The American Jobs Creation Act of 2004 authorized the IRS to enter into contracts with private collection agencies (PCAs) to assist with the collection of outstanding federal tax debts. Controversy has been the result since then. At present, two PCAs, Pioneer Credit Recovery, Inc. and the CBE Group, Inc. assist the IRS with the collection of federal taxes. While the law provides specific protections of taxpayers' rights during the private debt collection process, many groups have been lobbying for more protections or a reversal of the rules that permit private collection.

Referral to PCAs

After notifying the taxpayer that he has an unpaid tax debt, the IRS may refer the taxpayer's account to a PCA for collection. The IRS will send the taxpayer a mailing, which will provide him with the PCA's contact information, information about what to expect from a PCA and the telephone number for the IRS office overseeing the PCA. The mailing will also explain that a taxpayer may submit a written request to have the IRS continue to service his account instead of a PCA. As soon as the IRS receives a notice from the taxpayer to stop PCA collection, the PCA collection process must stop immediately.

The IRS will transmit to the PCA only that confidential taxpayer information needed for the PCA to do its job. That information includes the taxpayer's name, social security number, last known address and information on the balance due.

Payment Options

After the IRS refers an account, the PCA will send a letter to the taxpayer introducing itself and providing information on the balance due. The PCA will discuss available payment options with the taxpayer in the same letter. The PCA may request at that time additional financial information from the taxpayer for forwarding to the IRS.

If the taxpayer cannot pay the debt in full, the PCA may arrange for paying in installments; it is not authorized, however, to negotiate any reduced payment of principal or interest. A taxpayer must file all required federal tax returns in order to be eligible for an installment agreement. The IRS retains the right to reject any installment agreement negotiated between the PCA and the taxpayer.

IRS Supervision

The IRS is required to carefully review the work of PCAs to ensure that taxpayers are treated fairly and professionally. Taxpayers may contact the PCA or the IRS concerning the conduct of any PCA. If a complaint is lodged, the PCA will suspend working on the account until the PCA and IRS have investigated the complaint. Congress requires the IRS to enforce strict standards. PCAs will be disqualified from further work on the IRS contract if they are found guilty of any act of misconduct.

House bill

As of May 3, 119 members of the House have signed-on as co-sponsors of a bill to end the IRS's private tax collection program. The bill would repeal the IRS's authority to contract with PCAs. The bill has been referred to the House Ways and Means Committee. Last year, the House approved similar legislation.

Our office will monitor the progress of this legislation and keep you updated. If you are ever contacted by a private debt collection agency in connection with a federal tax liability, please give us a call immediately.