Column: Collecting For The IRS

I wrote about this subject in my December 2002 column and at the time, the thought of the IRS using private collection agencies was just that; a thought. It seemed to be a passing and actually a fading thought, but almost 2 years later, it could be a reality.

On October 7, 2004, the House approved HR 4520 (American Jobs Creation Act of 2004) and on October 11, 2004, the U.S. Senate approved and passed the bill. In that bill, there is language that allows the IRS to contract with private debt collection agencies for the collection of back taxes.

I have always been a proponent of the IRS using private collection agencies, but not everyone has shared my position. In my first column, I listed some responses from posters on the message board and basically, the outlook on this opportunity was grim, to say the least. The general consensus from the posters was this; it’s a recipe for disaster. I disagreed with that and I actually said, “What’s wrong with us?” My thought was that this is the IRS and along with being a huge opportunity for agencies, the agencies would also be receiving solid accounts that could easily be backed up and validated. I still hold those thoughts, but there may be a catch.

In the first column, I had one concern and it involved the FDCPA. Given the fact that the Federal Trade Commission and the Internal Revenue Service are both government agencies, I felt that the IRS would most likely lobby the FTC to make amendments to the FDCPA that would cater to their efforts. My thought was that the IRS would want every weapon available to them to collect their money and if that meant changing the FDCPA, (for their benefit and their agency’s benefit only, of course) then that’s what would need to be done. I was wrong…sort of.

Apparently there is very specific language in the bill that, in the simplest terms, releases the IRS from any liability in civil actions brought about by consumers claiming a violation of the FDCPA. On the surface, that seems fair, because if an agency messes up and violates the FDCPA, then the original creditor (in this case the IRS) should not be held liable. There are exceptions, however, where I feel that the original creditor actually should be held liable.

The FDCPA has a section that discusses the false representation of the character, amount, or legal status of any debt. That is section 807 and specifically 807(2)(a). There are a few key things to look at in this section, which could be potential FDCPA violations against the agency if:

• Creditors place the same account with several different agencies
• Creditors continue to work accounts that are placed with an agency or at least give the impression that the account is still in the creditor’s hands or could still be in the creditor’s hands
• The agency is collecting on an “estimated bill,” meaning that they are not certain that the amount being collected is the true amount

I may be looking into all of this too much, but I don’t think so. This will be a new thing for all of us and I don’t know if all of the details, at least the details that will matter to an agency, have been worked out. Let us not forget, if the details are not worked out and a mistake is made, then the collection agency is left holding the bag with one hand and writing a check with the other hand.

Section 807 is actually full of potential pitfalls for collection agencies in this relationship and 807(4) is another good example. This section mentions threatening to take a consumer’s tax refund when the agency has no authority to do so and if the collection agency threatens that action, it would be a violation. Although it’s a known fact that if you owe back taxes, then the IRS will take your refund and apply it to any amount due, is the collection agency allowed to say that and use that as a collection lever? Also, since it is actually the original creditor (the IRS in this case) that has the authority to take the refund, is it a violation for the collection agency to threaten that action?

I have a headache just thinking about all of this.

The other thing to consider is the IRS Restructure and Reform Act of 1997. As it was pointed out by a poster on the message board, the IRS is still liable for damages if they disregard laws or regulations in connection with the collection of federal taxes. With that, a consumer (tax payer) can basically sue the IRS for attempting to collect an invalid amount or for “abuse of the collection process.” I am only paraphrasing here, because I didn’t actually take the time to look at this Act in detail. Why? Because I don’t care!

Granted, the IRS can still be sued based on the Reform Act, but what I really care about is the agencies that are working the accounts. They may be opening themselves up to needless lawsuits, based on inaccurate account information and in the end, if it’s an FDCPA lawsuit, the IRS can simply say, “We are not responsible for that.”

Even though it may not seem like it, I am still a proponent of the IRS using private collection agencies to collect their money. I would, however, like to know that this has been thought through completely before it happens. Eliminate the pitfalls, remove the chance for the interpretations of the FDCPA that are likely to surface and most importantly, stand behind the collection agencies that you are placing on the front line.

If I were one of the agencies that had the opportunity to get a piece of this business, I would accept it with open arms. However, I would buckle up securely, because it could be a long and bumpy ride.

Bill Lindala provides training and consulting services to collection agencies, collection attorneys and internal collection departments of creditors. He has been a part of the industry since 1990 and has been involved in all aspects of the agency business. Bill and his company, Premier Consulting Group, LLC, have formed an alliance with Kaulkin Ginsberg to provide these services.

Previously, Bill worked primarily in the third party collection arena in marketing, daily operations, compliance and internal training. He has served as a Certified Instructor for ACA International and was also a Certified Collection Specialist. Bill has written several articles about the collection industry that have appeared in state and national publications, and he has also been asked to speak at various industry functions.