IRS Allowed to Use Private Collection Agencies; Bill Passes Senate

In the long legislative battle over allowing the IRS?s use of private collection agencies to collect back tax, the collection industry has scored a victory. After intense debate over the weekend, the U.S. Senate approved and passed HR 4520 (American Jobs Creation Act of 2004) Monday by a vote of 69-17 after the House had approved the bill on October 7. Contained in the extensive corporate and special-interest tax relief bill was language that allowed the IRS to contract with private debt collection agencies for the collection of back taxes.

Lawmakers inserted the pro-collection agency clause to make up for the nearly $140 billion in tax breaks contained in HR 4520. It is hoped that private agencies can bring in $1.4 billion in past due taxes over the next 10 years.

The section allowing the IRS to contract with private parties for debt collection sets the fee that the IRS can pay a collection firm at no higher than 25% of total debt collected. The language was also explicit in reiterating that all companies performing collection duties for the government must adhere to the Fair Debt Collection Practice Act (FDCPA). Along these lines, lawmakers inserted very specific language releasing the United States from liability in civil actions brought by debtors claiming a violation of the FDCPA. Any civil action must be taken against the person or entity that entered into the tax collection contract.

The IRS provision can begin to take effect immediately after HR 4520 is signed into law. In theory, the IRS could set out requests for proposals for the tax collection contracts by the end of this year.

A potential hurdle to implementation exists for the IRS. In September, an amendment barring the IRS from contracting with private collection agencies was added to a large appropriations bill in the House (read the full story). The amendment would effectively prevent the IRS from receiving funds to implement a private debt collection initiative. It is unclear as to whether the amendment will remain in the massive appropriations bill.