Internal Revenue Service: Issues Affecting IRS' Private Debt Collection Pilot

Published by the Government Accountability Office on 1997-07-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
      General Accounting Office
      Washington, D.C. 20548

      General    Government   Division


      July 18, 1997

      The Honorable Nancy L. Johnson
      Chairman, Subcommittee on Oversight
      Committee on Ways and Means
      House of Representatives

      Subject:         Internal Revenue Service:     Issues Affecting IRS’ Private Debt
                       Collection Pilot

      Dear Chairman Johnson:

      This letter responds to your request that we summarize the key issues we
      discussed during our May 13, 1997, briefing’ on the Internal Revenue Service’s
      (IRS) pilot program, which was established to test the use of private collection
      companies to assist IRS in collecting delinquent federal taxes. As we pointed
      out in our briefing, our work focused on identifying the key issues affecting the
      implementation of IRS’ pilot program. These issues included the limitations that
      (1) certain IRS legal interpretations place on contracting out for tax-related
      collection activities and (2) IRS’ computer systems and operations place on the
      selection and referral of cases to private collectors. We also pointed out that
      the program lacked a mechanism to capture information on the best collection
      practices used by the contractors that could be adopted by IRS.


      IRS was directed in its fiscal year 1996 appropriations to test the use of private
      collection companies, and Congress earmarked $13 million for that purpose.
      With the passage of IRS’ fiscal year 1997 appropriation, Congress earmarked

      ‘Also present at the May 13 briefing were the Chairman of the Subcommittee on
      Government Management, Information and Technology, House Committee on
      Government Reform and Oversight; the Chairman of the Subcommittee on
      Treasury, Postal Service, and General Government, House Committee on
      Appropriations; congressional staffers;. and cognizant IRS and GAO officials.

                                         GAO/GGD-97-129R   Issues Affecting   IRS’ Collection   Pilot

another $13 million and directed that IRS extend the initial pilot for a second year. An
additional $13 million was also earmarked in IRS’ fiscal year 1997 appropriation for a
second pilot-to be managed by the Department of the Treasury-to further test the use of
private collection companies to assist IRS in collecting delinquent taxes.

Prior to our May 13 meeting with you and the other subcommittee Chairmen, IRS officials
briefed us on the results of their assessment of the pilot. The issues disclosed by IRS
officials during this meeting were basically the same as those we provided in our briefing
to you. However, a major focus of IRS’ briefing was that total revenues collected during
the pilot had been significantly lower than anticipated. IRS reported that through January
1997, private collectors successfully contacted about 14,000 taxpayers and had
attributable total revenues collected of about $3.1 million. IRS also reported that pilot
design, startup, and administrative expenses through January 1997 were about $3.1
million. Performance payments to the private collectors were reported to be $1,049,648.
In addition, IRS cited lost-opportunity costs of about $17 million because it had to move
collection personnel off line to work on the pilot.

As you know, subsequent to our May 13 briefing, you and the other subcommittee
Chairmen sent a letter to Treasury directing that it not move forward with plans to award
contracts for the Treasury-managed pilot at this time. In addition, IRS officials with
concurrence from the Subcommittee on Treasury, Postal Service, and General
Government, House Committee on Appropriations, also discontinued plans to exercise the
second-year option for the initial pilot contract.


IRS’ efforts to design and implement the private debt collection pilot program were
hindered by limitations that affected the program’s results. One set of limitations
involved the effect of certain legal interpretations on the contracts with private collection
companies. Specifically, the Office of Management and Budget and IRS consider the
“collection of taxes” to be an “inherently governmental” function that must be performed
by government employees. Therefore, the program’s private collectors were hired to
assist IRS only in locating and contacting taxpayers to remind them of their outstanding
tax liability and to suggest various payment methods. Under IRS’ interpretation, the
collectors were barred from actually collecting the funds to settle delinquent accounts.

Another IRS legal interpretation barred collectors from being paid a percentage of the
amount of taxes collected as a result of their efforts. Instead, they were paid a fixed fee
for actions such as successfully locating and contacting delinquent taxpayers. This
performance fee arrangement provided the same payment to collectors regardless of the
amount of the account collected.

                                        GAO/GGD-97-129R    Issues Affecting   IRS’ Collection   Pilot


A second set of limitations involved IRS’ reliance on its computer systems and
procedures, which made it difficult to identify, select, and transmit collection eases to
private collectors. IRS did not envision taxpayer cases being released to private
collectors, and its data systems contain sensitive taxpayer information that IRS considers
inappropriate for release outside of the agency. Therefore, IRS required additional
processing time to develop the criteria and computer programs that were needed to
screen cases to (1) exclude those individuals whose circumstances-for example prisoners
and potentially dangerous, deceased, and bankrupt taxpayers-IRS determined precluded
their participation in the pilot program and (2) assemble the appropriate taxpayer
information on individuals who were identified for referral to the collectors.

In addition, IRS computer systems and technology and the inability to transfer data from
one service center to another impeded IRS’ ability to refer cases to the collectors, As a
result, service centers often spent additional time and resources running duplicate
processes to identify and extract cases for referral. Once the cases were identified, IRS
experienced difficulties in transmitting them to the collectors.

During the pilot, the number and types of cases referred to the collectors were
significantly different from those anticipated in the pilot program’s original design. For
example, in the original design the inventory of cases to be sent to the collectors was to
include a small percentage (about 6 percent) of cases in the “deferred” category. Cases in
this category have balances due that are lower than other delinquent cases; and according
to IRS data, IRS is generally quite effective in collecting the taxes owed on these cases
with little collection action (e.g., by offsetting amounts due from future refunds).
However, as of December 1996, private collectors had received about 153,000 cases, of
which about 53 percent (versus the original 6 percent) were in the “deferred” category.

The Enal issue we discussed in our May 13 briefing involved the pilot program’s
measurement plan, which did not include a comparison of the best practices used by the
private collectors with IRS’ own collection techniques. Part of Congress’ intent in
approving the pilot was for IRS to learn more about collection techniques used in the
private sector. IRS’ measurement plan identified two performance measurement factors:
(1) gross Enancial gain measured by total dollars collected versus total costs to collect
and (2) net financial gain measured by total dollars collected minus dollars expected to
have been collected without intervention versus total costs to collect. The written design
did not include mechanisms to identify and capture information on successful collection
techniques used by the contractors that could be adopted by IRS. In commenting on this
letter, IRS officials cited plans to collect and evaluate the best practices used by the
private collectors According to these officials, they are currently developing procedures
to identify which practices worked well during the pilot so that they can be compared
with IRS’ current practices and appropriate changes can be recommended.

                                      GAO/GGD-97-129R    Issues Affecting   IRS’ Collection   Pilot



To gather information for the briefing, we visited, interviewed, and obtained information
and relevant data from responsible officials at IRS’ National Office who planned the pilot
and developed its methodology; the F’resno, CA, Service Center who managed the Referral
Unit that processed contractor-developed taxpayer information; and the Ogden, UT,
Service Center who selected the cases and transmitted data on them to the private
contractors. We also visited, based on their proximity to available staff, three of the five
private debt collectors that were selected for the pilot and used a structured
questionnaire to obtain information from all five private contractors.

We conducted our review between October 1996 and June 1997 in accordance with
generally accepted government auditing standards.


We obtained IRS’ comments on a draft of this report from IRS’ Assistant Commissioner
for Collections and the Chief, Management and Administration on June 26, 1997. While
these officials generally agreed with the facts presented, they provided clarifying
information, and we made technical corrections where appropriate.

Copies of this letter are being sent to the Ranking Minority Member of your Committee,
the Chairmen and Ranking Minority Members of other congressional committees with
jurisdiction over IRS and tax matters, the Director of the Office of Management and
Budget, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other
interested parties. It will also be made available to others upon request.

                                        GAO/GGD-97-129R    Issues Affecting   IRS’ Collection   Pilot


Major contributors to this letter were Joseph E. Jozefczyk, Carrie Watkins, Willie E.
Bailey, Thomas Venezia, and Alex Lawrence. As agreed with your office, no additional
work will be performed on this request. If you have any questions regarding this letter or
any of our previous work, please call me at (202) 512-8633 or Joe Jozefczyk at (202) 512-

Sincerely yours,

Lynda D. Willis
Director, Tax Policy and
 Administration Issues


                                      GAO/GGD-97-129R   Issues Affecting   IRS’ Collection   Pilot

Ordering    Information

The first copy of each GAO report and testimony is free.
Additional  copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent    of Documents, when
necessary. VISA and Mastercard     credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting  Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony.   To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information         on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with “info” in the body to:


or visit GAO’s World Wide Web Home Page at:

United States
General Accounting Office          ,
Washington, D.C. 20548-0001

Official Business
Penalty for Private    Use $300

Address   Correction   Requested