Last Friday, President Obama signed into law the Fixing America’s Surface Transportation Act, or “FAST Act.” Included in that law is a provision requiring the Internal Revenue Service (IRS) to use private debt collection companies.

insideARM has written extensively about this possibility over the past few months. For background see:

In July I wrote about a story in the Huffington Post that I felt dramatically distorted the facts regarding past efforts to outsource collection of delinquent tax debts.

On October 8th Stephanie Eidelman wrote a story on the then upcoming vote on the legislation and a negative op-ed by Chi Chi Wu, a staff attorney at the National Consumer Law Center, about IRS outsourcing that had been published on The Hill website.

Shortly thereafter, Stephanie responded to the Wu op-ed.  The Hill published her response on October 20th.

The full text of the law can be found here.   Section 32102: Reform of rules relating to qualified tax collection contracts is the key section.  It can be found starting on page 1124 and continues through page 1131.

The IRS already has the authority to outsource collections to private debt collection companies. The IRS has chosen not to do so.  (Though, to be fair, there have been two prior attempts to outsource. Both were aborted shortly after they began. ) The key element of this new law is that the IRS is now REQUIRED to use private debt collection companies to collect “inactive tax receivables.”

“Inactive tax receivables” are defined as:

  1. Removed from the active inventory for lack of resources or inability to locate the taxpayer;
  2. For which more than 1/3 of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or
  3. For which, a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection.

The law also specifies certain IRS debts that are not eligible to be placed with private agencies. They are debts:

  1. Subject to a pending or active offer-in- compromise or installment agreement,
  2. Classified as an innocent spouse case,
  3. Involving a taxpayer identified by the Secretary as being: a) deceased, (b)   under the age of 18, (c)   in a designated combat zone, or (d)  a victim of tax-related identity theft,
  4. Currently under examination, litigation, criminal investigation, or levy, or
  5. Currently subject to a proper exercise of a right of appeal under this title.

The law requires that contracting priority be given to private collection contractors and debt collection centers on the schedule required under section 3711(g) of title 31, United States Code. The law also requires that IRS shall begin entering into contracts and agreements within 3 months after the date of the enactment of the Act.

Finally, the new law imposes some specific reporting requirements on the IRS (through the Secretary of the Treasury).  Two reports are required to be prepared for the House Committee on Ways and Means and the Senate Committee on Finance.

The first is an annual report to include, among other things, the total number and amount of tax receivables provided to each contractor together with the total amounts collected by and installment agreements resulting from the collection efforts together with collection costs incurred by the IRS.

The second report is required biannually and must include an independent evaluation of each private debt collection performance and a measurement plan that includes a comparison of the best practices used by private debt collectors to those used by the IRS as well as how they identify and capture information.

insideARM Perspective

This law is long overdue. Despite the rhetoric in opposition to this provision, it makes sense.  Delinquent tax debt is not being collected. Efforts should be made to collect the delinquent debt. The accounts to be assigned are accounts that are not being worked by the IRS.  Private debt collectors can and will do a good job.

The law requires the IRS to “begin entering into contracts and agreements within three months after the date of the enactment of the Act.” However, there is no specified time frame for placements to begin. One wonders when the IRS will be ready to actually begin making placements. There is work to be done before placements can begin. It is hard to believe that the IRS was spending resources on preparation for the project prior to the passing of the legislation and the President’s signature on Act.

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