IRS Wrong to End Private Debt Collection Program: GAO Report

A report released Tuesday from the Government Accountability Office (GAO) said that the IRS may have used flawed study methodology when it decided to stop outsourcing some delinquent tax collection work to private debt collection agencies.

The IRS started using private debt collectors in September 2006, when it first forwarded accounts to three selected vendors. The tax group killed the program in March 2009, citing a study that indicated the IRS could do the same work at a lower cost (“IRS Kills Private Debt Collection Program,” March 6, 2009). That study was put under the GAO microscope, leading to this week’s report.

“IRS’s comparative study of the PDC [private debt collection] program was not soundly designed to support its decision on whether to continue contracting out debt collection,” the report said, adding that the “study was not originally intended or designed as primary support for the decision.”

The GAO said the sample size of the IRS study was too small to be the basis for the decision to terminate the program. The study also did not take into account taxpayers’ compliance cost.

Senate Finance Committee ranking member Chuck Grassley (R-Iowa), who initially called for the GAO to investigate the IRS study, criticized the IRS for not following the guidance it was provided by the GAO and Office of Management and Budget (OMB).

“According to this report, the IRS used a flawed study to justify ending its contracts with private agencies to collect owed taxes that the IRS wasn’t collecting on its own,” Grassley said in a statement. “The IRS knows the study was flawed because the GAO told the IRS how to do the study. But the IRS didn’t implement the GAO’s recommendations to fix the study even though it agreed with them. The IRS used the results from the defective cost-effectiveness study to defend its decision to terminate the use of private collection agencies, even though that wasn’t the primary purpose of the study.”

Grassley has supported the IRS use of private debt collection agencies since the program was conceived. One of the companies on the initial collection contract, The CBE Group, has its headquarters in the state he represents. Grassley noted the involvement of unions in the IRS decision; the most vocal opponent of the private debt collection program was the National Treasury Employees Union, which represents IRS workers.

Grassley said that union advocates told the public that IRS employees could collect tax debt cheaper while the pilot program that tested the effectiveness of private collectors showed money was being collected with private employees garnering higher quality ratings than that of IRS employees.

The GAO recommended that the IRS establish guidance on analyses to support program decisions; establish a policy requiring documentation of program studies; and ensure that PCA-type cases results are considered for IRSs new case selection model. The IRS agreed with the first two recommendations and agreed in principle with the third. But the agency said that while it recognized the limitations of their study, it stood behind the decision to terminate the program.

The GAO’s full report is available at http://www.gao.gov/new.items/d10963.pdf.