last year.
[fn3] A lot of the information here, unless otherwise linked, comes from the Taxpayer Advocate’s Most Serious Problems report; private debt collection was its number one most serious problem.
[fn4] If you only look at the top of the page, you’ll notice each of them was paid substantially more than that; it turns out that each of these collection agencies also contracts with the Department of Education, and their DoE contracts are substantially larger than their Treasury contracts.
[fn5] And, of course, it’s possible that they can increase their efficiency: there may be economies of scale, or they may figure out better how to collect. On the other hand, there may not be.