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The federal government could make a sizeable dent in that figure — without raising taxes or cutting spending — if it simply did a better job collecting taxes it’s already owed.
Tax deadbeats owe the federal government at least $380 billion. The IRS has proved unable to collect that debt. Between 2000 and 2010, the agency’s tax debt inventory increased more than sevenfold.
Rather than let tax cheats get off scot-free, the feds should explore new ways of collecting back taxes. A provision in the Highway Trust Fund bill currently under consideration in Congress would do just that by deputizing private contractors to collect back taxes. Such a move would reduce the federal budget deficit and lower the tax burden on law-abiding Americans.
The IRS doesn’t have the manpower to collect even a fraction of the back taxes it’s owed. According to one former IRS tax lawyer, the “odds [of avoiding prosecution] are overwhelmingly in the crooked taxpayer’s favor.”
When deadbeats cheat with impunity, law-abiding Americans must shoulder an even greater share of the deficit.
Private collection outfits are perfectly positioned to relieve this burden. They already collect $55 billion of public and private debt annually.
Much of that debt is actually owed to the federal government for things such as fines for littering in national parks and parking tickets issued on federal property. Over the past decade, the Treasury and Education departments have used private collection agencies to recover billions in debts owed to the government.
Employing private collectors to recover unpaid taxes would essentially build upon the status quo.
Thirty-eight states rely on private companies to help collect taxes and other debts. In fiscal 2012, an Arizona program that used private collectors to follow through on court orders and criminal restitution brought in $45.5 million, prompting one key official to call the system “very successful.”
In Philadelphia, an officer of the Chief Revenue Collection Office said, “These funds are essential to support important community services, like public safety, a clean environment and quality public schools. Failure to collect all funds owed to the City jeopardizes much needed services and increases the financial burden on compliant taxpayers and residents.”
Private collection agencies could deliver the funds the federal treasury needs. A 2006 pilot program employing private contractors to collect back taxes brought in $98 million before it was abruptly ended in 2009. That money covered the program’s one-time start-up costs — and still delivered the IRS a surplus of $8 million.
The Joint Committee on Taxation projects that private debt collectors would return $2.4 billion in unpaid federal taxes over the next decade — cash that would otherwise stay in the pockets of dishonest taxpayers.
Much of that money would go to the IRS, which has seen its funding cut by $1.2 billion between 2010 and this year. The provision within the Highway Trust Fund bill would direct one of every $4 collected to the IRS to hire personnel to ensure fewer citizens get away without paying their fair share.
The House Ways and Means Committee estimates that the IRS could add more than $100 million a year to its enforcement budget by contracting with private debt collectors. That would enable the agency to add as many as 1,000 new employees.
Critics of private debt collectors claim that because they’re paid on commission, they have an incentive to hound otherwise decent Americans who have simply fallen on hard times.
Such assertions are misguided. Federal law limits private collectors to calling taxpayers who have already agreed they owe money to work with them to voluntarily pay their debts. If a taxpayer claims financial hardship, the program would require private collectors to immediately refer him or her to the IRS.
In fact, during the three-year pilot program, private collection agencies received higher customer-satisfaction marks than did the IRS.
With budget deficits steadily rising, there’s no reason for the federal government to let hundreds of billions of dollars in taxes go uncollected. Teaming up with private collection agencies can help the feds shore up the public finances — and ensure that honest taxpayers aren’t played for suckers.
Jeff Stier is a senior fellow at the National Center for Public Policy Research.