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September 27, 2006

IRS Private Tax Debt Collection Agencies

IRS Debts

Houston Tax Attorney

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Congress recently enacted new Section 6306 to allow the IRS to assign certain delinquent tax accounts to private collection agencies. The new law and how it is implemented raises a number of interesting issues.

The Section 6306 Rules

Section 6306 authorizes the IRS to enter into contracts with private debt collectors. The private collectors can be awarded a fee not in excess of 25 percent of the amount collected.

The private collectors can then locate and contact taxpayers and ask for full payment of the outstanding tax.  If the taxpayer indicates that they cannot pay, the private collector is authorized to offer a 5 year installment plan.  The private collector is also to be provided certain information to allow it to carry out the collection activities, which it would seemly include taxpayer balances, names, etc.  

Private Debt Collector Abuses

But what about the taxpayer’s rights?  Section 6306 says that the “United States shall not be liable for any act or omission of any person performing services under a qualified tax collection contract. 

What about the private debt collector?  Do taxpayers have any recourse against the private debt collector?  Congress also amended Section 7433, which allows taxpayers to bring suit and recover damages for illegal collection activities by private debt collectors.  

Limits on Private Debt Collectors

The IRS has recently made some progress in implementing this program.  It recently issued Announcement 2006-63 and Publication 4815.  

Announcement 2006-63 says that the private collector “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.”  This severely limits the ability of private collectors to actually collect unpaid tax debts.  The announcement goes to to say that in most cases the private collector “will serve only to gather financial information for transmittal to the IRS.”

The announcement also limits the private collectors efforts to communicate with others about the tax debt:

employees are not permitted to call or write any third party, such as the taxpayer’s employer, bank, or neighbors, to ask about the taxpayer’s financial condition. [Private collector] employees may speak to intermediaries, such as a taxpayer’s spouse, or leave a message on an answering machine, for purposes of trying to contact the taxpayer by phone. Once the [private collector] knows how to reach a taxpayer directly, a [private collector] employee may not contact third parties in an effort to reach the taxpayer at a different temporary location.

If the Taxpayer Ignores the Private Collector

And what happens if the taxpayer ignores the private collector?  It is helpful to consider this in terms of the IRS and what happens when taxpayers ignore the IRS.

The IRS has the ability to levy on the taxpayer’s accounts.  It also has the power to summons the taxpayer and/or his records.  Private collectors do not have these powers.  

Ignoring the IRS can also make it harder to challenge the underlying tax.  This is a result of Section 7491, which applies to tax court disputes.  Section 7491 specifies that the burden of proof only shifts to the IRS if the taxpayer “cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews.”  It does not appear that this law would apply if the taxpayer refuses to deal with the private collector.

Thus, it appears that taxpayers are going to learn very quickly that they can just ignore the third party tax collector and there is nothing that the third party debt collector can do about it.

The limitations imposed on collectors are high.  And taxpayers with unpaid taxes are some of the most difficult to collect from.  This seems to indicate that the private collectors will not be all that successful.   It will be interesting to see how the IRS uses these private collectors. 

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