NEW YORK (CNNMoney.com) -- In her midyear annual report to Congress, National Taxpayer Advocate Nina Olson this week again called for the repeal of the IRS private debt collection program, which she characterizes as costly and inefficient.
"(T)he money spent on the IRS Private Debt Collection initiative is an inefficient use of government dollars," she wrote in her report.
The National Taxpayer Advocate is appointed by the Treasury Secretary and represents taxpayer interests before the IRS and Congress. The private debt collection initiative, launched in September 2006, is used to handle cases in which the back taxes owed do not exceed $100,000 and in which the taxpayer does not dispute his liability.
Olson's report came a day after the House Ways and Means Committee voted to repeal the IRS private debt collection program.
Supporters of the private debt collection program, including past IRS Commissioner Mark Everson and Acting Commissioner Kevin M. Brown, acknowledge the program's cost. But they say the cases given to the private agencies are ones the IRS wouldn't get to, so the money raised is money that otherwise would go uncollected. The program generates an estimated $185 million a year.
Private debt collection is often cited as one of the strategies to help narrow the tax gap, estimated at roughly $300 billion a year. The gap is the difference between taxes owed and taxes paid.
Beyond Olson's concerns that there is potential for taxpayer harassment by overly aggressive private agencies, Olson contends that the costs the IRS is incurring to set up and regularly monitor the new program (at least $70 million so far) could have been better spent beefing up the IRS' automated collection division known as ACS, which handles a lot of collection efforts by mail.
Olson's office estimates that the return on investment on the cases handled by the private agencies ($4 for every $1 spent on staffing) would be far outpaced if handled by the ACS division, which currently raises as much as $20 for every $1 spent on staffing. If the $70 million had been spent on the ACS division, her office estimates that could have generated $1.4 billion.
By the end of April, nearly 38,000 cases had been outsourced to the two private debt collection agencies currently under contract with the IRS, and 5,440 of them had resulted in full payment or approved installment agreements, according to testimony by IRS Acting Commissioner Brown. The total revenue collected by that point was $19.5 million, in line with IRS projections.
Currently, the program is heavily monitored both by the IRS and the Taxpayer Advocate Service. The number of complaints received account for well below 1 percent of cases so far, and after investigating them, the IRS has found no contractual violations on the part of the private collectors in the majority of instances, Brown told lawmakers in May.
Beyond cost, Olson questions the effectiveness of the program. The private debt collection agents have limited knowledge of tax issues, she contends, and their authority to negotiate is restricted (e.g., they are not allowed to work out an offer in compromise, which is a reduced payment that the taxpayer can afford).
Consequently, they have to send some cases back to the IRS. And she estimates those numbers will grow as the program expands. As that happens, Olson said in written Congressional testimony recently, "the underlying business case for the PCA initiative evaporates."
The IRS is currently conducting two studies that compare the effectiveness of the private debt collection program with that of IRS collection efforts. Results from those studies are expected in August 2008. 
