IRS Outlines Taxpayer Protections in Private Debt Collection Program

By Paul N. Gada, Toolkit Staff Writer

Although it's a bit early for Halloween, taxpayers will soon be faced with the scary prospect of the IRS using private collection agencies (PCAs) to go after delinquent tax accounts. However, the IRS is assuring taxpayers that there is really nothing to fear with this arrangement.

The IRS recently issued guidance outlining the protections in place for the new private debt collection program. Beginning September 7, the IRS will assign delinquent federal tax accounts to three PCAs. An initial 12,500 taxpayers who owe back taxes will be in this group, with the number reaching approximately 40,000 by the end of 2006.

The guidance describes the limited role PCAs may play in collecting back taxes and the legal restrictions and procedures in place to safeguard taxpayer privacy and taxpayer rights. It also describes the rules that will guide PCA conduct and protect taxpayer rights, the type of contacts a PCA may have with a taxpayer, and the procedures in place for the IRS to assist in training and monitoring PCAs.

"We're going to implement this program very carefully so we have a good program on sound footing," IRS Commissioner Mark W. Everson said. "We are working hard to protect taxpayer privacy and taxpayer rights."

The IRS emphasizes that the role of PCAs is limited to the following:

• Locating and contacting taxpayers specified by the IRS concerning tax debts specified by the IRS
• Requesting payment of specified taxes in a lump sum or, for taxpayers who cannot pay all at once, by installment agreement providing for full payment over a period of not more than five years
• Obtaining taxpayer financial information specified by the IRS

PCAs are not authorized to take enforcement actions such as filing liens, levying on property or seizing property. In addition, private firms are not authorized to work on technical issues such as offers in compromise, bankruptcies, hardship issues or litigation. Rather, the IRS will assign to the private firms cases in which the taxpayer has not disputed the liability. The private firms will contact taxpayers to make payment arrangements.

"Redirecting relatively simple cases to private firms will permit the IRS to continue to focus its existing collection and enforcement personnel on more complex tax issues," Everson said.

Installment agreements. Although the IRS retains the right to approve or reject any installment agreements negotiated between PCAs and taxpayers, PCAs must obtain specific IRS approval of any installment agreement involving payment of more than $25,000 or covering a period of more than 36 months. During evaluation of payment arrangements, the PCA may request taxpayer financial information that will be forwarded to the IRS. PCAs are not authorized to negotiate installment agreements for periods exceeding 60 months or that provide for less than full payment of the taxpayer's liability. In such cases, PCAs will serve only to gather financial information for transmittal to the IRS.

If the taxpayer proposes an installment agreement to the PCA and the IRS rejects the proposed installment agreement, the taxpayer may appeal the rejection to the IRS. If the IRS assigns a PCA to monitor an installment agreement and the PCA determines the taxpayer is in default, the taxpayer may appeal to the IRS if the installment agreement is terminated. In both situations, the taxpayer must first appeal to the IRS office supervising the PCA's day-to-day work, but if not satisfied the taxpayer may continue the appeal to the IRS Office of Appeals, pursuant to the IRS's contracts with the PCAs and the IRS's own implementation procedures.

Confidentiality and nondisclosure. PCA employees may be given certain tax return information necessary to perform services for the IRS. PCA employees are prohibited by law from disclosing the tax return information they receive from the IRS or from taxpayers to the same extent as are IRS employees.

PCA employees are also prohibited from gaining access to tax return information that is not necessary to the performance of their duties. PCA employees may be subject to criminal prosecution if they violate their obligation to keep tax return information confidential or if they gain access to tax return information that is not necessary to the performance of their duties under the contract with the IRS. A taxpayer whose return information was improperly disclosed may also have a civil cause of action against the PCA.

Taxpayer rights. PCAs and their employees must observe all of the Internal Revenue Code's protections for taxpayer rights in the collection process to the same extent as IRS employees do. Some areas of taxpayer protection specifically mentioned in the guidance include:

• A PCA's employees may not contact the taxpayer at any unusual time or place, or at a time or place that the PCA should know to be inconvenient, without a taxpayer's prior consent. Generally, no contacts will be made earlier than 8 a.m. or later than 9 p.m. local time at the taxpayer's location.
• PCA employees may not suggest or imply that the taxpayer's failure to pay the tax debt may affect the taxpayer's credit rating or that the unpaid tax debt may be reported to a credit bureau.
• A PCA is subject to a lawsuit by a taxpayer for damages if it fails to observe all of the Internal Revenue Code's protections for taxpayer rights in the collection process. PCAs enjoy no special immunity from being sued while working for the IRS.
• PCAs are subject to Taxpayer Assistance Orders issued by the National Taxpayer Advocate to the same extent as the IRS.

The National Treasury Employees Union (NTEU) also recently reminded taxpayers that they can opt-out of having their IRS accounts serviced by a private collection agency. Under the law, taxpayers may instruct a private collection agency to return their account to the IRS for service. Instructions must be in writing and a copy of the letter should be sent to the IRS. The private collection agency is responsible for returning all of the taxpayer's records and information to the IRS. The NTEU has published a sample letter on its website at www.nteuIRSwatch.org.

Scam warning. The IRS warns that scamsters try a variety of tricks to impersonate the IRS in hopes of tricking taxpayers into divulging personal or financial information or even conning people out of cash. Scam artists try to impersonate the IRS in person, by phone, by e-mail and over the Internet.

There are several key elements of the new PCA program that will alert taxpayers that they are part of this program and help other taxpayers from being scammed by impersonators:

• Taxpayer notification. All taxpayers who will be part of the private debt collection effort will know they are in the program before they are contacted by a private collection agency.
• IRS letter. All participants selected for the program will get a letter from the IRS, telling them they've been selected for the private debt collection program. The name of the company will be included in the letter.
• Collection agency letter. All participants will subsequently receive a letter from the collection agency, informing them they will be contacted soon regarding back taxes.
• Money collected. When paying a collection agency on behalf of the IRS, the check should be made out to the U.S. Treasury and not to an individual or firm. The collection agency will provide the appropriate IRS coupon and mailing address for the payment. The collection agencies will never ask for cash or checks written to individuals.

Contact the IRS. If in doubt, check www.irs.gov or call the IRS at 800-829-1040 for more information. The NTEU also advises taxpayers who encounter problems with debt collectors to contact the National Taxpayer Advocate, the Federal Trade Commission and their state attorney general.

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Posted September 7, 2006.