[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]



 
   USE OF PRIVATE COLLECTION AGENCIES TO IMPROVE IRS DEBT COLLECTION

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 13, 2003

                               __________

                           Serial No. 108-21

                               __________

         Printed for the use of the Committee on Ways and Means







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91-098                       WASHINGTON : 2003
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    EARL POMEROY, North Dakota
JERRY WELLER, Illinois               GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado              MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida                  JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.





                            C O N T E N T S

                               __________
                                                                   Page
Advisory of May 6, 2003, announcing the hearing..................     2

                               WITNESSES

Internal Revenue Service, Hon. Mark W. Everson, Commissioner.....     8
Internal Revenue Service, Nina E. Olson, National Taxpayer 
  Advocate.......................................................    20
U.S. Department of the Treasury, Pamela J. Gardiner, Acting 
  Treasury Inspector General for Tax Administration..............    26

                                 ______

ACA International, Rozanne M. Andersen...........................    41
Allied International Credit Corporation, Dexter Smith............    48
Diversified Collection Services, Inc., Jon D. Shaver.............    53
National Consumer Law Center, Chi Chi Wu.........................    58
National Treasury Employees Union, Colleen M. Kelley.............    29
North Carolina Department of Revenue, Alan Felton................    34

                       SUBMISSIONS FOR THE RECORD

COLLECTCORP, Inc., statement.....................................    75
GC Services, LP, Houston, TX, Robert S. Young, statement.........    77
Kramer & Frank, PC, Saint Louis, MO, Donald B. Kramer, statement.    78
National Society of Accountants, Alexandria, VA, statement.......    78


   USE OF PRIVATE COLLECTION AGENCIES TO IMPROVE IRS DEBT COLLECTION

                              ----------                              


                         TUESDAY, MAY 13, 2003

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601

FOR IMMEDIATE RELEASE
May 06, 2003
OV-4

                Houghton Announces Hearing on the Use of

       Private Collection Agencies to Improve IRS Debt Collection

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on private collection agencies. The 
hearing will take place on Tuesday, May 13, 2003, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 2:00 
p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include the Honorable Mark Everson, Commissioner of the 
Internal Revenue Service (IRS), and Nina Olson, the National Taxpayer 
Advocate.
      

BACKGROUND:

      
    Each year, the IRS collects over $2 trillion in tax revenue from 
all sources. A small percentage of this amount is assessed, but not 
collected. The IRS has 10 years to collect newly assessed taxes. Over 
the past decade, the total inventory of unpaid tax assessments has more 
than doubled. It has grown from $130 billion in 1992 to over $280 
billion in March 2003.
      
    Much of this amount represents tax debts that cannot be collected, 
due to death or bankruptcy, but the IRS estimates that about $78 
billion is collectible. The amount judged to be collectible has grown 
by 12 percent during the past 2 years, and the inactive portion that 
the IRS is not currently pursuing has grown by 38 percent. As of March, 
the IRS had identified over $13 billion in tax debts that can only be 
collected if the IRS has more resources.
      
    The Bush Administration is highly concerned about the growth in the 
inventory of uncollected taxes, and the IRS issued a Request for 
Information that appeared in the Federal Register in January 2002 to 
seek input from private collection agencies (PCAs) on how PCAs could 
assist the IRS with its collection efforts, while preserving important 
taxpayer protections in existing law. Using this information, the 
Administration developed a proposal that appeared in the fiscal year 
2004 budget request for the IRS. Chairman Houghton introduced 
legislation (H.R. 1169) that would implement the Administration's 
proposal.
      
    In announcing the hearing, Chairman Houghton stated, ``We all know 
that it is a duty of citizenship to abide by the rules and pay our 
taxes. Yet, in the event that the rules are not followed, the IRS is 
unfortunately not able to adequately enforce this obligation due to a 
lack of funds. Enforcement is inconsistent at best. The Administration 
is looking for innovative solutions to this problem, and I applaud them 
for it.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the Administration's proposal to use 
private collection agencies to support the IRS's collection efforts and 
Chairman Houghton's bill to implement the proposal.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to 
(202) 225-2610, by the close of business, Tuesday, May 27, 2003. Those 
filing written statements who wish to have their statements distributed 
to the press and interested public at the hearing should deliver their 
200 copies to the Subcommittee on Oversight in room 1136 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse sealed-packaged 
deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
      1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to  
hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
      2. Copies of whole documents submitted as exhibit material will 
not be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
      3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at  http://waysandmeans.house.gov.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman HOUGHTON. Good afternoon, ladies and gentlemen. 
Thank you very much for coming to this hearing. We are 
delighted to have the new Commissioner with us. I am going to 
make an initial statement. Then, Mr. Pomeroy, who is the 
Ranking Member, will make one, and if anybody else comes in and 
wants to do that, that is okay, too. Then we will get to you, 
Commissioner. So, thank you.
    As I had indicated, really this is the first time we have 
had you as the new Internal Revenue Service (IRS) Commissioner, 
and we are delighted and honored that you are here. The 
President, as many of you know, has shown great faith in Mr. 
Everson by entrusting him with the critically important job of 
managing the IRS, and I am sure he is up to the challenge.
    Now, we are all familiar with the annual tax filing ritual, 
but thankfully few Americans are familiar with the IRS 
collections process. Of the $2 trillion per year that the IRS 
collects through self-assessment, a small percentage, but a 
large amount in real terms, approximately $60 billion--$60 
billion--remains unpaid at the end of the year. Now, ideally, 
the IRS would collect every individual tax debt owed to the 
U.S. Department of the Treasury, but that has not occurred in 
recent years.
    It may never have occurred, but certainly the proportion 
has not been in recent years. The backlog of unpaid assessments 
has grown substantially since 2000, and the IRS estimates that 
$78 billion of the total inventory of outstanding tax 
liabilities is potentially collectible.
    The IRS has determined also that it lacks the resources, 
however, to pursue much of the unpaid taxes. This means that it 
is inevitable without a change in the status quo that the tax 
collection system will be conducted selectively. Some taxpayers 
will experience the full weight of the IRS enforcement powers, 
including liens, levies, wage garnishment and even bankruptcy, 
while other taxpayers will be able to walk away from their tax 
liabilities.
    This is an unconscionable situation that must be remedied, 
but we must also do this in a way that preserves taxpayer 
rights in the confidentiality of tax return information.
    Now, the solution proposed by the administration, and the 
topic of our hearing today, is the proposal for the limited use 
of private sector collection agencies (PCAs) consistent with 
taxpayer rights so they can assist the IRS in its collection 
efforts. The Administration has developed a detailed proposal 
that will allow the IRS to benefit from the knowledge and 
skills of private sector companies and also will allow IRS 
revenue officers to focus on higher priority tasks.
    Today, we are going to hear from a variety of experts on 
this subject. I should note that 40 States already use private 
debt collectors to assist in collecting unpaid tax debt, and 
the Federal Government uses private companies to collect 
student loan debt.
    Our hearing today will review these efforts, and we will 
hear how the IRS plans to address the challenge of implementing 
this proposal while at the same time protecting taxpayer rights 
and the confidentiality of return information.
    I would now like to yield to a good friend of mine, the 
Subcommittee's Ranking Member, Mr. Pomeroy from North Dakota.
    [The opening statement of Chairman Houghton follows:]
   Opening Statement of the Honorable Amo Houghton, Chairman, and a 
         Representative in Congress from the State of New York
    Good afternoon. Before us today, for the first time, is the newly 
confirmed Commissioner of the Internal Revenue Service, Mark Everson. 
The President has shown great faith in Mr. Everson by entrusting him 
with the critically important job of managing the Internal Revenue 
Service, and I have no doubt that he is up to the challenge.
    We are all familiar with the annual tax filing ritual, but, 
thankfully, few Americans are familiar with the IRS collections 
process. Of the $2 trillion per year that the IRS collects through 
self-assessment, a small percentage--but a large amount in real terms, 
approximately $60 billion, remains unpaid at the end of the year.
    Ideally, the IRS would collect every individual tax debt owed to 
the Treasury, but that has not occurred in recent years. The backlog of 
unpaid assessments has grown substantially since the year 2000, and the 
IRS estimates that $78 billion of the total inventory of outstanding 
tax liabilities is potentially collectible. The IRS has determined that 
it lacks the resources, however, to pursue much of the unpaid taxes.
    This means that it is inevitable--without a change in the status 
quo--that the tax collection will be conducted selectively. Some 
taxpayers will experience the full weight of the IRS's enforcement 
powers, including liens, levies, wage garnishment, and even bankruptcy, 
while other taxpayers will be able to walk away from their tax 
liabilities. This is an unconscionable situation that must be remedied, 
but we must do so in a way that preserves taxpayer rights and the 
confidentiality of tax return information.
    The solution proposed by the Administration, and the topic of our 
hearing today, is the proposal for the limited use of private sector 
collection agencies--consistent with taxpayer rights--to assist the IRS 
in its collection efforts. The Administration has developed a detailed 
proposal that will allow the IRS to benefit from the knowledge and 
skills of private sector companies and will allow IRS revenue officers 
to focus on higher priority tasks.
    Today we will hear from a variety of experts on this subject. I 
should note that 40 states already use private debt collectors to 
assist in collecting unpaid tax debt and the Federal Government uses 
private companies to collect student loan debt. Our hearing today will 
review these prior efforts, and we will hear how the IRS plans to 
address the challenge of implementing this proposal, while at the same 
time, protecting taxpayer rights and the confidentiality of return 
information.
    I would now like to yield to a good friend of mine, the 
Subcommittee's ranking member, Mr. Pomeroy from North Dakota.

                                 

    Mr. POMEROY. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I do think this is a proposal that needs 
our thorough evaluation. I want to begin by commending the 
Commissioner. It is good to have a Commissioner again, and as 
we mentioned in our meeting before the hearing, I have high 
confidence in the newly confirmed Commissioner and look forward 
to your new leadership on this critical government agency.
    Mr. EVERSON. Thank you.
    Mr. POMEROY. My concerns on the idea of suddenly enlisting 
significant private bill collectors to help the Federal 
Government collect back taxes is that it is an idea that 
frankly is not ready for prime time. I think we need to look at 
a lot of issues, and this hearing is going to be really the 
best public forum to date for Congress to evaluate the idea.
    I think you can start with the notion of collecting taxes. 
Now, if there is ever an inherently governmental function, it 
would seem like that really is to the core what would be a 
governmental function: collecting the revenues it is owed for 
purposes of running the government.
    I also believe that further investigation in this shows 
this is something the Federal Government has been doing a long 
time, it does it very well, very efficiently, and has now an 
operating environment where the Congress working with the IRS 
over the years has put in place a number of taxpayer 
protections very important to the rights of our taxpayers.
    From an efficiency standpoint, the average IRS collection 
employee brings in $900,000 in taxes each year. I think that 
that is very impressive. It would seem to me that we could 
expand collection, get at the uncollected debt this proposal 
would address through private collectors by simply funding more 
IRS collectors.
    When we have to give private collectors enlisted in the 
cause of collecting taxes a significant cut of the action by 
way of their compensation, be it up to 25 percent, we are 
diverting money that otherwise could be used to retire the 
deficit or fund critical programs like the military, and we are 
devoting it to compensation of private sector partners when 
this could be much more cost effectively performed simply by 
hiring and adding to the existing IRS collection system in 
place.
    Another very fundamental question I hope we can explore 
today is what kind of cases are going to be sent out for 
private collection? We have got a range of uncollected debt 
including individuals armed with accountants and lawyers and 
hiding behind the most elaborate yet phony tax avoidance 
schemes ever devised, and we have got a lot of middle class 
taxpayers that one reason or another have not paid what they 
owed.
    While it certainly would not seem fair to me if suddenly 
this barrage of private debt collectors singled on the middle-
income, modest-income household, leaving the more elaborate tax 
shelters for another day, a day that will not ever come in 
light of the existing staffing for the IRS. So, we need to 
learn more about how fairly this new private sector initiative 
is going to be applied.
    It certainly should not be just applied to your basic 
middle-income household that is behind on their tax obligation.
    We also need finally to explore whether the protections 
that taxpayers have when they are subject to IRS debt 
collection also exist when you have got a private bill 
collector coming after them.
    In 1998, and I believe the Chairman was very involved in 
this legislation, we no longer allowed IRS employees to be 
compensated based on percentage of what they bring in. There 
were some horrific examples brought forward in the hearings 
that we all recall of IRS overreaching in its debt collection, 
individuals that were usurping their authority and basically 
misapplying the authority of the Federal Government in 
collecting debt, driven in part by the fact that they were paid 
on a percentage basis: the more they brought in, the more they 
made, and they overreached.
    We prohibit that in public law, but will this same 
prohibition attach to private collection efforts? Actually the 
proposal looks as though that protection will not be in place. 
That compensation could be up to 25 percent of revenues 
collected, pure percentage based compensation, again putting in 
place in the private sector the potential that you are going to 
have the kind of abuse that we have moved to prohibit in the 
public sector.
    Will it happen? We do not know. These are questions that we 
certainly have to thoroughly plumb before we rush this proposal 
forward. So, in conclusion, Mr. Chairman, I just want to 
commend you. This is the right hearing on an important topic, 
and I think we all should pause before we go down this road and 
fully evaluate the wide-ranging consequences that suddenly 
enlisting private debt collectors could bring upon our 
taxpayers. Thank you, Mr. Chairman.
    [The opening statement of Mr. Pomeroy follows:]
 Opening Statement of the Honorable Earl Pomeroy, a Representative in 
                Congress from the State of North Dakota
    The Ways and Means Oversight Subcommittee is always interested in 
exploring innovative ways to better administer our federal tax system. 
One new proposal that merits our thorough review is the 
Administration's plan to allow private debt collection companies to 
begin contacting taxpayers for payment of taxes due.
    Based on what I know going into this hearing, I would say that the 
program is ``not yet ready for prime time.'' Fortunately, even the 
Administration's proposal does not anticipate implementation of private 
debt collectors until 2005. I would urge Committee Members to move 
slowly and carefully on this matter.
    The fundamental issue before the Subcommittee is whether 
``privatizing'' IRS debt collection is a good or bad idea. I believe 
that the public considers federal tax collections to be the job of the 
IRS and Department of Treasury--an inherently governmental function. I 
do not think that the public believes that federal tax collections 
should be profitable business transactions for parts of corporate 
America looking to expand their market share. The very notion of 
unleashing a small army of bill collectors on the taxpayers of this 
Nation should give us all major pause.
    Clearly, the IRS could do more collection work if they had more 
resources. An IRS collection employee averages about $900,000 in taxes 
collected each year. This is quite impressive. It would seem to me that 
the IRS could efficiently and effectively collect the next batch of 
tax-owed cases ``in the queue.'' The notice and letter machines, the 
telephone lines, the know-how, the entire process is there and ready to 
go at the IRS. All that is needed are people and resources to work the 
existing system. Why would we pay someone 25% of a $500 tax bill for 
making a phone call or sending a letter to a taxpayer, when the IRS 
could send that same letter or make that same phone call at little 
cost? It seems silly to intentionally deny the IRS needed collection 
funds and staffing, then say the IRS is ignoring many collection cases, 
and thus we must turn to private collectors.
    Putting this basic question aside, there are many unanswered 
questions about how the Administration's privatization plan would work:
    What types of cases will the IRS send to private collectors? Will 
they be large dollar uncollected tax cases owed by the ``big boys,'' or 
small amounts owed by working families? Will the cases be truly old and 
delinquent, or will they be new taxes-due found on recently-filed 
returns which the taxpayers fully intend to pay?
    How will the private contractors be rewarded? The IRS Reform Act of 
1998 specifically prohibits IRS employees from being evaluated based on 
collection results in order to eliminate incentives to use overly 
aggressive tax collection techniques. The private debt collector 
approach goes in the exact opposite direction. It specifically rewards 
collectors up to 25% of amounts collected. Why would we want to give 
people who are not directly accountable to the Treasury Department 
Secretary and IRS Commissioner a bounty for getting money from 
taxpayers?
    How can strong taxpayer protections be effective when dealing with 
private collectors? IRS employees are subject to job termination by the 
IRS Commissioner for harassing a taxpayer, destroying documents, 
violating IRS rules, etc. How would ``bad'' contractors be identified 
and would they too get fired? Further, the proposal explicitly prevents 
taxpayers from seeking relief or damages from the IRS if a contractor 
misuses confidential taxpayer information. Why would we want to reduce 
taxpayers' protections in dealing with IRS collection agents after 
fighting so hard for them in 1998?
    So, in conclusion, I want to thank Subcommittee Chairman Houghton 
for scheduling a hearing on this important issue. I share his view that 
hearings, such as today's, are critical to our understanding and 
evaluation of how to improve our administration and enforcement of the 
tax laws.
    Thank you.

                                 

    Chairman HOUGHTON. Okay. Well, thank you very much, Mr. 
Pomeroy, and Mr. Everson, we are delighted to have you here, 
and you follow an extraordinary man in Charles Rossotti, and I 
know you are going to equal him and do it even better. So, 
thank you, and we look forward to your testimony.

   STATEMENT OF THE HONORABLE MARK W. EVERSON, COMMISSIONER, 
                    INTERNAL REVENUE SERVICE

    Mr. EVERSON. Thank you. Mr. Chairman, Mr. Pomeroy, thank 
you for this opportunity to testify today. As you know, this is 
my first hearing before the Subcommittee since assuming office 
just last week. Mr. Chairman, I look forward to a productive 
working relationship with you, Mr. Pomeroy, and the entire 
Subcommittee and your staff.
    During my tenure as Commissioner, I expect to focus on 
three areas. One, we must continue the reorganization begun by 
Commissioner Rossotti in order to improve customer service. We 
must stay the course; employees and managers at all levels of 
the organization must fully embrace the changes he launched.
    Two, we must continue the information technology 
modernization program. Its success is critical to establishing 
a more efficient and effective IRS.
    Three, we must strengthen the integrity of our Nation's tax 
system through enhanced enforcement efforts. The IRS must deter 
those who might be inclined to evade their legal tax 
obligations and appropriately pursue those who actually do. It 
is as simple as this: people should pay what they owe.
    The President's budget requests a real increase in 
resources targeted toward enforcement, new money to expand 
enforcement efforts with a sharper focus on high income/high 
risk taxpayers and businesses. However, in order to attack 
systemic problems such as uncollected debt, we must use all, 
and I repeat all, available tools but, of course, with 
appropriate controls.
    In this regard, the budget contains an important 
legislative proposal that would authorize the IRS to contract 
with PCAs, to supplement current tax collection efforts for a 
targeted category of debt.
    I would like to emphasize that this proposal is totally 
distinct from competitive sourcing and will not result in the 
loss of a single job at the IRS. While Federal employees could 
do this work, as you know, appropriated resources are scarce, 
and I would like to point out that for 8 out of the last 10 
fiscal years, the IRS has actually received less than its full 
budget request.
    The proposed use of PCAs is a realistic approach. As the 
National Taxpayer Advocate states, quote: ``PCAs appear a 
limited but reasonable option.''
    For the purposes of this initiative, the Treasury 
Department and the IRS identified over $13 billion in 
individual tax debt designated as currently non-collectible. 
The cases the IRS would refer to PCAs are those where the 
taxpayer would likely pay the outstanding tax liability if 
contacted by telephone.
    These include situations where a taxpayer filed a return 
indicating an amount of tax due but did not also send in 
payment for that full amount. These cases also would include 
situations where the taxpayer has made three or more voluntary 
payments of tax that was assessed by the IRS.
    The IRS would not refer to PCAs cases for which there is 
any indication that enforcement action would be required to 
collect the tax liabilities. The IRS will avoid referring cases 
that would require IRS expertise or the exercise of discretion.
    I want to stress in the strongest possible terms that PCAs 
would be prohibited from threatening or intimidating taxpayers. 
Indeed, the PCAs would be governed by all of the same rules by 
which IRS employees are held accountable. The taxpayer 
protections woven throughout this proposal have also been 
thoroughly reviewed by the National Taxpayer Advocate who will 
be testifying this afternoon.
    From my previous perch as Deputy Director for Management at 
the Office of Management and Budget (OMB), I am also acutely 
sensitive to the need for proper supervision of outside 
contractors. I want to assure the Subcommittee that PCAs and 
PCA employees will receive close supervision by the IRS to 
ensure compliance with taxpayer protections and applicable 
policies and procedures. The National Taxpayer Advocate will 
continue to be involved in this process.
    Mr. Chairman, I want to make one final point. The 
President's initiative builds on a record of success at both 
the State and Federal level. The PCAs are common across more 
than 40 States including those represented on this 
Subcommittee. We will work to take the best from these 
different approaches, and we will also benefit from their 
lessons learned.
    In the Federal arena, I would like to point out that PCAs 
are being successfully used by both the Financial Management 
Service, within the Treasury Department and the U.S. Department 
of Education. Under the Debt Collection Improvement Act of 1996 
(P.L. 104-134), non-tax debts of a certain age owed to Federal 
agencies such as defaulted loans must be referred to the 
Finance Management Service (FMS). The collection of the debt is 
the responsibility of PCAs and this system is working very 
well.
    In addition, I have confirmed with the Deputy Secretary of 
Education that that Department's experience with PCAs is also 
very positive. Thank you. That concludes my oral statement. I 
would be happy to take any questions.
    [The prepared statement of Mr. Everson follows:]
  Statement of the Honorable Mark W. Everson, Commissioner, Internal 
                            Revenue Service
    Mr. Chairman and Members of the Subcommittee, there is a 
significant and growing backlog of cases involving individual taxpayers 
who are aware of their tax liabilities but have not paid them. We 
believe that many of these taxpayers have simply chosen not to pay, 
even though they have the means to do so. This is unfair to every hard-
working taxpayer who has paid his or her fair share of taxes. Indeed, 
nothing undermines the confidence of honest taxpayers in the tax system 
more than the perception that other taxpayers who can pay their 
liabilities are able to get away with not paying.
    The Administration's FY 2004 budget proposes to support the IRS's 
collection efforts with private collection agencies (PCAs) that will 
engage in carefully defined and limited collection activities. PCAs 
would be used to address two groups of taxpayers. The first group 
consists of taxpayers who have filed a tax return showing an amount of 
tax due, but who have failed to pay the tax. The second consists of 
taxpayers who have been assessed additional tax by the IRS and have 
made three or more voluntary payments to satisfy that additional tax, 
but who then have stopped making payments. These taxpayers clearly are 
aware of their liabilities. In many cases, however, they are taking 
advantage of the fact that the IRS cannot continually pursue each 
taxpayer who fails to pay an outstanding tax liability. We believe that 
PCAs could efficiently and effectively address these liabilities.
    PCAs would allow the IRS to focus its enforcement efforts on more 
complex cases and issues. Significantly, because PCAs would work the 
simplest and most straightforward collection cases they would enable 
the IRS to handle more collection cases at an earlier stage in the 
process--before those accounts become stale and harder to collect.
    Over 40 states have used private collection agencies successfully 
as part of their tax collection efforts, and other federal agencies 
have used private collection agencies for a number of years to collect 
a significant amount of delinquent federal nontax debt. Once the 
required authorizing and funding legislation are enacted, the IRS would 
be able to begin placing outstanding tax liabilities with PCAs by as 
early as a year later.
    At the present time more than $13 billion in individual income tax 
debt has been designated as uncollectible due to IRS collection and 
resource priorities. Less than three years ago, this amount was only $7 
billion. PCAs could be used to address many of these cases, and the IRS 
is working to identify other appropriate cases that may be eligible for 
referral if the necessary legislation is enacted.
    Taxpayer protections will be fully maintained under this proposal. 
The Treasury Department and the IRS determined early on that no 
proposal to engage PCAs would ever be feasible unless and until those 
developing the proposal could assure themselves and others that 
taxpayer rights would not be weakened in any way. A taxpayer contacted 
by a PCA would enjoy the same rights and protections as a taxpayer 
contacted by an IRS employee. The taxpayer protections incorporated in 
the Administration's proposal have been reviewed thoroughly in 
consultations with the National Taxpayer Advocate (NTA). The NTA and 
her organization would have a continuing role in ensuring that taxpayer 
protections are maintained under any program using PCAs to support the 
IRS's collection efforts.
Present Law
    Under present law, the IRS must collect tax liabilities; they 
cannot be referred to a PCA for collection. This stands in stark 
contrast to other federal agencies that may, and often do, enter into 
contracts with non-governmental parties for the collection of debts 
owed to the United States.
    Section 6301 of the Internal Revenue Code (Code) directs that 
``[t]he Secretary shall collect the taxes imposed by the internal 
revenue laws,'' and the Code defines the ``Secretary'' to mean 
officers, employees, or agencies of the Treasury Department. The 
reservation of tax collection authority to Treasury officers and 
employees also is reflected in the Debt Collection Improvement Act of 
1996 (DCIA), Public Law 104-34. The DCIA expressly permits federal 
agencies to enter into contracts with private contractors for the 
collection of debts owed to the United States. This authorization, 
however, specifically excludes Federal tax debts.
    The Treasury Department's Financial Management Service (FMS) 
currently uses private collection agencies as part of its 
implementation of the DCIA. Under the DCIA, nontax debts of a certain 
age that are owed to most federal agencies must be referred by the 
agency to FMS. FMS then may refer those debts to private collection 
agencies for collection. Since 1998, FMS has collected $109 million in 
nontax debts through the use of private collection agencies, with $43 
million of this amount being collected in FY 2002. The amount being 
collected through the use of private collection agencies has been 
growing at a rate of at least 22 percent since 1999.
    Section 7809(a) of the Code provides that collections received or 
collected by authority of the internal revenue laws shall be paid daily 
into the United States Treasury, without any deduction for 
compensation, fees, costs, charges, expenses, or claims of any 
description. The existing statutory exceptions do not cover potential 
fees or compensation earned by a PCA. Therefore, unless modified, 
section 7809 would require fees or compensation due to a PCA to be paid 
only from funds already appropriated to the IRS. In contrast, under the 
DCIA federal agencies that enter into contracts with private collection 
agencies for the collection of public nontax debts are allowed to 
deduct the fees owed to private collection agencies directly from the 
amounts recovered.
Reasons For Change
    Our tax system has a simple time-honored premise: each person who 
is voluntarily meeting his or her tax obligations must have confidence 
that his or her neighbor also is complying. While most taxpayers do 
their best to comply with our tax laws, some do not. In those cases, 
the IRS must exercise its enforcement powers to achieve compliance.
    In recent years, the increased demands on the IRS's collection 
resources have resulted, as of March 2003, in over $13 billion in 
individual income tax debt being designated as uncollectible due to 
collection and resource priorities. Not all of these delinquent tax 
liabilities, however, are truly uncollectible. Rather, we believe that 
many of these accounts could be collected relatively easily with 
minimal follow-up efforts.
    More troubling is the fact that this backlog of cases will only 
grow over time. The total accounts receivable dollar inventory is 
growing at an annual rate of 3-4%. Thus, without a significant change 
in business practice, the pool of uncollected, but potentially 
collectible, tax liabilities will continue to plague us. This not only 
will result in billions of dollars of lost revenue but also will 
undermine voluntary compliance by allowing some taxpayers to pay less 
than their fair share.
    PCAs would allow the IRS to address efficiently a significant 
portion of currently inactive inventory. The cases the IRS would refer 
to PCAs are those where the taxpayer would likely pay the outstanding 
tax liability if contacted by telephone. These cases would include 
situations where a taxpayer filed a return indicating an amount of tax 
due but did not also send in payment for that full amount. These cases 
also would include situations where the taxpayer has made three or more 
voluntary payments of tax that was assessed by the IRS.
    The IRS would not refer to PCAs cases for which there is any 
indication that enforcement action would be required to collect the tax 
liabilities. The IRS also would not refer any case that likely would 
require IRS expertise or the exercise of discretion. Discretion is 
required, for example, in determining how to best obtain payment of a 
delinquent tax liability, including the use of enforcement tools such 
as a lien or levy, where the taxpayer will not voluntarily enter into 
repayment terms.
A Description Of The Administration's Proposal
    The Administration's proposal has three components: (1) the 
activities PCAs would undertake in support of the IRS's overall 
collection efforts; (2) the taxpayer protections that would apply with 
respect to actions taken by PCAs; and (3) the compensation of PCAs.
    Statutory authorization is required for the IRS to use PCAs and the 
revolving fund mechanism for compensating PCAs. In addition, certain 
statutory changes would be required to ensure that all taxpayer rights 
and protections would continue to apply. A number of the items 
discussed below, however, would be addressed through the IRS's 
administration of the program and its contracts with the PCAs. This 
would provide the IRS with the flexibility needed to ensure that the 
PCAs are used in a manner that best serves the proposal's objectives.
                             PCA Activities
    Under the Administration's proposal, PCAs would focus on taxpayers 
who are likely to pay their outstanding tax liabilities, either in full 
or in installments, if they were located and contacted. These are 
functions that would not require the exercise of discretion or involve 
enforcement action. PCAs may be provided by the IRS with a specific 
statement that can either be sent or delivered verbally to taxpayers 
regarding the benefits of paying an outstanding tax liability, and the 
potential consequences of failing to do so. This statement would not be 
taxpayer specific, but rather would be a more general description of 
the collection process that would serve an important taxpayer education 
purpose.
    Mr. Chairman, I want to stress in the strongest possible terms that 
PCAs would be prohibited from threatening or intimidating taxpayers, or 
otherwise suggesting, beyond the specific statement discussed above, 
that enforcement action will or may be taken if a taxpayer does not pay 
the liability. Decisions regarding enforcement actions will always 
remain with the IRS. In no case would a PCA be permitted to take 
enforcement action against a taxpayer.
    After thoughtful consideration, we came up with the following 
process that the PCAs would carefully employ to assist the IRS in 
collecting delinquent taxes.

    1.
       LSelection of Accounts to be Referred to PCAs--The IRS would 
select those cases likely to be the simplest to collect, based on 
factors indicating that the taxpayer would likely pay the outstanding 
tax liability if contacted by telephone. The initial identification of 
referable accounts would target taxpayers who have indicated an amount 
of tax due on a return but who have not paid that amount (so-called 
``balance-due'' taxpayers). This initial identification also would 
target taxpayers who have been assessed tax by the IRS (e.g., after 
having failed to file a return or report all income received) and who 
have made three or more voluntary payments of assessed tax. Again, the 
IRS would not refer cases for which there is an indication that 
enforcement action may be necessary or that IRS discretion would be 
required to resolve the liability.
    2.
       LNotification by Mail--A PCA would send to each assigned 
taxpayer's last known address a written notice informing the taxpayer 
that the PCA is attempting to collect a debt owed to the IRS. (For 
taxpayers who have filed a power-of-attorney with the IRS, the PCA 
would contact the designated representative.) The notice would comply 
with the requirements imposed by the Fair Debt Collection Practices Act 
(FDCPA), 15 U.S.C.  1692 et seq., and the requirements applicable to 
comparable notices issued by the IRS. Each notice would be accompanied 
by a copy of IRS Publication 1 (``Your Rights as a Taxpayer''), which 
provides a brief overview of the collection process, including a 
taxpayer's right to seek assistance from the Taxpayer Advocate Service.
    3.
       LLocation of Taxpayers--In cases where the FDCPA notice is 
returned as undeliverable, and for purposes of verifying a taxpayer's 
telephone number, PCAs would obtain current contact information by 
using automated database matching (e.g., running a name against an on-
line or electronic ``white pages'') and, if necessary, contacting 
information sources, such as directory assistance. PCAs, however, would 
not contact individuals (such as relatives and neighbors) or employers 
in order to locate a taxpayer.
    4.
       LTelephone Contact with Taxpayers--After a FDCPA notice has been 
sent to a taxpayer, the PCA would contact the taxpayer by telephone to 
discuss the tax liability. The purposes of this call is to respond to 
questions that the taxpayer may have, based on specific information 
provided by the IRS to the PCA; request that the taxpayer pay the 
amount due in full; and, if the taxpayer is unable to do so, offer the 
taxpayer the ability to pay the full amount due pursuant to an 
installment agreement providing for full payment of the liability over 
a period of up to three years (a ``3-year installment agreement''). A 
3-year installment agreement, like all installment agreements under 
section 6159 of the Code, would be between the taxpayer and the IRS and 
would be subject to all of the protections provided for under the Code, 
including the restriction on levy under section 6331(k).
    5.
       LQuestions Regarding an Outstanding Liability--PCAs would have 
access to specific information regarding an outstanding tax liability 
(e.g., type of tax, tax years affected, dates of assessment, whether 
the assessment is based on a taxpayer's own balance due return or an 
IRS notice, prior payments, and application of prior payments) in order 
to answer basic, but important questions that a taxpayer may have 
regarding the liability.
       L  The taxpayer information provided to PCAs would be strictly 
limited to the information required for the collection of the specific 
tax liability at issue. PCAs would not receive, for instance, 
information regarding a taxpayer's total or adjusted income, sources of 
income, IRS examination results, delinquency history for liabilities 
not being handled by the PCA, or employer information.
       L  Let me stress here too that PCAs would be trained with 
respect to the information that they can, and cannot, provide in 
response to a taxpayer question. PCAs would not be permitted to address 
questions as to the validity of the liability, or the basis for the 
liability, beyond providing the taxpayer with the basic account 
information to which the IRS gives the PCA access.
    6.
       LFull Payment Of Outstanding Liability--PCAs would request that 
a taxpayer pay the outstanding tax liability in full and provide 
directions for doing so. PCAs would be provided with a specific 
statement that they can make to taxpayers regarding the benefits of 
paying the liability (including the stopping of interest and penalties, 
and the release of any tax liens). All taxpayer payments, whether in 
full satisfaction of an outstanding liability or an installment 
payment, would be made directly to the IRS. PCAs would not actually 
collect any amount.
       L  Mr. Chairman, in no case would a PCA be permitted to provide 
advice to the taxpayer regarding the legality of, or proper way to 
challenge the outstanding tax liability or the consequences of paying, 
or failing to pay, that liability beyond the specific statement 
provided by the IRS and the explanations in IRS Publication 1. 
Taxpayers with further questions would be directed to consult with 
their own advisor, with IRS personnel overseeing the PCA, or with the 
Taxpayer Advocate Service.
    7.
       LPayment Pursuant To A 3-Year Installment Agreement--If a 
taxpayer is unable to pay immediately the full amount of the 
outstanding tax liability, the PCA would request that the taxpayer 
enter into an installment agreement (i.e., full payment over time, not 
to exceed 3 years).
       L  A PCA would be responsible for monitoring installment 
agreements that are facilitated by the PCA. Specifically, a PCA would 
monitor whether a taxpayer was making payments in accordance with the 
terms of the installment agreement and, if payments stopped, would 
contact the taxpayer in an effort to bring the taxpayer current with 
the installment agreement. A PCA would be prohibited, however, from 
threatening or intimidating taxpayers, or suggesting that enforcement 
action will or may be taken if a taxpayer does not continue making 
payments.
       LA PCA would notify the IRS if a taxpayer remained in breach of 
the installment agreement for nonpayment, and any decision to terminate 
the installment agreement would have to be made by the IRS. Any 
termination decision by the IRS would be subject to the notice of 
proposed termination required by section 6159(b)(5), an independent 
administrative review by the IRS Office of Appeals under section 
6159(d), and the prohibition on levy under section 6331(k) until any 
such review has been resolved.
    8.
       LCases Where a Taxpayer Cannot Pay in Full or Enter into a 3-
Year Installment Agreement--The Treasury Department and the IRS expect 
that in certain cases, a taxpayer either may request to pay the 
outstanding tax liability over more than three years or may indicate 
that he or she is unable to pay the liability in full even over time. 
In these cases, the PCA would attempt to obtain from the taxpayer 
financial information in the same manner that the IRS does through its 
Automated Collection System (ACS). Generally, this would involve the 
PCA eliciting information from the taxpayer in response to specific 
questions. The IRS would provide PCAs with specific training regarding 
this process, and the information received would be forwarded to the 
IRS.
       L  The IRS would evaluate the financial information collected by 
the PCA for further action, as well as any offer by a taxpayer to enter 
into an installment agreement other than a 3-year installment 
agreement. Although the IRS would be responsible for reaching 
resolution of the liability with the taxpayer (e.g., the execution of 
an installment agreement other than a 3-year installment agreement), 
PCAs would be permitted to monitor installment agreements reached 
between the IRS and taxpayers who were contacted originally by the 
PCAs. As with 3-year installment agreements, PCAs would monitor whether 
a taxpayer was making payments in accordance with the terms of the 
installment agreement and, if payments stopped, would contact the 
taxpayer in an effort to bring the taxpayer current with the 
installment agreement.
       L  Again, a PCA would be prohibited from threatening or 
intimidating taxpayers, or suggesting that enforcement action will or 
may be taken if a taxpayer does not continue making payments. A PCA 
would notify the IRS if a taxpayer remained in breach of the 
installment agreement for nonpayment, and any decision to terminate the 
installment agreement would have to be made by the IRS. Any termination 
decision by the IRS would be subject to the notice of proposed 
termination required by section 6159(b)(5), an independent 
administrative review by the IRS Office of Appeals under section 
6159(d), and the prohibition on levy under section 6331(k) until any 
such review has been resolved.
    9.
       LDeath, Bankruptcy, Incarceration, and Other Special 
Situations--We would make every effort to refer only those cases where 
a taxpayer is likely to agree to pay an outstanding tax liability if 
contacted by a PCA. In some cases, however, the taxpayer will be unable 
to do so because of a special circumstance. For these cases, the IRS 
may develop specific procedures to permit a PCA to gather information 
that would enable the IRS to resolve the account administratively. 
These procedures, for instance, may permit the PCA to contact an 
official representative of the taxpayer or taxpayer's estate (e.g., a 
trustee in case of bankruptcy, or executor in case of death) as well as 
access other publicly available sources such as court records.

    An IRS support unit and PCA oversight team would work with each PCA 
to ensure proper controls, protection of taxpayer rights, and 
segregation of activities considered inherently governmental. PCAs 
would be evaluated based on a balanced measure scorecard that would 
reflect quality of service, taxpayer satisfaction, PCA employee 
satisfaction, and case resolution, in addition to collection results. 
Scorecard results would impact the number of taxpayer accounts that a 
PCA would receive.
                          Taxpayer Protections
    Under this proposal, taxpayer protections would be preserved under 
existing law and through a combination of statutory amendments, 
explicit contractual provisions, and detailed oversight by the IRS over 
PCAs. This proposal, however, has been designed to minimize the 
possibility that any PCA would be engaged in an activity that may 
violate a taxpayer right or protection in the first place.
    More generally, our experience with the 1996/97 IRS pilot and FMS' 
more recent experience using PCAs to collect nontax debts indicate 
that, properly structured, the use of PCAs to support the IRS's overall 
collection effort would not threaten taxpayer rights or protections.
    PCAs and PCA employees would be subject to extensive quality-
control monitoring by the IRS to ensure compliance with taxpayer 
protections and applicable policies and procedures. This monitoring 
would include ``live'' monitoring of telephone communications between 
PCA employees and taxpayers, review of recorded conversations, 
taxpayer-satisfaction surveys, audits of PCA records, and periodic 
reviews of PCA performance. In addition, the IRS would specifically 
monitor PCA compliance with taxpayer confidentiality requirements and 
the restrictions contained in section 1203 of RRA 1998.
    Mr. Chairman, the following are the specific safeguards that will 
protect the taxpayer:

     LProtections Provided by the Fair Debt Collection 
Practices Act (15 U.S.C. Sec. 1692 et. seq.)--PCAs would be required to 
adhere to all applicable requirements and restrictions contained in the 
Fair Debt Collection Practices Act (FDCPA). (Certain provisions of the 
FDCPA have been incorporated into the Code in section 6304 so that they 
apply to IRS employees.) PCAs, for instance, would be prohibited from 
communicating with taxpayers at an unusual or inconvenient time or 
place, or engaging in conduct that is harassing, oppressive or abusive.
     LProtections Against Unauthorized Disclosure (I.R.C. 
Sec. 6103)--Sections 6103(n) and 7431(a)(2) of the Code currently 
permit a taxpayer to pursue legal action against any person who is 
permitted to receive tax returns and return information for purposes of 
assisting in tax administration, but who unlawfully inspects or 
discloses that information. Criminal penalties also may be imposed. 
I.R.C.  7213, 7213A. These provisions would apply to PCAs. The 
Administration's proposal would require annual reports outlining the 
safeguards in place at the PCAs to protect taxpayer confidentiality and 
PCA compliance with the taxpayer confidentiality provisions.
     LAssistance from the National Taxpayer Advocate (I.R.C. 
Sec. Sec. 7803(c) and 7811)--The office of the National Taxpayer 
Advocate provides assistance to taxpayers seeking help in resolving 
their problems with the IRS. Any taxpayer experiencing a significant 
hardship (as defined in section 7811 of the Code and the Taxpayer 
Advocate Service manual procedures) relating to the manner in which the 
internal revenue laws are being administered may seek assistance from 
the office of the NTA. Under this proposal, PCAs would be required to 
inform taxpayers of their right to obtain assistance from the office of 
the NTA and to immediately refer any case where such assistance is 
requested to the local Taxpayer Advocate office. All efforts by the PCA 
to collect would be suspended until the office of the NTA decides 
whether to act upon the taxpayer's request for assistance.
     LProtections with Respect to Third-Party Contacts (I.R.C. 
Sec. 7602(c))--As explained above, PCAs would not, except in highly 
unusual circumstances, communicate with third parties in a manner that 
would constitute third-party contacts for purposes of the notification 
and reporting requirements of section 7602(c) of the Code. A PCA would 
be required to notify the IRS if the PCA intends to make a 
communication governed by section 7602(c), and must receive specific, 
written authorization from the IRS before the communication could be 
made.
     LProtections with Respect to Installment Agreements--Any 
installment agreement between the IRS and a taxpayer who is contacted 
by a PCA (including 3-year installment agreements) would be treated 
like any other installment agreement pursuant to section 6159 and, 
therefore, would be subject to the protections provided by the Code. 
These protections include the prohibition on levy during the 
consideration and term of the installment agreement, as well as 
immediately after a proposed rejection or termination of an installment 
agreement. I.R.C.  6331(k). In addition, a taxpayer has a right to a 
hearing with the IRS Office of Appeals following the termination or 
rejection of an installment agreement. I.R.C.  6159(d), 7122(d).
     LProtections with Respect to Communications--PCAs would be 
required to comply with Code provisions governing notices reflecting 
balances due, penalties, and interest. I.R.C.  6631 and 6751(a) 
(currently suspended until July 1, 2003) and I.R.C.  7522. In 
addition, PCAs also would be required to follow Internal Revenue Manual 
provisions governing taxpayer interviews by IRS employees.
     LProtections against Conduct that Violates Minimum 
Standards--Section 1203 of RRA 1998 prohibits certain specified conduct 
by IRS employees, including conduct in connection with the collection 
of any unpaid tax. IRS employees, for example, are prohibited from 
violating any constitutional or civil right of, or retaliating against, 
a taxpayer or taxpayer representative. PCAs would be required to comply 
fully with the provisions of section 1203, including, to the extent 
permissible under applicable law, the removal or termination of PCA 
employees who violate the requirements of this provision. The 
Administration's proposal would require annual reports outlining 
compliance by PCAs with the restrictions contained in section 1203 of 
RRA 1998.

    This proposal would amend section 7433, which generally permits 
civil actions by taxpayers for unauthorized collection actions, to 
extend this provision to actions by employees of a PCA. Taxpayers 
therefore could bring actions for damages against a PCA employee if the 
employee violated a protection provided by the Internal Revenue Code. 
The amendment, however, would permit the government to intervene in any 
action brought by a taxpayer against an employee of a PCA (whether 
under section 7431 or section 7433), although in no case would the 
government be liable for a wrongful act of a PCA.
                            PCA Compensation
    Under the Administration's proposal, section 7809 of the Code would 
be amended to create a revolving fund from the tax revenue collected by 
PCAs, and the amounts in this fund would be used to compensate the 
PCAs. IRS's administrative costs would be paid for from appropriated 
funds. This proposed revolving fund mechanism is a critical component 
of this proposal for two important reasons.
    First, the revolving fund mechanism would allow the IRS to preserve 
its existing collection resources for complex cases and issues. Second, 
the revolving fund mechanism, in conjunction with the IRS's ability to 
control the number of cases that are referred to PCAs, provides 
flexibility with respect to the extent to which PCAs would support the 
IRS's overall collection effort.
Revenue Estimates
    In January 2002, the IRS issued a Request for Information regarding 
the potential use of PCAs to support the IRS's overall collection 
effort. Twenty-three firms responded. Several of the requests for 
information concerned the average collection rates and fees for 
contracts similar to the ones contemplated under this proposal. The IRS 
also obtained average collection rates and fee information for state 
and local government receivables.
    Based on this information, the IRS's current inventory of 
outstanding tax liabilities closed for workload balancing purposes, and 
the IRS's expected future inventory of tax liabilities with similar 
classification, the proposal is expected to return an incremental 
$1.008 billion to the Treasury over 10 years. The Treasury Department 
and the IRS are continuing their review of this estimate.
Conclusion
    Mr. Chairman, in conclusion, the Administration's proposal to 
permit the IRS to use PCAs could be an important tool to support our 
overall compliance program. Taxpayer rights will be protected to the 
fullest and the real beneficiaries of this program will be the 
overwhelming majority of America's taxpayers who play by the rules and 
expect everyone else to do the same.

                                 

    Chairman HOUGHTON. Well, thank you very much. I have a 
question, and then I will turn it over to you, Earl, and then 
we can go back and forth. Now, you have only been on the job--
what--a week?
    Mr. EVERSON. A week. It seems a little longer, but----
    Chairman HOUGHTON. All right. You will never be more 
objective than you are now. Let me ask you a personal question 
here. If you had been on the job 2 years ago, would you have 
initiated this type of program, knowing what you knew then?
    Mr. EVERSON. Let me say this because that sounds like it is 
trying to look back at what happened under the previous 
Commissioner.
    Chairman HOUGHTON. Oh, I do not mean to----
    Mr. EVERSON. Maybe that is not the----
    Chairman HOUGHTON. No, no. I do not mean to throw any cold 
water on former Commissioner Rossotti because he did an 
absolutely great job.
    Mr. EVERSON. You mean you think there should have been----
    Chairman HOUGHTON. All of a sudden you are thrust into this 
thing.
    Mr. EVERSON. Right.
    Chairman HOUGHTON. Would you have done this thing this way 
and now?
    Mr. EVERSON. I do not think that there is any question that 
it makes sense to do this initiative. Appropriate resources are 
scarce. After Commissioner Rossotti got in, he had to redirect 
the IRS very clearly toward the service side of the business. 
That involved to a certain degree a poaching from the 
enforcement side.
    He has talked about that. He laid it all out in his end-of-
term report, which I know you have seen, and so that does go 
back into the period you talk about. What this initiative does 
is it enables you to get to a piece, and only a piece, of this 
whole enforcement question. The Ranking Member, Mr. Pomeroy, is 
quite correct in stating we need to be working on high-end 
taxpayers, the tax shelter schemes, all these areas.
    This is another piece of it, and we can get to this piece 
of it without the appropriated resources, and we can do it with 
the proper controls. So, my answer is, yes, this is a tool that 
the IRS should have available to it, and I think it is a good 
tool now, 2 years ago, 10 years ago, as with the Education 
Department when they began using PCAs, or in the future.
    Chairman HOUGHTON. So, in effect, just to follow this up 
very briefly, you feel that control, and you just mentioned 
this, is adequate to sidestep some of the problems which they 
had with the original IRS agents in trying to get an incentive 
to bring people into court just for their own financial 
benefit? You think that is controllable with these outside 
agencies?
    Mr. EVERSON. I think it is, sir. We have worked very 
closely with the Taxpayer Advocate and the proposal that has 
been developed. It builds off of a balanced scorecard concept 
that looks at issues like customer satisfaction, employee 
satisfaction, a whole number of areas. It is not as simple as 
just saying maximize your return by the dollars you brought in. 
That will not necessarily generate additional casework for the 
various firms that will be involved.
    There will be a whole series of factors which will be 
carefully weighted to make sure that private collections are 
not judged solely on the amount of dollars coming in. I think 
we can handle that.
    Chairman HOUGHTON. Okay. Thank you very much. Mr. Pomeroy.
    Mr. POMEROY. Commissioner, following up on the Chairman's 
line of questioning, I look at this really as Plan B for the 
IRS, Plan A being staff up, staff up so that the IRS can do its 
work. If in 8 of the last 10 years, the IRS has been able to 
get through the OMB and into the President's budget a request 
for resources that Congress has reduced, again in 8 of 10 
years, clearly you were seeking a greater measure of internal 
capacity to address this debt question than you presently have. 
Is that correct?
    Mr. EVERSON. I think we are looking broadly to increase all 
the enforcement efforts along the lines of what you said. We 
need a balanced program. I am not interested at all in going 
after middle-income taxpayers or low-income taxpayers, and just 
leaving the people who have more and owe more on their own. Of 
course not. This is a relatively clear way to supplement that 
whole program, and again I am going to, as I made the statement 
last week before the Members of the House Committee on 
Appropriations--I am going to take a fresh look, and if we 
believe we need more resources on the enforcement side, we will 
bring forward proposals.
    This is a way of making sure that we can actually get to 
the inventory that is already out there and we will not need to 
actually even make that request. So, I think it is a pretty 
clean way of doing it.
    Mr. POMEROY. Although, Commissioner, I just think under the 
circumstances of its implementation, it is not going to be 
comprehensive in its reach. You do not propose that you will be 
freeing up institutional resources by these private debt 
collectors to have them applied to other work. They are going 
to be doing the same thing. These just go to pots of 
unrecovered debt that are sitting there unintended to; is that 
correct?
    Mr. EVERSON. That is absolutely correct, sir.
    Mr. POMEROY. Reclaiming my time to make my point, you talk 
about going after not those that involve some discretionary 
call or elaborate review of the legitimacy of the tax shelter, 
but rather debt where they have made some payments and then 
fallen off, or they have filed a return, and the check does not 
match what they owe. So, they indicate they are trying but they 
do not quite get there, but they need a little prod. They need 
a little kick in the backside to pay what they owe, and you and 
I are absolutely in accord on that. People need to pay what 
they owe and the IRS has to establish its absolute credibility 
and seriousness that it is going to demand enforcement.
    You are going to be required to pay what you owe or there 
will be consequences. I do not know how we run a tax program 
without that deeply imbedded in our institutional framework----
    Mr. EVERSON. Right, yes.
    Mr. POMEROY. The people's understanding of government. The 
only things certain are death and taxes.
    Mr. EVERSON. Yes.
    Mr. POMEROY. Tax collection is part of taxes.
    Mr. EVERSON. It should be, yes.
    Mr. POMEROY. If we get to this situation where the only 
people we are getting are those people that are filing a little 
bit and are paying a little bit and then not, it would seem to 
me that inherently that new effort is geared to middle and 
moderate income households. I would expect most of these would 
be in the $75,000 and below category. Wouldn't you, fairly?
    Mr. EVERSON. That may very well be the case, but again in 
the budget request that the President has put forth, he has 
asked for additional moneys to attack these other problems that 
you are referencing, and that I am very sensitive to as well. 
Honestly, I think we cannot afford to say that we are going to 
ignore any area. We have to have a feeling that there is an 
obligation to comply across the spectrum of the taxpaying 
public, and clearly we are going to target and work very 
heavily in coming months on the corporate abuses, the tax 
shelters, the offshore schemes, all of these areas. That is 
where we are going to put the appropriate resources.
    Mr. POMEROY. Commissioner, I think that the public is going 
to look at this with somewhat of a jaundiced eye if, for 
example, the Senate has proposed this in a pay-for as part of 
their tax bill. Now, I do not know what their bill is by way of 
breakdown, but the bill that came out of this Committee had 
about 75 percent of the tax relief going to the top 5 percent 
in terms of income of U.S. households over the next 10 years.
    If connected with that, we have a new collection initiative 
using private bill collectors sent out across the land targeted 
at those under $75,000 as part of the same package, that is 
going to seem viciously unfair to people.
    On the one hand, if you are $75,000 and below, you do not 
get much under the tax bill, and by the way expect a call 
because we are going to send some private bill collectors after 
you to collect the debt you owe. I think that maybe Congress 
will want to think long and hard about whether we want to 
cobble both of those elements in the same package if this is a 
legitimate endeavor, and I certainly respect the seriousness 
and professionalism of your approach in trying to collect what 
is owed to the IRS.
    This would be a bad way to start it, I think. I think there 
would be a lot of cynicism out there about this. Anyway, that 
is not a IRS issue. That is a political issue, but I very much 
appreciate your testifying today. I yield back, Mr. Chairman. 
Thank you.
    Chairman HOUGHTON. Just to pick up on that a little bit, 
maybe I misunderstood, but I do not think you were thinking of 
picking on any one particular group. There is a whole variety 
of people who are fudging on their taxes willfully or just out 
of ignorance. You are trying to do that, and then in terms of 
the 5 percent figure, you know the whole concept is when you 
put a tax bill in, you ask people in the higher categories to 
pay more of the tax, and when you take a tax off, they are in 
necessity of relief that they would not have gotten under 
ordinary circumstances.
    So, I think what you are trying to do, if I understand it--
I do not mean to be answering your question--but to try to even 
this thing out.
    Let me ask you another question. You plan to require 
companies to comply with this so-called Fair Debt Collection 
Practices Act (FDCPA) (P.L. 104-208), which is a tough consumer 
law that regulates the private debt collection industry. Can 
you explain what this means and why it is important?
    Mr. EVERSON. Well, yes, Mr. Chairman. There will be a very 
rigorous procurement process to make sure we get qualified 
effective organizations but also those that will act 
responsibly in the conduct of this matter. My understanding of 
that act is that it governs issues such as PCAs' conduct 
relative to harassing people at certain hours, odd hours of the 
day or night, and the FDCPA very much controls what kind of 
contact they can or cannot make with the individual that owes 
the money. So, we will be following that.
    It is my understanding that this process is being practiced 
by the Education Department. It is not a statutory requirement, 
but it is one they impose on their collectors, so it is not as 
if new ground is being broken here, sir. I think this is well 
understood out in the industry as to how that applies. We will 
absolutely assure that standards regarding contact with 
individuals are applied. We will go beyond that, in fact.
    I would note, again, that in the Education Department, the 
PCAs actually have some authority to settle and negotiate some 
of these issues. We are not giving that authority to the PCAs. 
Under our proposal, the PCAs would be limited to call up and 
say, Mr. Pomeroy, you have a balance due of $10,000; would you 
like to pay that? Would you like to pay that all at once? Would 
you like to pay that over a period of up to 3 years?
    Mr. POMEROY. This is a hypothetical example, Mr. Everson?
    Mr. EVERSON. I am not allowed to disclose any individual 
taxpayer information.
    Chairman HOUGHTON. He says he is going to refer it to Mr. 
Houghton who has got to pay even more.
    [Laughter.]
    Mr. EVERSON. Anyway, that is how it would work and, yes, we 
would adhere to that.
    Chairman HOUGHTON. I have another. We have spent a lot of 
time and money in terms of the computer system and the methods 
of managing cases. We assume that that is going to go hand-in-
hand with this other program. We are just not going to stop.
    Mr. EVERSON. No, Mr. Chairman, you are absolutely right. My 
understanding is that this would require an additional 
incremental investment now, something $10 to $15 million, to 
develop a system, because we have to work very carefully with 
the PCAs in terms of the data they would gather. It would be 
very limited. Once you establish a program where somebody 
agreed to pay over a 3 year period, you have to make sure you 
are able to track it, and that information is fed into the IRS.
    So, we will have to find some money and we will do this. 
The IRS spends $2 billion a year on Information Technology 
(IT), so I would like to believe that we will be able to find 
money to get this system going and there will be overall work 
on collection systems as part of the bigger modernization 
effort as well.
    Chairman HOUGHTON. Well, I do not have any other questions. 
Do you, Earl?
    Mr. POMEROY. No, I think we have covered it.
    Chairman HOUGHTON. All right. Good. Listen, thank you very 
much. I certainly appreciate your coming in. We look forward to 
working with you.
    Mr. EVERSON. Thank you.
    Chairman HOUGHTON. Now the second panel is Ms. Nina Olson, 
National Taxpayer Advocate of the IRS; Ms. Pam Gardiner, Acting 
Treasury Inspector General for Tax Administration (TIGTA), in 
the Treasury Department; Ms. Colleen Kelley, President of the 
National Treasury Employees Union (NTEU); and Mr. Alan Felton, 
who is the Assistant Secretary for Examinations and Collections 
in North Carolina Department of Revenue.
    Ladies, gentlemen, we are delighted to have you here, and 
do not forget that there is a 5 minute rule, and if you can do 
it any shorter than that, that would be okay also, whatever you 
want, but watch that red light.
    So, why don't we start, Ms. Olson, with you, if you are 
ready. If not, we will wait for you.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
                    INTERNAL REVENUE SERVICE

    Ms. OLSON. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Okay. Thank you.
    Ms. OLSON. This past year I have, in fact, worked closely 
with the IRS and Treasury Department so that taxpayer rights 
and confidentiality are protected in contract collection 
arrangements. As you know, the Federal Government cannot 
constitutionally delegate to private parties any power 
inherently governmental, as evidenced by the exercise of 
judgment and discretion. The government can contract out 
ministerial acts, but it must retain sufficient control over 
the private contractors to ensure against arbitrary or self-
serving use of government power.
    This oversight and control is particularly important where 
Federal tax debt is concerned because our tax system relies on 
the willingness of taxpayers to voluntarily report, file, and 
pay their taxes. That willingness will be eroded if taxpayers 
believe that the government or its contractors are acting 
capriciously in collecting the tax.
    There is no question that the IRS must augment its current 
efforts to collect outstanding tax debts. It may be true that 
IRS employees are the best qualified and most efficient tax 
collectors. However, in the absence of funding to hire 
additional employees to work this inventory, PCAs could be used 
for the collection of those tax debts which by definition and 
careful selection are easily resolvable and not subject to 
dispute.
    Of course, any such arrangement must meet constitutional 
requirements. Here are some of my major concerns for this type 
of arrangement. First, IRS employees and PCA employees must 
work on a level playing field. The PCA employees must be 
subject to the same restrictions and penalties for overreaching 
as are IRS employees. Otherwise, the IRS could get around 
taxpayer protections Congress enacted by simply contracting out 
tax collection.
    The PCA employees should not be permitted to work on 
accounts other than IRS cases and information obtained from 
working an IRS account regardless of source cannot be used for 
a non-IRS account that the PCA has involving that taxpayer.
    Consumer groups and tax professionals have raised several 
issues including the IRS's ability to conduct live as well as 
taped monitoring of taxpayer calls, the application of FDCPA to 
the PCAs without exception or exemption, and limits on the use 
of subcontractors.
    Using subcontractors increases the IRS's oversight burden 
and could have the effect of weakening taxpayer protections 
including confidentiality of tax return information. We 
recommend that PCAs be prohibited from using subcontractors or 
leased employees in any activity that involves direct taxpayer 
contact or direct contact with or handling of taxpayer 
information in activities other than skip tracing.
    The legislation should clarify that subcontract employees 
be subject to the same restrictions and liabilities as PCA 
employees. When a subcontractor violates a contract provision, 
it may be appropriate to impose a penalty on the contractor as 
well.
    Today, IRS employee performance evaluation is based on 
balanced measures: employee satisfaction, customer 
satisfaction, and business results. The proper balance between 
these three aspects of tax administration creates good customer 
service and prevents abuses. Compensation arrangements with 
PCAs must reflect a similar approach.
    If we do not structure compensation incentives properly, 
PCA employees may place taxpayers into inappropriate payment 
arrangements or fail to refer cases back to the IRS or the 
Taxpayer Advocate Service (TAS).
    Proper case selection is essential for success of this 
program. If the IRS does not select cases carefully, PCA 
employees will send these cases back to the IRS to be worked. 
We will have a new backlog of cases, having resurrected the 
taxpayer from one queue only to be placed into the black hole 
of yet another queue.
    Finally, taxpayers must have access to the TAS. The PCA 
employees must advise taxpayers that if they are experiencing a 
significant hardship, TAS may be able to help. Moreover, the 
National Taxpayer Advocate should have the same statutory 
authority to intervene in a PCA case and over PCA employees as 
she has over other IRS employees. She must also have the 
authority to issue a taxpayer assistance order to remove the 
case from the PCA to the IRS for consideration.
    When I was in private practice representing taxpayers in 
State tax collections by PCAs, I witnessed first-hand many of 
the abuses that the IRS proposal tries hard to avoid. Because 
of these experiences and the concerns expressed by many others, 
I have worked with the IRS and Treasury Department to structure 
a proposal that if authorized will be a model for protection of 
taxpayer rights. Although I would prefer that we not contract 
out collection of tax debts, I believe that this proposal can 
meet constitutional requirements, create a level playing field, 
protect taxpayer rights and confidential information and 
actually result in fair and accurate tax collections.
    Should Congress authorize the use of PCAs to collect 
Federal tax debt, my office will actively monitor its 
implementation. Thank you for the opportunity to speak today.
    [The prepared statement of Ms. Olson follows:]
   Statement of Nina E. Olson, National Taxpayer Advocate, Internal 
                            Revenue Service
    Mr. Chairman and members of the committee, thank you for inviting 
me here today to testify about the proposal to contract out the 
collection of certain categories of tax debt to private collection 
agencies. I must state at the outset that I have a level of discomfort 
with the concept of using private collection agencies (PCAs) based on 
my earlier professional experiences representing taxpayers in states 
that utilize PCAs.[1] Much to their credit, both the 
Department of Treasury and the Internal Revenue Service have included 
the Office of the Taxpayer Advocate in the development of this proposal 
and have sought to accommodate my office's concerns wherever and 
whenever possible. In my testimony today, I will outline some of those 
concerns and the proposal's attempts to address them.
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    \[1]\ Internal Revenue Service: The Commissioner's Final Report: 
Hearing before the House Comm. On Gov't. Reform, Subcomm. on Gov't. 
Efficiency, Financial Management and Intergovernmental Relations, 107th 
Cong. 107-169 (2002) (Statement of Nina E. Olson, National Taxpayer 
Advocate, Internal Revenue Service).
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The Inherently Governmental Nature of Tax Collection
    As early as 1819, the United States Supreme Court recognized that 
the Federal Government's taxing power is ancillary to its 
sovereignty.[2] In McCulloch v. Maryland, Chief Justice 
Marshall stated that the power to tax ``is an incident of sovereignty, 
and is coextensive with that to which it is incident.'' Thus, that 
power--to assess and collect taxes--is ``inherently governmental.'' The 
hallmark of an inherently governmental function is one that requires 
the exercise of discretion in interpreting and executing the law. It is 
a function that is recognized as ``so intimately related to the public 
interest as to mandate performance by Government employees. . . .'' 
[3] An inherently governmental function cannot be delegated 
by the government to private parties.[4] A ministerial 
function, however, may be delegated to private parties.[5]
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    \[2]\ Marshall v. McColloch, 17 U.S. 316, 429 (1819).
    \[3]\ OMB Circular No. A-76,  6(e) (1999). The proposed revision 
of OMB Circular No. A-76 states at (E)(1) that ``[a]n inherently 
governmental activity is an activity that is so intimately related to 
the public interest as to mandate performance by governmental 
personnel.'' (November 14, 2002.)
    \[4]\ Carter v. Carter Coal Co., 298 U.S. 238 (1936).
    \[5]\ In the context of interest abatement, the IRS defines a 
ministerial act as one that does not involve the exercise of judgment 
or discretion. Treas. Reg.  301.6404-2(b)(1).
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    Within these constitutional parameters, Congress has broad 
authority to delegate such governmental powers. Such delegations must 
establish clear standards that detail how and when private parties may 
exercise government power. The delegating governmental body must 
conduct sufficient oversight, including the establishment of procedural 
safeguards, and retain sufficient control over private delegates to 
ensure against arbitrary or self-serving use of government power. Under 
such delegations of government authority, private parties are 
essentially limited to advising the government and performing 
ministerial acts. Functions involving the exercise of discretion are 
reserved to the government itself.
    Where the Federal Government seeks to delegate the collection of 
federal tax debt to private parties, the activities must be limited to 
those that do not involve the exercise of discretion. The Federal 
Government must structure the terms of the contract and its 
implementation so that the government has close oversight and control. 
The head of the delegating agency must retain the authority to resolve 
disputes, compromise claims or terminate the collection 
action.[6] Finally, the Federal Government cannot dilute the 
rights and protections taxpayers otherwise enjoy merely by contracting 
out certain functions to private parties.
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    \[6]\ 31 U.S.C.  3718(a).
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The Unique Nature of Tax Debt
    I believe that taxes are fundamentally different from other types 
of debt owed to the Federal Government for several reasons. First, 
unlike other federal obligations, taxes are the ``lifeblood'' of the 
government.[7] Second, because our tax system relies on the 
willingness of taxpayers to voluntarily report, file, and pay their 
taxes, there is the potential for an erosion of that willingness, if 
taxpayers believe that the government or its contractors are acting 
capriciously in collecting the tax. Third, the correct tax liability 
often cannot be determined from the ``four corners'' of the taxpayer's 
own return or even an IRS notice, thus, taxpayers are allowed to 
dispute the correctness of a tax assessment, including their own 
original assessment on a return. Taxpayers, the IRS and the courts are 
often called upon to interpret the Internal Revenue Code and 
regulations to determine the actual tax debt, and taxpayers can 
challenge the amount of actual liability up to two years after their 
last payment. These qualitative differences between tax debts and other 
government accounts raise, in turn, serious practical challenges for 
contracting out the collection of federal tax debt.
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    \[7]\ Bull v. United States, 295 U.S. 247, 259 (1935).
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The Current Tax Gap and Potentially Collectible Inventory
    Today, the Internal Revenue Service has a known $78 billion 
inventory of potentially collectible debt, up from $68 billion in 
September, 2000. Of the $78 billion potentially collectible inventory 
(PCI), approximately 38 percent is in inactive status. This is debt 
that the taxpayer has either agreed is due and owing and/or on which 
the taxpayer has made at least three payments, yet the IRS is unable to 
collect because it cannot locate the taxpayer or does not have 
sufficient resources.
    Most commentators, practitioners, and IRS employees believe that 
the IRS can collect federal tax debt more efficiently than private 
contractors. The IRS possesses many powerful tools with which to 
collect debt. The application of liens, levies, other seizures, 
compromises of tax, abatements of penalties and interest, the 
determination of allowable expenses for purposes of an installment 
agreement or ``currently not collectible'' hardship status--all of 
these procedures involve the exercise of discretion. Issues arise in 
the course of tax collection that may require the IRS to revisit the 
underlying tax liability. Any attempt to collect tax is also an 
opportunity to educate the taxpayer about his or her rights and 
obligations under the Internal Revenue Code. As government employees, 
IRS employees are trained in aspects of these procedures and are, to 
various degrees, authorized to exercise discretion, where appropriate, 
in the collection of federal tax debts.
    However, Congress can reasonably conclude that it would make sense 
for these valuable IRS resources to be applied to those aspects of tax 
enforcement, including collection of intractable or elusive tax 
accounts, that absolutely require the unique skills IRS employees 
possess. Within constitutional boundaries, private contractors could 
reasonably be used for the collection of those tax debts which, by 
definition and careful selection, are easily resolvable and not subject 
to dispute.
The Level Playing Field
    Particularly with respect to the collection of federal tax debt, 
Congress has seen fit to provide taxpayers with significant due process 
protections and to place restrictions or requirements on IRS employees 
whose function is to collect federal taxes.[8] Any 
delegation of even ministerial authority must not dilute those rights 
but rather must ensure that IRS employees and contract employees 
operate on a level playing field. Otherwise, the IRS could subvert 
existing taxpayer protections by simply contracting out the collection 
of federal tax debt.
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    \[8]\ These procedures include the lien and levy collection due 
process hearings under IRC  6320 and 6330; the right to appeal an 
offer in compromise or installment agreement determination under 
section 7122(d); the taxpayer protections under RRA 98 section 1203; 
and a right of action against the IRS for its employees' negligent 
collection activity under IRC  7433.
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    Therefore, any proposal for contracting out the collection of 
federal tax debt must, at a minimum, incorporate the following 
protections:

     LProvisions similar to those under section 1203 of the 
Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) 
[9] that protect the taxpayer from harassment, threats, 
retaliation, and that provide for similar sanctions (including 
termination of employment) against any PCA employee who, after 
investigation, has been found to have committed one or more of the 
prohibited acts.
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    \[9]\ Pub. L. No. 105-206 (1998).
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     LContractor liability for PCA employees' negligent 
collection actions, to the same extent as is applicable to the IRS 
under IRC section 7433.
     LRestrictions on taxpayer information shared with PCAs to 
that which is necessary for the PCA to locate the taxpayer and to 
collect the tax. Generally, this would only include the taxpayer's 
name, last known address, tax year, type and amount of tax liability, 
amount and date of payments made toward the tax debt, and the portion 
of the tax liability attributable to tax, penalty and interest.
     LA prohibition that bars Private Collection Agency 
employees working on IRS accounts from working on any other PCA 
account. Similarly, any information obtained in the course of working 
an IRS account, whether from the IRS, from the taxpayer, or from some 
third source, cannot ``migrate'' to a non-IRS account that the PCA has 
involving that taxpayer.
Implementation Issues
    There are, of course, significant practical concerns regarding the 
implementation of this proposal which would not only limit its success 
in terms of tax collection but also impose undue burdens on taxpayers. 
During the months I worked with Treasury and the IRS to ensure that 
taxpayer rights were protected, I heard from many tax practitioners, 
low income taxpayer clinics, and consumer groups. Here are some of the 
practical concerns raised by my office and others about this proposal.
    Selection of Appropriate Cases. The IRS has stated that it will 
only send to PCAs those cases that meet the following criteria:

    L  (1) the taxpayer has either agreed to the tax debt and/or has 
made three or more payments toward that debt; and
    L  (2) the taxpayer appears to have the ability to pay this debt in 
full immediately or within 36 months.

    It is vital to the success of this proposal that only those cases 
that fit these parameters are selected and referred to the PCAs. If PCA 
employees receive cases and make contacts with taxpayers, only to find 
that taxpayers frequently cannot full pay the tax debt either 
immediately or within 36 months; or they request penalty or interest 
abatements; or they are candidates for offers-in-compromise or 
currently-not-collectible status; or they challenge the underlying 
liability, then these cases, which must be referred back to the IRS for 
resolution because they require the exercise of discretion, will create 
a backlog and be counterproductive. We will have resurrected the 
taxpayer's account from the ``black hole'' of inactive potentially 
collectible inventory and contacted the taxpayer, only to have the 
account fall into another queue for the collection of unpaid taxes--
albeit a specific, dedicated queue.
    Thus, the Service's initiatives for case analysis and selection 
must be carefully planned, scrutinized, and funded. Systems must be in 
place to identify trends in case selection on an ongoing basis and to 
quickly alter the selection algorithms when problems arise.
    Access to and Authority of the Office of the Taxpayer Advocate. IRS 
Publication 1, ``Your Rights as a Taxpayer,'' describes the role of the 
Office of the Taxpayer Advocate and will be enclosed in each PCA 
contact letter. However, as a safeguard against any overreaching on the 
part of PCAs, PCA employees should advise taxpayers that if they are 
experiencing a significant hardship, the Taxpayer Advocate Service may 
be able to assist them. The Taxpayer Advocate Service must have the 
opportunity to provide training to PCA employees about how to recognize 
a significant hardship situation under IRC section 7811, so that if a 
PCA employee discovers a situation in his later dealings with the 
taxpayer, he can remind the taxpayer about access to the Taxpayer 
Advocate Service.
    Finally, the National Taxpayer Advocate and her employees should 
have the same statutory and delegated authority to intervene in a PCA 
case and over PCA employees as they have over IRS employees, including 
the authority to issue a Taxpayer Assistance Order to the IRS to have 
the case removed from the PCA to the IRS for consideration. We do not 
have this authority today.
    Compensation and Balanced Performance Measures. IRS employees are 
prohibited from being evaluated based on Records of Tax Enforcement 
Results.[10] Today, IRS employee performance evaluation is 
based on balanced measures--employee satisfaction, customer 
satisfaction, and business results. The proper balance between these 
three aspects of tax administration creates good customer service and 
prevents abuses. The compensation arrangements with the PCAs must 
reflect a similar approach. PCAs must be measured not only by the tax 
that they collect or the accounts they bring to resolution but also by 
the appropriate referrals they make back to the IRS or to the Taxpayer 
Advocate Service. Moreover, while it may be too much to expect that 
taxpayers contacted by the PCA will be happy that they are having to 
pay an aged tax debt, they can at least feel that they were treated 
professionally and courteously, that they received clear and helpful 
explanations about the debt, that their rights and recourse were 
clearly explained, and that their concerns were listened to and 
addressed. Thus, customer satisfaction should be prominently factored 
into PCA compensation.
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    \[10]\ RRA 98 section 1204.
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    In response to these concerns, the IRS plans to issue each PCA a 
monthly scorecard that will cover the three aspects of balanced 
measures, including customer satisfaction. Compensation will be tied to 
the scorecard results. Further, the IRS plans to tie the placement of 
future work (and future PCA revenue) to that score, such that it will 
place additional cases with those companies having the highest score. I 
do not know if this approach strikes the right balance to compensation; 
I believe this is an issue that Congress should review very carefully.
    I am keenly aware that PCA compensation must be structured so that 
we do not create incentives for PCA employees to encourage taxpayers to 
enter into payment arrangements that they will not be able to keep or 
disincentives for PCA employees to refer cases back to the IRS or to 
the Taxpayer Advocate Service. If Congress authorizes the Secretary to 
contract out the collection of federal tax debt, my office will be 
closely monitoring the performance, evaluation, and compensation of 
PCAs.
    Monitoring and Supervision of PCAs. During the development of this 
proposal, the IRS team (which included a representative of the Taxpayer 
Advocate Service) studied and visited several private collection 
agencies, including those that collected state tax debts and other 
federal agency debts. I, too, discussed this issue with tax 
professionals and advocates who represented individuals before private 
collection agencies. The IRS learned a great deal from all of these 
contacts and has designed what I think is a commendable approach to 
monitoring and supervising the PCAs.
    Unlike many other agencies, the IRS intends to conduct live call 
monitoring in addition to taping calls to ensure that taxpayers are 
treated appropriately. The IRS will also have an on-site presence at 
each private collection agency. Cases referred from a PCA to the IRS 
for resolution will go to a dedicated unit, so that the IRS can monitor 
the effectiveness of referrals and quickly resolve open issues.
    The Office of the Taxpayer Advocate will actively monitor the 
implementation of this initiative. Referrals from PCAs to the Taxpayer 
Advocate Service will go to one or two locations so that my office can 
quickly analyze and identify trends. My office will independently 
review all of this information and make recommendations for improvement 
of protections, oversight, training and other issues. An analyst from 
my office will work routinely and directly with the IRS to discuss and 
share any suggestions and trends. Finally, I will include regular 
reports on this initiative in my annual reports to Congress under IRC 
section 7803.
    Fair Debt Collection Practices Act. It is my understanding that the 
Fair Debt Collection Practices Act [11] will apply, without 
exemption or exception, to all private collection agencies under this 
proposal. I believe that this is an important distinguishing feature 
between the IRS proposal and other federal or state agencies' use of 
private debt collectors. That is, other government agencies either do 
not apply the provisions of the FDCPA to their private collection 
contractors or exempt these contractors from some provisions of the 
Act.
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    \[11]\ 15 USC  1692.
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    PCA Use of Subcontractors. The use of subcontractors or leased 
employees by private collection agencies in the course of collecting 
federal taxes raises several difficult issues. Since protecting the 
confidentiality of taxpayer information is paramount, the use of 
subcontractors to collect taxes, or to process taxpayer correspondence, 
or even to prepare and mail notices to taxpayers will impose additional 
oversight burdens on the IRS, essentially forcing it to monitor two 
entities for conformity with taxpayer protections. The use of a 
subcontractor may be thought to be a means to dilute the liability of a 
contractor for violation of taxpayer rights or other provisions. On the 
other hand, it may be industry practice to contract out certain 
activities, such as skip-tracing.
    In light of these concerns, my office recommends that PCAs be 
prohibited from using subcontractors or leased employees in any 
activities that involve (1) direct taxpayer contact or (2) direct 
contact with or handling of taxpayer information in activities other 
than skip-tracing. The legislation should specifically address this 
issue, and should clarify that employees of permitted subcontractors 
are subject to the same restrictions and to the same liability as PCA 
employees with respect to federal tax collection. In fact, where a 
subcontractor has violated one of the contract provisions, it may be 
appropriate to impose a penalty on the contractor as well. This penalty 
regime would reinforce the need for serious oversight of subcontractor 
activities.
    Correspondence with Taxpayers. The reporting, filing and payment of 
taxes is the primary contact most taxpayers have with the Federal 
Government on a routine basis. Since our tax system depends on the 
willingness of taxpayers to come forward and voluntarily report, file 
and pay taxes, the IRS must take every step necessary to reassure 
taxpayers that their rights and their tax information are secure. I 
believe that taxpayers may be alarmed if they receive a letter, direct 
from a PCA, requesting payment of their federal tax debt. I believe 
this is true even where those same taxpayers are accustomed to dealing 
with PCAs for collection of student loans or state taxes. I attribute 
this to the unique nature of federal tax debt, discussed above, and to 
the fact that Congress has afforded federal taxpayers with rights and 
protections that exceed those available with respect to other federal 
agency or state tax debts.
    Thus I believe that the first communication with a taxpayer whose 
account will be handled by a PCA should come from the IRS. This letter 
should clearly inform the taxpayer that a PCA will be contacting the 
taxpayer; it should outline what the taxpayer has the right to expect 
of the PCA, both in terms of PCA conduct and case resolution, and it 
should provide the taxpayer with a toll-free number for reporting PCA 
misconduct or grievances. The IRS letter would then be followed by the 
PCA's initial contact letter, which would include Publication 1. This 
sequence of letters would clearly inform the taxpayer of this new 
program and his or her rights thereunder (a communication that should 
come directly from the tax agency itself) while minimizing the 
possibility that the taxpayer will call the IRS directly to resolve the 
debt.
Conclusion
    The use of private collection agencies to collect federal tax debt 
is a complex issue. There is a clear need to work the tax debt that is 
languishing in our inactive but potentially collectible inventory--a 
need not just based on revenue but also on fairness to all other 
taxpayers who are dutifully paying their tax debts. Moreover, the IRS 
has many other demands on its use of limited resources and personnel; 
indeed, some of these demands, such as stemming various abusive tax 
schemes, threaten to undermine the very confidence in the tax system we 
are seeking to protect. In light of these competing concerns, PCAs 
appear a limited but reasonable option.
    However, I represented taxpayers in state tax collections by PCAs 
when I was in private practice. I witnessed first-hand many of the 
abuses that the IRS proposal tries hard to avoid. Because of these 
experiences, and the concerns expressed by many practitioners, IRS 
employees, consumer groups, and taxpayers, I have worked with the IRS 
and Treasury to structure a proposal that, if Congress so authorizes, 
will be a model for federal debt collection in terms of the protection 
of taxpayer rights. My office will be watching closely to ensure that, 
if authorized and implemented, this initiative succeeds in meeting its 
constitutional requirements, creates a level playing field between IRS 
and PCA employees, protects taxpayer rights and confidential 
information, and actually collects the correct amount of tax due.

                                 

    Chairman HOUGHTON. Thank you very much. Now, Ms. Gardiner.

  STATEMENT OF PAMELA J. GARDINER, ACTING TREASURY INSPECTOR 
GENERAL FOR TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY

    Ms. GARDINER. Mr. Chairman, Ranking Member Pomeroy, I 
appreciate the opportunity to appear before you today to 
discuss the IRS's progress regarding the use of collection 
agencies and my office's work in assessing this progress.
    The use of collection agencies to assist in the collection 
of Federal tax debt is not a new concept. In 1996, the IRS 
piloted the use of collection agencies and after a detailed 
internal evaluation concluded that their use was not 
economically viable.
    The IRS's current approach, however, differs significantly 
from the prior methodology. Most importantly, in 1996, the 
collection companies were compensated with moneys from the 
IRS's appropriated funds. In contrast, as part of its 2004 
budget submission, the IRS has requested authority to fund the 
use of collection companies directly from the moneys collected 
by those companies from taxpayers.
    The IRS plans to eventually place 2.6 million cases 
annually with collection companies. The Treasury Department 
projects that this initiative will produce revenue of as much 
as $1 billion through 2013. While this amount is significant, 
it represents a small portion of the $280 billion accounts 
receivable that were due at the end of fiscal year 2002.
    In a recent audit report, TIGTA identified that the IRS's 
preliminary planning efforts for using collection companies 
were extensive. The IRS carefully evaluated similar programs at 
other Federal and State government entities such as the 
Education Department and the State of Virginia, contacted 
subject matter experts regarding industry best practices, 
issued a draft request for quotation on February 14, 2003, and 
subsequently held an informational conference to solicit 
feedback and answer questions from potential contractors 
regarding the IRS's requirements.
    Although these efforts were good, TIGTA identified several 
areas where IRS planning could be enhanced: additional focus on 
the development of management information to improve the IRS's 
ability to oversee the program; better development of detailed 
requirements to help ensure taxpayer rights and privacy are 
protected; and a more measured initial release of cases to 
collection companies to provide IRS more data to determine 
staffing needed to effectively support this initiative.
    The IRS management agreed with all of these recommendations 
and indicated that they have already implemented corrective 
actions to address the findings in our report.
    One issue warranting future attention which is critical to 
the success of the program is the process of selecting which 
cases are given to the contractors. In the 1996 IRS pilot, most 
of the cases delivered to the collection agencies were small 
dollar delinquencies normally collected by the IRS at a minimal 
cost.
    However, the case selection process has changed over time 
at the IRS. In fact, the IRS has recently changed the methods 
used to determine which cases it works internally. These 
changes will affect the types of cases that the contractors 
receive, but the IRS has not yet officially finalized the 
method for selecting cases for this new initiative.
    We are also concerned generally with IRS's contract 
administration and oversight of contractors. The TIGTA has 
issued several audit reports and conducted investigations of 
alleged criminal or civil misconduct in the procurement area in 
the last 3 years, finding such things as:
    Employees at one lockbox bank lost or destroyed more than 
70,000 taxpayer remittances worth more than $1.2 billion, and 
another 71 investigations identified 14 instances of thefts of 
receipts valued at close to $2 million; an IRS employee ensured 
certain companies received contracts in exchange for illegal 
payments; and, a contractor was not in compliance with the 
terms of its contract resulting in increased security risk at 
some IRS locations.
    The IRS proposal to contract out the collection of 
delinquent accounts to private collection companies has the 
potential to recover a significant amount of IRS accounts 
receivable. Nonetheless, we will want to watch the effort 
closely to ensure the dual risks of protecting taxpayer rights 
and effective contract administration are addressed. This 
concludes my statement.
    [The prepared statement of Ms. Gardiner follows:]
Statement of Pamela J. Gardiner, Acting Treasury Inspector General for 
          Tax Administration, U.S. Department of the Treasury
    Mr. Chairman, Ranking Member Pomeroy, and Members of the 
Subcommittee, I appreciate the opportunity to appear before you today 
to discuss the IRS's progress regarding the use of collection agencies 
and my office's work in assessing this progress.
    The use of collection agencies to assist in the collection of 
federal tax debt is not a new concept. In 1996 the IRS piloted the use 
of collection agencies, and after a detailed internal evaluation, 
concluded that their use was not economically viable. The IRS' current 
approach, however, differs significantly from the prior methodology. 
Most importantly, in 1996 the collection companies were compensated 
with monies from the IRS's appropriated funds. In contrast, as part of 
its 2004 budget submission, the IRS has requested authority to fund the 
use of collection companies directly from the revenues collected by 
those companies.
    The IRS plans to eventually place 2.6 million cases annually with 
collection companies. Treasury projects that this initiative will 
produce revenue of as much as $1 billion through 2013. While this 
amount is significant, it represents a small portion of the $280 
billion in accounts receivable that were due at the end of FY 2002.
    In a recent audit report, TIGTA identified that the IRS's 
preliminary planning efforts for using collection companies were 
extensive. The IRS carefully evaluated similar programs at other 
federal and state government entities, such as the U.S. Department of 
Education and the State of Virginia, contacted subject matter experts 
regarding industry best practices, issued a draft Request for Quotation 
on February 14, 2003, and subsequently held an informational conference 
to solicit feedback and answer questions from potential contractors 
regarding the IRS's requirements.
    Although these efforts were good, TIGTA identified several areas 
where IRS planning could be enhanced:

     LAdditional focus on the development of management 
information to improve the IRS's ability to oversee the program.
     LBetter development of detailed requirements to help 
ensure taxpayer rights and privacy are protected.
     LA more measured initial release of cases to collection 
companies to provide IRS more data to determine staffing needed to 
effectively support this initiative.

    IRS management agreed with all of these recommendations and 
indicated that they have already implemented corrective actions to 
address the findings in our report.
    One issue warranting future attention, which is critical to the 
success of the program, is the process of selecting which cases are 
given to the contractors. In the 1996 IRS pilot, most of the cases 
delivered to the collection agencies were small dollar delinquencies 
normally collected by the IRS at a minimal cost. However, the 
collection case selection process has changed over time at the IRS. In 
fact, the IRS has recently changed the methods used to determine which 
cases it works internally. These changes will affect the types of cases 
that the contractors receive, but the IRS has not yet officially 
finalized the method for selecting cases for this new initiative.
    We are also concerned generally with IRS's contract administration 
and oversight of contractors. TIGTA has issued several audit reports 
and conducted investigations of alleged criminal or civil misconduct in 
the procurement area in the last three years, finding such things as:

     LEmployees at one lockbox bank lost or destroyed more than 
70,000 taxpayer remittances worth more than $1.2 billion, and another 
71 investigations identified 14 instances of thefts of receipts valued 
at close to $2 million.
     LAn IRS employee ensured certain companies received 
contracts in exchange for illegal payments.
     LA contractor was not in compliance with the terms of its 
contract resulting in increased security risk at some IRS locations.

    The IRS's proposal to contract out the collection of delinquent 
accounts to private collection companies has the potential to recover a 
significant amount of IRS accounts receivable. Nonetheless, we will 
want to watch the effort closely to ensure the dual risks of protecting 
taxpayer rights and effective contract administration are addressed. 
This concludes my statement. For further information on the Treasury 
Inspector General for Tax Administration's (TIGTA) work related to the 
use of debt collection agencies, see:

Management Advisory Report:
Additional Options to Collect Tax Debts Need To Be Explored
July 2001
Reference Number: 2001-40-122
http://www.treas.gov/tigta/2001reports/200140122fr.pdf

Efforts to Develop a Successful Collection Contract Support Program 
Could Be Enhanced
March 2003
Reference Number: 2003-30-075
http://web.tigta.treas.gov/aci-ia/03-AuditProgram/03-AuditReports/
FY03AuditReports/06Mar03/200330075fr.html

                                 

    Chairman HOUGHTON. All right. Well, thank you very much. 
Ms. Kelley.

 STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL 
                    TREASURY EMPLOYEES UNION

    Ms. KELLEY. Chairman Houghton, Ranking Member Pomeroy, I 
very much appreciate the opportunity to share the view of 
frontline IRS employees on turning over IRS tax collection 
responsibilities to private debt collectors.
    The NTEU strongly opposes hiring private tax collection 
agencies on a commission basis to collect tax debt. This 
proposal will cost the taxpayers more money than having this 
work done by IRS employees, and it will jeopardize the rights 
and the privacy of thousands of taxpayers by putting private 
taxpayer files in the hands of private companies.
    I urge the Subcommittee to reject this. If given the 
appropriate resources, IRS employees could collect outstanding 
tax debt at significantly less cost than contractors and avoid 
subjecting taxpayers to the unknown impact of providing their 
confidential tax information to private collection companies.
    In a report submitted to the IRS Oversight Board last 
September, former Commissioner Charles Rossotti made clear that 
with more resources to increase IRS staffing, the IRS would be 
able to close the compliance gap. Commissioner Rossotti stated 
that the IRS is simply outnumbered when it comes to dealing 
with the compliance risks.
    The Rossotti report found that while workload had increased 
16 percent over the last 10 years, the number of full-time 
employees dropped from 115,000 in 1992 to 95,000 in 2001. A 
disproportionate reduction occurred in field compliance 
personnel falling 28 percent from 29,000 in 1992 to 21,000 in 
fiscal year 2002.
    The Rossotti report quantified the workload gap noting that 
the majority of the workload gap is in compliance. It found 
that if Congress were to appropriate an additional $296 million 
to hire additional IRS compliance employees to focus on field 
and phone accounts receivable, the IRS could collect an 
additional $9.47 billion in known tax debts per year.
    In other words, for every dollar spent on implementing 
Commissioner Rossotti's plan, a net of $31 will be collected. 
Compare that to the administration's 25 percent commission 
scheme, $3.25 billion to collect $13 billion, that under the 
best case scenario nets only $3 for every taxpayer dollar spent 
versus the $31 if IRS employees were doing this work.
    According to the Joint Committee on Taxation, the 
administration's tax collection privatization proposal would 
bring in less than $1 billion over 10 years. The IRS could 
bring in that amount in 1 year with the appropriate resources. 
Steadily increasing compliance staffing levels at the IRS will 
give the taxpayers a return on their tax dollar that is 10 
times better than the privatization initiative being proposed.
    I would note that in a report issued just last week on May 
7 by the U.S. General Accounting Office (GAO), they noted that 
the IRS has not done a cost analysis on implementing the PCA 
initiative versus expanding the traditional use of IRS 
collection activities, and GAO noted we have not seen any plans 
to do so in the future.
    Tax collection has historically been defined as an 
inherently governmental function. As a result, legislation is 
necessary to allow contractors to perform this function. Two 
pilot projects were authorized by Congress to test the private 
collection of tax debt in 1996 and 1997.
    The 1996 pilot was so unsuccessful that the 1997 project 
was canceled. Contractors violated the FDCPA and did not 
protect the security of sensitive taxpayer information. An IRS 
internal audit report found that contractors made hundreds of 
calls to taxpayers outside of the time restrictions of the 
FDCPA, and calls were placed as early as 4:19 a.m.
    In addition, the contractors did not bring in anywhere near 
the dollars they projected and millions were spent by the IRS 
to train the contractors instead of doing their IRS work.
    The IRS has said that it has learned from the 1996 project 
and can now address the problems. The IRS has not shown, 
however, that it has contractor oversight systems or personnel 
in place to ensure that contractors comply with the laws and 
regulations that are in place to protect the taxpayers.
    The Mellon Bank lockbox program has already been mentioned 
as an example of the failure of contractor oversight by the IRS 
on this project.
    Section 1204 of the IRS Restructuring and Reform Act (RRA) 
1998 (P.L. 105-206) also specifically prevents IRS employees or 
supervisors from being evaluated on the amount of tax 
collections they bring in. This was done to eliminate 
incentives for overly aggressive tax collection techniques.
    Paying a contractor a percentage of what they collect 
clearly flies in the face of this policy and ensures that the 
employees of the contractors will do what they need to do to 
produce, knowing that they won't have a job if they do not.
    The NTEU is not alone in opposition to this proposal. 
Earlier this month, the National Association of Enrolled Agents 
testified about the risk of taxpayer information being 
released, and the Tax Section of the American Bar Association 
pointed out paying vendors a percentage of collections is 
inconsistent with RRA 1998.
    The risk of paying contractors commissions to collect taxes 
are great. Instead, the IRS should increase compliance staffing 
levels at the IRS so that the IRS employees can do the work 
that they do very well, and if funded to do so, there is no one 
who could do this work better on behalf of America's taxpayers. 
Thank you.
    [The prepared statement of Ms. Kelley follows:]
 Statement of Colleen M. Kelley, National President, National Treasury 
                            Employees Union
    Chairman Houghton, Ranking Member Pomeroy, and other distinguished 
Members of this subcommittee, my name is Colleen Kelley and I am the 
National President of the National Treasury Employees Union (NTEU). 
NTEU represents 150,000 federal employees in 28 federal agencies and 
departments, including the men and women who work at the Internal 
Revenue Service (IRS). I appreciate you giving me the opportunity to 
share the views of frontline IRS employees on turning over IRS tax 
collection responsibilities to private debt collectors.
    Let me be very clear: NTEU strongly opposes hiring private tax 
collection agencies on a commission basis to collect tax debt. This 
proposal will cost the taxpayers more money than having this work done 
by IRS employees, and will jeopardize the rights and privacy of 
thousands of taxpayers by putting millions of taxpayer files in the 
hands of private companies. There are also serious questions regarding 
the government's liability and taxpayer remedies should such 
information be misused and whether the IRS has the needed technology to 
select appropriate cases. This scheme is costly, risky, and would lead 
to a gross invasion of the privacy of American taxpayers. I urge this 
subcommittee to reject it.
                    Spending Taxpayer Dollars Wisely
    Even the IRS will acknowledge that if given the appropriate 
resources, IRS employees could collect outstanding tax debt at 
significantly less cost than contractors and avoid subjecting taxpayers 
to the unknown impact of providing their confidential tax information 
to private collection companies. In a report submitted to the IRS 
Oversight Board last September, titled ``Assessment of the IRS and the 
Tax System,'' former Commissioner Charles Rossotti made clear that with 
more resources to increase IRS staffing, the IRS will be able to close 
the compliance gap. Commissioner Rossotti stated that ``the IRS is 
simply out-numbered when it comes to dealing with the compliance 
risks.''
    The Rossotti report found that while workload had increased 16% the 
number of full time employees dropped from 115,205 in FY 1992 to 95,511 
in FY 2001. A disproportionate reduction occurred in Field Compliance 
personnel, falling 28% from 29,730 in FY 1992 to 21,421 in FY 2002. 
From 1997 through 2002 the IRS has lost an additional 2,952 employees.
    The Rossotti report quantified the workload gap, noting ``the 
majority of the workload gap is in compliance.'' (See attached charts.) 
It found that if Congress were to appropriate an additional $296 
million to hire more IRS compliance employees to focus on Field and 
Phone Accounts Receivable, the IRS could collect an additional $9.47 
billion in known tax debts per year. This would be a $31 dollar return 
for every dollar spent. Compare that to the Administration's 25% 
commission scheme--$3.25 billion to collect $13 billion or a $3 dollar 
return for every dollar spent. According to the Joint Committee on 
Taxation, the Administration's tax collection privatization proposal 
would bring in less than $1 billion over ten years. The IRS could bring 
in that amount in one year with just over $30 million in additional in-
house enforcement resources.
    Plain and simple, we can avoid putting taxpayer information in the 
hands of private collectors by steadily increasing compliance staffing 
levels at the IRS and, in the process, give the taxpayers a return on 
their tax dollar that is ten times better than the privatization 
initiative being proposed. Yes, I am a certified public accountant, but 
this is math my six year old nephew understands.
        Privatization of Tax Collection Was Tried and It Failed
    Tax collection has historically been defined as an inherently 
governmental function, and therefore private contractors have been 
prevented from bidding for this work. As a result, legislation is 
necessary to allow contractors to perform this inherently governmental 
function. Two pilot projects were authorized by Congress to test 
private collection of tax debt for 1996 and 1997. The 1996 pilot was so 
unsuccessful that the 1997 project was cancelled. Contractors violated 
the Fair Debt Collection Practices Act (FDCPA) and did not protect the 
security of sensitive taxpayer information and the IRS officials 
charged with oversight of the contracts were ill-informed of the law 
and lax in their duties, failing to cancel the contracts of those in 
violation even though they had the authority to do so.
    An IRS Internal Audit Report (Reference No. 080805, 12/19/97) found 
that reviews of only a small number (18 to 40 days) of telephone 
records for three contractors found 294 instances of completed calls 
placed before 8 a.m. or after 9 p.m., the times prohibited by the act. 
Calls were placed as early as 4:19 a.m. (p. 15). The audit found that 
IRS ``Collection officials were unaware that phone calls to third 
parties to locate debtor taxpayers were subject to the time frames of 
the FDCPA.'' (p. 15). It found that required weekly reviews of 
contractor telephone reports were not being done. (p. 16). And the 
audit found that contractors did not adequately protect sensitive 
taxpayer information. ``System security at some contractor sites did 
not meet contractual requirements or did not provide adequate 
protection over sensitive taxpayer data.'' (p. 20)
    In addition to using prohibited collection techniques and not 
safeguarding confidential taxpayer information, the contractors did not 
bring in anywhere near the dollars they projected, and millions were 
spent by the IRS to train the contractors and millions were not 
collected by IRS employees because they were training the contractors 
instead of doing their jobs. (See GAO/GGD-97-129R and IRS Private Debt 
Collection Pilot Project, Final Report, Oct. 1997)
    Some supporters of private tax collection say the pilot was flawed 
due to the kind of cases given to the contractors. But technology to do 
the kind of analysis of what kind of cases might be successful, as both 
the GAO and the Taxpayer Advocate have said would be necessary, is not 
in place and, in fact, such proposals were dropped from the President's 
FY '04 budget submission.
           The Inability of the IRS to Manage its Contractors
    The IRS has said that it has learned from the 1996 project and can 
now address the problems raised. However, even very recent evidence is 
to the contrary. As this subcommittee is well aware, the contractor-led 
IRS Business System Modernization continues to have cost overruns and 
delivery delays. For example, A Treasury Inspector General for Tax 
Administration (TIGTA) report issued in September 2002 (Ref. #2002-20-
189) criticized the PRIME contractor, stating, ``progress has been 
slower and more costly than expected. Project dates were delayed from 4 
to 9 months, while cost increases ranged from nearly $700,000 to over 
$13 million from original estimates.''
    Another example of poor IRS management of contractors came to light 
recently when an IRS contractor who provided bomb detection dogs and 
services to patrol the perimeters at the IRS Service Center in Fresno 
was indicted on 28 charges after he lied about the qualifications of 
his dogs, then faked the dogs' certifications to keep his business with 
the IRS and other federal agencies.
    And members of this subcommittee may be familiar with the troubling 
case of Mellon Bank, a contractor hired by the IRS as part of its 
``lockbox program.'' Mellon Bank lost 78,000 taxpayer checks worth more 
than $1.2 billion in revenues for the U.S. Treasury. In response to the 
Mellon Bank contracting fiasco, GAO issued a report in January 2003 on 
the IRS lockbox program titled, ``IRS Lockbox Banks: More Effective 
Oversight, Stronger Controls, and Further Study of Costs and Benefits 
Are Needed'' (GAO-03-299). The report highlighted a number of 
deficiencies of the lockbox program that are very relevant to the 
proposal to privatize tax collection. Here is a sampling of some of the 
report's findings:

    1.
       L``Oversight of lockbox banks was not fully effective for fiscal 
year 2002 to ensure that taxpayer data and receipts were adequately 
safeguarded and properly processed. The weaknesses in oversight 
resulted largely from key oversight functions not being performed'' (p. 
3)
    2.
       L``Tax receipts and data were unnecessarily exposed to an 
increased risk of theft.'' (p. 21)
    3.
       LThere were ``deficiencies in processing controls designed to 
account for or protect tax data and receipts.'' (p. 27)
    4.
       LContract ``employees were given access to taxpayer data and 
receipts before bank management received results of their FBI 
fingerprint checks.'' (p. 29)

    The IRS will likely testify that lessons have been learned from 
cleaning up after the Mellon contracting mess, and that contracts with 
tax collection contractors will be written in a way to protect the 
taxpayers. Yet even though the GAO found all of these flaws in the poor 
oversight and management of the lockbox contracts, GAO ``found nothing 
inherent in the new 2002 lockbox bank contractual agreements or the 
prior agreements that would necessarily contribute to mishandling of 
taxpayer receipts'' (p. 12). So in other words, thousands of privacy 
and security provisions designed to protect the taxpayers can be 
written into each and every one of these contracts with private 
collection agencies, but the bottom line is that the IRS cannot and 
will not be able to ensure taxpayers are protected. The IRS simply does 
not have the staffing or systems in place to monitor the work of 
contractors.
 Failure to Safeguard Confidential Taxpayer Information From Criminals
    Another problem that continues to threaten taxpayer confidentiality 
and will pose an even greater threat under this privatization proposal 
is the inability of the IRS to conduct background checks on 
contractors. A February 2003 report from the Treasury Inspector General 
for Taxpayer Administration (TIGTA) found that the IRS failed to 
conduct background checks on its contract employees. The report found 
that the IRS did not perform required background checks on more than 
2,100 contract employees working in IRS offices in New Carrolton, 
Maryland who have access to sensitive taxpayer information.
    Additionally, background checks that have been conducted on IRS 
contract employees are incomplete at best. Employees who work for the 
IRS must be U.S. citizens. However, there is no such requirement that 
government contractors hire only U.S. citizens, even if they will be 
reviewing sensitive private taxpayer information. While the IRS has 
indicated all employees working for the tax collection contractors will 
undergo background checks, GAO's January report on the lockbox program 
found criminal investigation controls to be inadequate. ``This hiring 
practice may pose unnecessary risks to IRS materials because the FBI 
fingerprint check, which is national in scope, may have very little 
information to disclose if these individuals lived in this country for 
only a short period of time.'' GAO raised concerns that lockbox 
contractors could hire ``individuals with criminal histories which, in 
turn, increases the risk of theft of receipts or misuse of tax data.'' 
How much can even the FBI learn about an individual who has only lived 
in the U.S. for less than two years? The arrangement for the tax 
collection privatization initiative is even more suspect than the 
lockbox initiative, especially since some of the companies bidding for 
the work are not even based here in the United States.
       Incentives for Private Debt Collectors to Harass Taxpayers
    Allowing private collection agencies to collect tax debt on a 
commission basis flies in the face of the tenets of the IRS 
Restructuring and Reform Act of 1998 (RRA 98). Section 1204 of RRA 98 
specifically prevents employees or supervisors at the IRS from being 
evaluated on the amount of collections they bring in. Yet despite RRA 
98's clear mandate to ensure fair enforcement of the tax laws, the 
Administration is now proposing incentives for contractors to use 
aggressive collection techniques. Even if individual contract employees 
were not to be evaluated on the basis of their individual collection 
amounts, surely they will know that if they do not produce, they will 
not have a job. Paying a contractor out of its tax collection proceeds 
clearly encourages overly aggressive tax collection techniques, the 
exact dynamic RRA 98 sought to avoid.
    Additionally, RRA 98 allows a taxpayer to recover damages from the 
Federal Government if an IRS employee is found to have inappropriately 
accessed or misused confidential taxpayer information. However, under 
H.R. 1169, such a taxpayer could only seek damages against the 
collection company, so if a contractor cannot pay a judgment the 
taxpayer is out of luck.
              Poor Experience with Private Debt Collectors
    The contractors will say that state and non-tax federal efforts 
have been wildly successful, but independent sources have a different 
view. On April 15, 2002, at a hearing before the House Government 
Reform Committee, National Taxpayer Advocate Nina Olson testified on 
private tax collection. She said ``Few state and private creditors are 
subject to the significant due process protections enjoyed by Federal 
taxpayers in the post RRA 98 era. My own personal experience with 
private contractors attempting to collect State tax debt has not been 
positive. In my former tax practice, which included a large number of 
collection cases, I continually struggled with private collection 
employees of different skill levels and expertise. It was difficult to 
get a case out of the hands of the collection agency and back into the 
tax authority for issue resolution.'' She went on further to state 
``Contractors resisted revising inappropriate collection terms and 
agreements.''
    And the Department of Education's experience with using contractors 
to help prevent and collect defaulted student loans has been heavily 
criticized. A GAO report (GAO-03-531T) dated March 12, 2003, found that 
``neither Congress nor the public can determine whether FSA's (Office 
of Federal Student Aid) default management goals have been met.'' And a 
Department Inspector General Report (ED-OIG/A07-B0008) issued in 
November 2002, focused on FSA's Modernization Partner Agreement with 
its contractor. This IG report found that the performance measures to 
review the work of the contractor ``did not provide sufficient 
quantifiable or qualitative information to determine if the 
contractor's performance was in accordance with the terms of the 
contract.'' The IG also criticized the Department for using inaccurate 
baseline information used to calculate payments to the contractor, 
which resulted in larger payments to the contractor than what should 
have been actually earned. No wonder contractors think this is a great 
program.
        Widespread Opposition to Privatization of Tax Collection
    NTEU is not alone in its opposition to this proposal. At a hearing 
on April 8, 2003 before this subcommittee, the Tax Executives 
Institute, an association of business tax professionals, testified that 
``using outside, for-profit contractors could impede taxpayer privacy 
and undermine the perception of fairness. Such concerns are even more 
acute if the companies are compensated on a contingency basis, which 
raises significant due process issues.''
    At that same hearing, the National Association of Enrolled Agents, 
testified in opposition to the tax collection privatization initiative, 
stating that ``the opportunities for disclosure of taxpayer information 
combined with the potential for aggressive collection approaches 
inherent in a bounty-incentive approach runs counter to the protection 
of taxpayer rights.''
    And a representative of the Tax Section of the American Bar 
Association at the April 8th hearing urged caution, and pointed out 
that ``paying vendors a percentage of collections appears to be 
inconsistent with the prohibition of collection statistics in the 1998 
Revenue Reconciliation Act.''
    IRS employees were demoralized by the 1997 Congressional hearings 
and have worked hard to repair the damage to their image, much of which 
was due to inaccurate information. However, the American public rating 
of the IRS is significantly higher than what it was in 1997. Now, the 
Administration is going to turn around and tell the IRS workforce that 
private collection agencies will be let loose to recover unpaid tax 
debt? And if the contractors are overly aggressive and it turns out to 
be a repeat of the 1996 pilot project disaster, it will be the IRS 
employees labeled again as the jack booted thugs when the contractors 
are long gone.
    The risks of privatizing tax collection are enormous. It is a 
disservice to the taxpayers, and a disservice to IRS employees to pay 
contractors a bounty to collect taxes. Instead of rushing to privatize, 
the IRS should make the necessary investments today in increased agency 
staffing, resources, and better training, so that the compliance gap 
can be closed without compromising taxpayer rights. When supported with 
the tools and resources they need to do their jobs, there is no one who 
is more reliable and who can do the work of the IRS better than IRS 
employees.
    Thank you for giving me the opportunity to testify today.

                                 

    Chairman HOUGHTON. Thank you very much, Ms. Kelley. Mr. 
Felton.

 STATEMENT OF ALAN FELTON, ASSISTANT SECRETARY FOR EXAMINATION 
AND COLLECTION, NORTH CAROLINA DEPARTMENT OF REVENUE, RALEIGH, 
                         NORTH CAROLINA

    Mr. FELTON. North Carolina began outsourcing collection 
cases to private contractors in late 2000. Currently, we have 
four collection agencies on contract, but only actively use two 
of the four--National Coordination Office Financial Services 
and Open Source Initiative outsourcing. We consider use of the 
contractors one strategy in a multifaceted collection program.
    North Carolina uses PCAs to work lower value but high 
volume collection accounts. At the time we began the 
outsourcing program, we found that accounts with a $500 balance 
or less comprised two-thirds of our caseload, but only 10 
percent of the value of our receivable inventory.
    Outsourcing these low-yield cases and other low priority 
accounts allows the Department of Revenue to focus our internal 
resources on the remaining one-third of our cases that comprise 
90 percent of the value of our receivable inventory.
    By employing a comprehensive collection program, including 
the use of collection contractors, we have been able to 
increase delinquent tax collections by nearly $150 million 
between July 1, 2001 and April 30, 2003. This represents more 
than a 40-percent increase over previous years.
    From our experience with PCAs, there are several lessons 
learned that may be helpful to keep in mind. Administration of 
the collection outsourcing program should be as simple as 
possible. Simplicity allows taxing agency administrators more 
time to focus on ensuring quality service and productivity and 
less time performing unnecessary administrative tasks.
    North Carolina places its accounts on a contingency basis 
and only owes fees to the contractor after collections are 
processed and posted to the Department of Revenue system. This 
contingency arrangement creates a real partnership between the 
Department of Revenue and the collection contractors.
    We also recommend resisting the urge to micromanage the 
contractors' collection process. Providing clear goals and 
objectives, then allowing the contractor to determine the best 
way of accomplishing them seems to have been the best way to do 
this business.
    Evaluation of contractor performance is essential. The 
evaluation methods should be consistent, simple and tough. 
Since December 2002, North Carolina has issued a scorecard that 
evaluates collection agency performance using both objective 
collection criteria and more subjective ratings for quality of 
service including the level of taxpayer complaints.
    This month, we will begin changing account placement ratios 
for the two collection agencies the State uses based on the 
performance rating on these scorecards.
    Last, our contract with private agencies allows the 
Department of Revenue to pull a single case or every case 
assigned to the contractors at any time and for any reason. 
Pulling cases and returning them to our internal case inventory 
is as simple as making a telephone call. We believe this 
ensures that the contractor does business in a way that 
guarantees taxpayer rights and privacy while at the same time 
ensures maximum quality effort is exerted from the collection 
agency.
    The use of contract collection agencies has been of great 
benefit to the Department of Revenue, and more importantly to 
the citizens of North Carolina. The program has received no 
significant opposition from the State Legislature, the tax 
practitioner community, the departmental staff, or the general 
public. A solid comprehensive collection program that includes 
PCAs is an effective way to do business.
    Again, I appreciate this opportunity to share information 
on North Carolina's collection outsourcing program with the 
Committee. This concludes my remarks.
    [The prepared statement of Mr. Felton follows:]
   Statement of Alan Felton, Assistant Secretary for Examination and 
   Collection, North Carolina Department of Revenue, Raleigh, North 
                                Carolina
    Mr. Chairman and Members of the Committee:
    Thank you for inviting me to present the North Carolina Department 
of Revenue's experience with outsourcing delinquent tax accounts to 
private collection agencies. I am Alan Felton and I serve as the 
Assistant Secretary of Revenue for Examination and Collection. 
Accompanying me is Charlie Helms, Assistant Director of the Collection 
Division and contract administrator of our collection-outsourcing 
program.
    North Carolina began outsourcing collection cases to private 
contractors in late 2000. Currently, we have four collection agencies 
on contract, but only actively use two of the four--NCO Financial 
Services and OSI Outsourcing. We consider use of the contractors one 
strategy in a multifaceted collection program. North Carolina uses 
private collection agencies to work lower value, but high volume, 
collection accounts. At the time we began the outsourcing program, we 
found that accounts with a $500 balance or less comprised two-thirds of 
our case load but only 10% of the value of our receivable inventory. 
Outsourcing these low yield cases and other low priority accounts 
allows the Department to focus our internal resources on the remaining 
one-third of our cases that comprise 90% of the value of our receivable 
inventory. By employing a comprehensive collection program, including 
the use of collection contractors, we have been able to increase 
delinquent tax collections by nearly $150 million between July 1, 2001 
and April 30, 2003. This represents more than a 40% increase over 
previous years.
    From our experience with private collection agencies, there are 
several lessons learned that may be helpful to keep in mind.
    Administration of the collection-outsourcing program should be as 
simple as possible. Simplicity allows taxing agency administrators more 
time to focus on ensuring quality service and productivity and less 
time performing unnecessary administrative tasks.
    North Carolina places its accounts on a contingency basis and only 
owes fees to the contractor after collections are processed and posted 
to NCDOR's system. This contingency arrangement creates a real 
partnership between NCDOR and the collection contractors. We also 
recommend that you resist the urge to micromanage the contractors' 
collection process. Provide clear goals and objectives then allow the 
contractor to determine the best way of accomplishing them.
    Evaluation of contractor performance is essential. The evaluation 
methods should be consistent, simple, and tough. Since December 2002, 
North Carolina has issued a ``scorecard'' that evaluates collection 
agency performance using both objective collection criteria and more 
subjective ratings for quality of service, including the level of 
taxpayer complaints. This month we will begin changing account 
placement ratios for the two collection agencies the state uses based 
on the performance rating of their scorecards.
    Lastly, our contract with the private agencies allows the 
Department to pull a single case or every case assigned to the 
contractors at any time and for any reason. Pulling cases and returning 
them to our internal case inventory is as simple as making a telephone 
call. We believe this ensures the contractor does business in a way 
that guarantees taxpayer rights and privacy while at the same time 
ensures maximum, quality effort is exerted from the collection agency.
    The use of contract collection agencies has been of great benefit 
to the NC Department of Revenue and, more importantly, to the citizens 
of North Carolina. The program has received no significant opposition 
from the state legislature, the tax practitioner community, or the 
general public. A solid, comprehensive collection program that includes 
private collection agencies is an effective way to do business.
    Again, I appreciate the opportunity to share information on North 
Carolina's collection outsourcing program with the Committee.

                                 

    Chairman HOUGHTON. All right. Thank you very much. I will 
have a question for each one of you, but let me just briefly go 
over them. First of all, we are interested in protection of 
taxpayer rights and the safeguarding. Ms. Olson, you could talk 
about that.
    Ms. Gardiner, I would like to talk a little bit about the 
program in 1996, and what is different now. Ms. Kelley, I would 
like to ask you a little bit about the Education Department's 
program, and then, Mr. Felton, I would like to ask you about 
the reaction of State employees and their representatives to 
the proposal, and why you started this at $500?
    So, maybe we could talk, Ms. Olson, on the safeguarding, 
the protection of taxpayers.
    Ms. OLSON. Well, I am concerned about the spread of 
information from the contract agency from one side of it to 
another, to other accounts. I am concerned that the agencies 
will pressure taxpayers into accepting arrangements in order to 
get a fee. The IRS employees are going to be paid regardless of 
whether they literally collect taxes. They may get a poor 
evaluation if they don't do their job correctly, but they will 
still get their paycheck.
    I am concerned that we won't have what I call a level 
playing field between the contractors and the IRS, and so, I 
have made some proposals about how you could structure that. 
Certainly the section 1203 restrictions that are against the 
IRS employees which can result in termination and actually are 
supposed to result in termination unless the Commissioner 
mitigates that effect, there needs to be an identical 
arrangement with the PCA employees, so they are operating with 
the same kind of brakes that IRS employees have on them.
    The balanced measures--I cannot emphasize how important 
that is. I know we talk about the contingency fee arrangement. 
The IRS has looked at this very carefully. They may not have 
come to the level that I am as comfortable about. I would like 
to see more emphasis placed on customer satisfaction in the 
actual compensation arrangement, not just in a bonus pool or 
giving out cases in advance. Those are all brakes, as I would 
think about it, that would protect taxpayers.
    Chairman HOUGHTON. Okay. Thank you very much. Ms. Gardiner, 
compared to the program started in 1996, do you think the IRS 
has taken better steps to plan for the proposed use of private 
debt collectors?
    Ms. GARDINER. Yes, sir, I do. Some of the differences are 
in the 1996 pilot, they did not do any kind of benchmarking 
like the Education Department or other States. This time they 
did extensive benchmarking to find out the good things, the bad 
things, the things to be aware of, so they are entering into 
the project knowing a whole lot more, and what to be cautious 
about.
    Other things such as the age of the cases, in the original 
1996 pilot, they selected cases to give to the contractors that 
were 9 years or less in terms of age. This time they know that 
they want to give them cases that are 6 years or less. Six 
years still sounds like a long time but it is still better than 
9.
    The way they would compensate the contractors as Nina had 
mentioned, in some cases they might just determine that the 
taxpayer is deceased or there might be some other outcome 
besides just the collection of taxes and they would still get a 
payment for that, so it is not based solely on a flat rate of 
how much they would collect.
    The other way that the contractor would solicit payment, 
they are thinking that they would use some kind of voucher that 
was scannable that the taxpayer could send in to the IRS. So, 
IRS would still be collecting the tax, but it would be in a 
more efficient manner than the way they had done it in the 1996 
pilot.
    So, those are some of the differences. There is still a lot 
to be cautious of, but at least this time I think they have a 
better idea of what they need to be cautious of.
    Chairman HOUGHTON. Right. Well, thank you very much. Now, I 
would like to ask the following question of Ms. Kelley. I think 
in an ideal world, we would like all these things to be done 
in-house, in the government. The problem, of course, is money. 
The IRS has had tremendous demands on it to bring the IRS up to 
speed. It was woefully behind speed, and so what happens is 
that the collection process and the hiring and recruiting of 
good young people go by the boards every single time. That is 
really too bad.
    I do not know why it is not possible, at least on a 
temporary, maybe permanent, but at least on a temporary basis, 
to be able to trust outside agencies to try to fill in the gap 
while this whole modernization program comes along. Now, for 
example, with the Education Department program, don't you think 
they have done pretty well there?
    Ms. KELLEY. My only knowledge of that is what I have read 
about it, Mr. Chairman. I believe there are some on the panel 
behind me who may report on some failures and abuses and 
problems with that program. I do not have any firsthand 
information on that, but what I can say is that I see a 
distinction between the Education Department student loan 
program and IRS taxes.
    There is probably nothing that taxpayers hold more 
confidential than their tax information. Even if it is a single 
number like the balance due on a tax return and the amount of 
taxes owed, they do not have a choice in releasing that 
information. Well, they do, if they want to be subject to 
criminal action.
    The law requires them to submit that information to the 
IRS. Those who submit and deal with the Education Department on 
student loans have a choice to make as to whether they want to 
voluntarily provide the information in an effort to get a loan 
and then, of course, whatever the process is for the collection 
of that, but I see those as very, very different issues, and I 
do believe that you will hear on a subsequent panel of some 
first-hand abuses and problems with the Education Department.
    Chairman HOUGHTON. Of course the requirement of being 
discrete is not selective here. It is for everyone whether you 
have a private or a PCA, and I would imagine, according to what 
Ms. Olson says and others, that there is rather rigorous 
determination on who should be that PCA and the people in it, 
and if they do not fulfill their obligations, the wheels go 
under them pretty fast.
    So, it is really, you see, if you look at it from the 
standpoint of the Federal Government, we are trying to solve a 
problem. We do not have enough money to do it right now with 
the accounting system being what it is.
    Ms. KELLEY. I would suggest if there is money to pay 
contractors to do this work, then a way should be found to find 
the money to give the IRS to do it, especially when the cost to 
do it produces so many better benefits for taxpayers as $31 for 
every dollar spent as set out in the numbers that we have from 
Commissioner Rossotti's report.
    Chairman HOUGHTON. The difference, I think, there is that 
the IRS is doing a whole range of income, and from what I 
understand, and I think I was wrong when I made that comment 
with you, Earl, that the whole focus is on the lower-income 
people. So, that when you get the payback, you are talking 
about a different universe of taxpayers.
    Ms. KELLEY. Well, I think those are some of the things that 
the IRS has said about the kind of work that will be given to 
the PCAs. However, there has not been a model yet developed by 
the IRS to identify those cases. I believe the IRS will 
acknowledge that and GAO's report, again, just issued last week 
says that the IRS realizes identifying appropriate cases for 
referral to PCAs is a key issue. The GAO report says: ``While 
IRS proposes using `case selection analytics' to identify 
appropriate cases. That model has not yet been developed.''
    So, I would question the specificity with which they think 
they can possibly do this in a manner that will be successful. 
There are many trained committed, career IRS employees, who are 
not just committed to doing this work as a part of their job. 
They are committed to the mission of the agency which is 
collecting the appropriate tax and respecting taxpayers' 
rights.
    Chairman HOUGHTON. Sure. Well, now let us move for a moment 
on to Mr. Felton. Mr. Felton, what has been the reaction of 
State employees and the representatives to the proposal?
    Mr. FELTON. The reaction, Mr. Chairman, has been quite 
positive. We have received no negative comments or complaints 
from our employees. There has been no resulting job reductions 
from the use of PCAs at the Department of Revenue in North 
Carolina.
    Chairman HOUGHTON. Thank you very much. Sir.
    Mr. POMEROY. Mr. Chairman, it is a delight to be your 
Ranking Member. I have been in Congress now I am going on 11 
years, and I have never heard a Chairman ever self-correct 
himself before.
    [Laughter.]
    Mr. POMEROY. You are so refreshing in your leadership. Let 
me begin by following up on this point of who is going to be 
the universe targeted with this new initiative. Ms. Olson, we 
are talking about people that have made some payments and then 
dropped off a payment, have not fulfilled the payment reflected 
on their tax return. Just based on your own expertise as the 
Nation's taxpayer advocate, what proportion in this category 
would have over $200,000 adjusted gross income compared to 
those that would have under $75,000 adjusted gross income?
    Ms. OLSON. Congressman Pomeroy, it varies all over the 
United States. I think when we talk about the $278 billion that 
is in the known tax gap, and we narrow it down to $78 billion 
in what we call potentially collectible inventory, and my 
understanding is that 38 percent of that is cases that we are 
not working because we can't find the taxpayer, we don't have 
the resources to work them, et cetera.
    Some of them are people who do have high adjusted gross 
incomes. It may be over $100,000 or $200,000. They are out 
perhaps in a queue in the field. They are in line to be worked 
by a revenue officer. A classic story that I have sort of held 
in my mind as I have gone through this process is a husband and 
wife and they were married and they have a joint tax debt, and 
they split. The wife is the wage earner. Well, we have got her 
in the system.
    We can do all sorts of things by computer with her without 
sending collections of the account out to a human being. We can 
identify her wages, we can garnish her wages, whereas her ex-
husband may be a small businessman and files a Schedule C and 
makes over $100,000. He is in a queue somewhere. So, as every 
week we are collecting out of that one person's paycheck, but 
we are not doing a thing to that other person's because we do 
not have the resources.
    It is entirely possible that that person, if we actually 
made our presence known, would get nervous, because we could 
shut down his business. We could levy his business accounts and 
things like that, and he would start talking to us. As long as 
we are not there there is the ostrich effect. If I stick my 
head in the sand, they will not see me. That happens a lot.
    I do not know what is going to be in this population of 
cases. I know that eventually the IRS intends to select from 
all different categories of taxpayers, and so the way they 
described it is----
    Mr. POMEROY. Although, reclaiming my time, basically I did 
not hear the Commissioner saying about any effort to make 
certain this kind of evenly fell across income distribution 
points. It was a matter of what was the activity on behalf of 
the taxpayer that lent itself to collectibility. So, it was 
this kind of partial performance and then falling off, which I 
believe--in fact, I think the Commissioner gave us some 
evidence--is going to fall disproportionately on middle and 
moderate.
    I think if cobbled with the tax bill, you could have the 
ironic situation where $200,000 and up get a tax break; under 
$75,000, get a tax collector. It is just not fair, 
fundamentally not fair.
    I agree that student loan collection has been done very 
efficiently in the private sector, and I used to be very 
familiar with the program run by the State of North Dakota 
through the Bank of North Dakota, where they had a collection 
function. I do think that there are some things to distinguish 
student loan debt and that whole genre of activity versus tax 
collection, although in raising my doubts, I certainly do not 
mean to discredit either the Bank of North Dakota's efforts or 
Sallie Mae's efforts or any other student loan collector's 
effort. I do think that has been done pretty effectively.
    What I think we need to do is be sensitive and raise to the 
public's attention the relative cost of using private vendors 
to collect taxes. The whole outcry about the $600 toilet seat 
or whatever it was in U.S. Department of Defense procurement 
was because we were getting a bad deal. We were spending 
dollars that we otherwise would not have had to spend. Same 
thing here.
    We staff this internally and collect, we get a whole 
different measure of return than if we outsource it and pay a 
significant margin to the private collector. This is the $600 
toilet seat of tax collection. I would like your reflection on 
that, Ms. Olson, if you would.
    Ms. OLSON. I viewed my role in this as certainly not the 
person making the decision about whether this initiative was 
going to go forward or not. I have expressed my preference that 
we not contract out debt for the reasons in my testimony, one 
of which is that Federal tax debts are different from student 
loan debts, and taxes are the life blood of our government, and 
it is a contract between the taxpayer and the government how we 
manage this.
    Once the decision has been made, at least internally, that 
we might think to use this and look at it, then my job becomes 
to look at this proposal and make sure that taxpayers are 
protected in that contract, and that is how I have approached 
it.
    Mr. POMEROY. I understand that. I guess I am somewhat----
    Ms. OLSON. It is difficult.
    Mr. POMEROY. We are not too far apart in our analysis. If 
left with the choice, Earl, you get this or you get nothing, 
well, then I would have to think long and hard about it. I do 
not think we have fully exhausted the staffing model. In North 
Dakota, when I was in the State Legislature in 1993, Tax 
Commissioner Kent Conrad, now Senator Kent Conrad, brought 
forth an initiative titled ``Catch the Tax Cheater'' program, 
cleverly named. It was to basically bolster tax collection 
efforts, and he promised the legislature $10 dollars for every 
$1 spent, and he delivered, and his successor delivered, and 
for 10 years in North Dakota, tax collection efforts of this 
``Catch the Tax Cheater'' program produced about a 10 to 1 
return.
    Is it your evaluation that if Congress was really concerned 
about collecting back tax debt and doing so in a way that would 
yield the highest return to the Treasury Department, that 
staffing it up internally would produce better value in terms 
of ultimate collections?
    Ms. OLSON. Yes.
    Mr. POMEROY. Thank you. I yield back, Mr. Chairman.
    Chairman HOUGHTON. Of course that gets into the bigger 
issue than dynamic scoring, return on your investment, which I 
agree with you. If you do that, you take a look if you spend $1 
here, do you get $10 dollars back, or do you spend a dollar 
here and only record it as a dollar of expense?
    Well, listen, thank you very much. You have been very, very 
helpful, and we will take your comments under advisement.
    Chairman HOUGHTON. I would like to call the next panel 
which is Rozanne Andersen, General Counsel, Association of 
Credit and Collection Professionals, who comes from 
Minneapolis; Dexter Smith, Senior Vice President, Government 
Services Division, Allied International Credit Corporation in 
Smyrna, Georgia; Jon Shaver, Chief Operating Officer, 
Diversified Collection Services (DCS), Incorporated, in San 
Leandro, California; and Chi Chi Wu, attorney, National 
Consumer Law Center in Boston, Massachusetts.
    Okay. Are we ready? Thank you very much for being here. We 
appreciate your time, and Ms. Andersen, would you start?

 STATEMENT OF ROZANNE M. ANDERSEN, GENERAL COUNSEL AND SENIOR 
       VICE PRESIDENT, LEGAL AND GOVERNMENT AFFAIRS, ACA 
             INTERNATIONAL, MINNEAPOLIS, MINNESOTA

    Ms. ANDERSEN. Chairman Houghton, Congressman Pomeroy, I am 
Rozanne Andersen, General Counsel and Senior Vice President for 
Legal and Government Affairs for the Association ACA 
International.
    Thank you for the opportunity to testify on behalf of the 
industry this afternoon. The ACA International is a 64-year-old 
trade association composed of 5,300 credit and collection----
    Chairman HOUGHTON. Please speak right into the mike. As 
Chairman Thomas is fond of pointing out, it is a very 
unidirectional, and he is going to get a new sound system, but 
he has not yet. So, just have it right up there.
    Ms. ANDERSEN. How does this work? Okay. All right. Shall I 
begin again? All right. Thank you. Chairman Houghton, 
Congressman Pomeroy, I am Rozanne Andersen, General Counsel and 
Senior Vice President for Legal and Government Affairs for ACA 
International.
    Thank you for the opportunity to allow me to testify this 
afternoon on behalf of the industry. ACA International is a 64-
year-old trade association composed of 5,300 credit and 
collection professionals, headquartered in Minneapolis, 
Minnesota. The ACA's membership spans all 50 States. Our 
agencies range in size from three-person operations to publicly 
held corporations that employ between 5,000 and 15,000 
individuals.
    The ACA strongly supports H.R. 1169, Mr. Chairman, and the 
framework of the IRS outsourcing proposal. This legislation 
provides that the power to make decisions that impact the 
rights of individual taxpayers would remain solely with the 
IRS. Under the program, private collection agents, PCAs, would 
be imbedded in the IRS collection scheme, not working outside 
or independent of it.
    The PCAs would have neither enforcement authority nor 
discretion to determine tax liability. They would operate under 
the supervision and control of the IRS to perform a strictly 
limited function collection activity.
    There are a number of Federal agencies that contract with 
PCAs for debt collection services with documented success. You 
have heard from at least one this afternoon: the Education 
Department has used PCAs to collect on delinquent student loans 
since the mid-eighties. The Treasury Department began to 
contract with PCAs for non-tax collection services in 1998. The 
Security and Exchange Commission (SEC) recently revealed that 
it too is contemplating a plan to contract with PCAs to enhance 
its collection activities.
    Yet opponents say that debt collectors will abuse citizens 
and that the privacy of taxpayer information will not be 
protected. Such talk indicates a lack of understanding of the 
many Federal and State laws that strictly regulate the 
activities of private debt collectors.
    The primary Federal laws governing the practices of debt 
collectors include the FDCPA, the Fair Credit Reporting Act 
(P.L. 104-208), the Federal Trade Commission Act (1914, Ch. 
311, 38 Stat. 717), the Gramm-Leach-Bliley Act (P.L. 106-102) 
in certain instances, and the Health Insurance Portability and 
Accountability Act (HIPAA) (P.L. 104-191), as well as numerous 
State and local statutes.
    Collectors winning a contract under the draft Request for 
Information (RFI) would also be subject to the Taxpayer Bill of 
Rights (P.L. 100-647), the Federal Claims Collection Act (P.L. 
89-508), and the Privacy Act 1974 (P.L. 93-579).
    A number of these laws impose duties and restrictions on 
private sector debt collectors that do not currently apply to 
IRS employees. The IRS intends that all Federal tax debt 
collection activities performed by the PCAs be subject to the 
FDCPA. This is to afford taxpayers additional consumer 
protections in addition to those currently governing the IRS 
employees.
    The ACA suggests H.R. 1169 should clarify that the FDCPA 
applies to PCAs collecting on behalf of the IRS. In addition to 
the statutory and regulatory framework, ACA members must also 
adhere to rigorous ethical standards and guidelines established 
by our association.
    Collectors have long understood the need to protect 
consumer privacy and to maintain rigorous controls to ensure 
that private consumer information indeed remains private. In 
fact, the Federal Trade Commission's (FTC) 2002 and 2003 annual 
reports to Congress made it clear that the number of complaints 
against debt collectors is de minimis when compared to the 
billions of contacts between debt collectors and consumers that 
occur annually.
    Health information is arguably as sensitive and as private 
of information as any information retained by the IRS for tax 
purposes, and in fact medical debts comprise approximately 65 
percent of the total number of accounts currently transferred 
to third-party debt collectors.
    Recent regulations under HIPAA only allow collection agents 
access to that information which is minimally necessary to 
perform collection functions. These regulations could certainly 
serve as a blueprint for resolving taxpayer data privacy 
concerns as proposed by H.R. 1169.
    Some question the ability of the IRS to ensure that private 
debt collectors are operating properly when actually contacting 
taxpayers. Advanced technology systems allow the IRS to monitor 
phone conversations while they are happening to see how the 
collectors are updating their collection records during the 
calls.
    In addition, the IRS can send staff to audit the collection 
activity of any PCAs at any time. Most importantly, through 
membership in ACA International, collection agencies receive 
training, access to written electronic and web-based collection 
training modules, direct access to 5 compliance attorneys, 
access to 50 State compliance chairs, agency certification 
opportunities as well.
    Currently, 34 States have licensing, registration or bond 
requirements for debt collectors. Under the IRS proposal, State 
attorneys general and the FTC would monitor activities of the 
IRS's contracted private debt collectors adding another layer 
of protection, as these agencies currently have no role in IRS 
collections.
    Finally, if H.R. 1169 is properly drafted, the enabling 
legislation would also afford private citizens with even 
greater protections under the law. I urge the Committee to 
ensure that this outsourcing contract is available to small, 
minority, persons with disabilities, and women-owned collection 
agencies.
    The number of contractors contemplated by the IRS is very 
limited in scope: 10 agencies with 2 additional contracts set 
aside for small business. Available technology affords the IRS 
with the ability to expand this number of contractors to as 
many as one per State. In order to accomplish such a 
distribution of accounts, H.R. 1169 may need to be modified to 
specifically authorize the Secretary to enter into both direct 
and indirect qualified tax collection contracts.
    In keeping with the President's policy of encouraging more 
participation by small business in the Federal procurement 
process, I suggest the Committee consider this modification to 
H.R. 1169.
    Mr. Chairman, Congressman Pomeroy, the collection industry 
has a great deal to offer the Federal Government and the 
taxpayers that support it. H.R. 1169 would bring needed Federal 
revenue into the Treasury Department and would make progress in 
eliminating the huge backlog of collections on overdue tax 
debt.
    The ACA is the premier trade association representing the 
collection industry with the experience, knowledge, training 
and certification credentials to ensure the success of the IRS 
outsourcing program. If given the opportunity, our members will 
perform exemplary collection services in partnership with the 
IRS, while at all times exhibiting great sensitivity toward the 
privacy rights of taxpayers. I urge the Subcommittee's support 
of this important measure.
    [The prepared statement of Ms. Andersen follows:]
   Statement of Rozanne M. Andersen, General Counsel and Senior Vice 
     President, Legal and Governmental Affairs, ACA International, 
                         Minneapolis, Minnesota
    Chairman Houghton, Ranking Member Pomeroy, and members of the 
Subcommittee, I am Rozanne Andersen, General Counsel and Senior Vice 
President for Legal and Government Affairs for ACA International. It is 
a pleasure and a privilege for me to present testimony today on behalf 
of the nation's premier trade association representing the credit and 
collection industry.
    ACA International is a 64 year-old trade association composed of 
5,300 credit and collection professionals who provide a wide variety of 
accounts receivable management services to credit grantors. 
Headquartered in Minneapolis, Minnesota, ACA's membership spans all 
fifty states and includes 3,400 third-party collection agencies, 750 
attorneys, 1,200 credit grantors, and 140 vendors. The third-party 
collection agencies that belong to ACA range in size from small 3 
person operations to huge, publicly held corporations that employ 
between 5,000-15,000 individuals. In short, ACA's membership represents 
both the very smallest of businesses that operate within a very limited 
geographic radius within a state, and the very largest of multinational 
collection agency corporations that operate in all fifty states.
    ACA strongly supports H.R. 1169, Mr. Chairman, and the framework of 
the proposal put forward by the Internal Revenue Service, to outsource 
the collection of past due federal income taxes to private collection 
agencies. We commend the leadership you have shown in introducing the 
enabling legislation that would allow this worthy and necessary 
proposal to move forward, and for holding this hearing today.
    I apologize if my testimony sounds a little like `deja vu' all over 
again. In 1996, ACA presented testimony before this Subcommittee on the 
subject of outsourcing IRS collections. Today we are considering, once 
again, a proposal that will allow the IRS to partner with private 
collections agencies to bring uncollected federal tax revenue into the 
Treasury. The arguments about why this is a good idea--for the 
Treasury, for the IRS, for the economy, and most importantly, for the 
vast majority of American taxpayers that dutifully pay their fair share 
of federal income taxes each year--remain the same. In my observation 
what has changed is the Administration's and the IRS's commitment to 
this program, with success being the only acceptable outcome. 
Commissioner Everson, I commend you for being here today as evidence of 
the IRS's commitment to moving this proposal from concept to reality.
Debt Collection and the U.S. Economy
    If I may, I'd like to take a moment to talk about the collection 
industry, and it's impact on the U.S. economy. As one of our members 
said to me recently, ``One of the quickest ways to kill a conversation 
at a social gathering is to tell someone you're a debt collector.'' 
Perhaps IRS employees can relate to this experience. A better way to 
explain who we are is to say that this industry really serves as an 
extension of your community's businesses, such as the hardware store, 
the retailer down the street, or the local hospital. The collection 
industry works with these businesses to try to get payment for those 
goods and services that have been delivered to the consumer. Unless 
someone tries to collect what is owed, the existence of these 
businesses may be threatened. Furthermore, the rest of us pay a higher 
price for the goods and services we need, to compensate for uncollected 
bad debt.
    According to the Federal Reserve Board and the U.S. Census Bureau, 
total consumer bad debt costs every adult in the United States $683 
annually. This translates into a cost for the average non-supervisory 
worker of nearly 54 hours (before taxes) in lost salary every year to 
pay for the bad debt of other consumers. Collection services, such as 
those offered by ACA members, are an essential part of the U.S. 
economy. In 1999, more than $216 billion in past due accounts were 
referred to collection agencies. Collection on those accounts recovered 
approximately $30.4 billion--a massive infusion of money into our 
economy.
IRS Compliance Concerns
    Mr. Chairman, I cite these statistics to emphasize the importance 
of debt collection in our economy. The amount of federal income taxes 
owed the government and not paid each year is staggering. The IRS 
estimates that $249 billion in federal tax debt is currently past due. 
Although estimates vary, between $76 and $112 billion of this 
delinquent amount has some collection potential. However, when 
considering the topic of today's hearing, much more is at stake than 
bringing in much-needed funds to the Treasury. This is really an issue 
of fairness. Our tax system is a voluntary one, in which we rely upon 
individual citizens to dutifully file their returns and pay their taxes 
every year. Nonetheless, I don't believe that the millions of citizens 
who file their taxes and pay their fair share view their compliance as 
``voluntary,'' anymore than they would consider the decision of some 
not to pay the federal taxes they owe an acceptable choice.
    As the Government Accounting Office (GAO) noted in it's report to 
the Subcommittee in May, 2002, ``Taxpayers' willingness to voluntarily 
comply with tax laws depends in part on their confidence that friends, 
neighbors and business competitors are paying their fair share of 
taxes.'' Law-abiding citizens need to be assured that their government, 
which created our federal tax system, will effectively enforce its 
requirements. It is a matter of taxpayer equity.
    Mr. Chairman, there is a crises in the collection of past due 
federal income tax. This crises is well documented in the IRS's own 
assessments, and by independent studies by the GAO. In GAO testimony 
presented last week before an Appropriations Subcommittee, the IRS's 
collection programs were shown to have significant declines in workload 
coverage, cases closed, direct staff time used, productivity and 
dollars of unpaid taxes collected. This same report cites the IRS's 
deferral policy, which had been in place for three and one-half years, 
as part of the collection backlog. By the end of FY 2002, the IRS had 
deferred taking action--i.e. not pursued--collection on $15 billion in 
unpaid taxes, interest, and penalties. In one out of every three cases 
requiring collection activity, the IRS has deferred action. The GAO 
cites an average of 1.6 years elapsing between the time past due taxes 
are established and collections activity is initiated by the IRS. As 
staff has been shifted to other priority functions, a 60 percent gap 
has grown between the collection workload and work completed. The IRS 
staff needs and deserves relief from this overwhelming situation.
Using the Private Sector to Collect Past Due Federal Income Taxes
    The former IRS Commissioner reported in September 2002 that 5,450 
new full time employees at a cost of $296.4 million would be required 
to close this gap.
    Alternatively, the IRS collection-related contract support 
initiative is a proposal to leverage the resources of private 
collection agencies with minimal investment of taxpayer dollars, while 
providing maximum protection of taxpayers' rights. It is an important 
piece of a comprehensive effort to reorganize, streamline and improve 
collection outcomes. Since 1998, the IRS has worked with experts, 
including ACA and ACA member companies, to study and design the best 
method to implement the program. Under the proposal, private collection 
agencies would perform supplemental collection activities, subject to 
the oversight and control of the IRS, and in compliance with all 
applicable laws and regulations.
    Let me be clear, as I know there are those skeptical of the concept 
of using private businesses to perform a function that has been 
reserved for IRS employees. However, the passage of enabling 
legislation, such as H.R. 1169, will not permit the IRS to abdicate its 
responsibilities. The power to make decisions that impact the rights of 
individual taxpayers shall remain solely with the IRS. Under the 
program, private collection agents (PCAs) will be embedded in the IRS 
collection scheme, not working outside or independent from it. PCAs 
will have neither enforcement authority nor discretion to determine tax 
liability. They will operate under the supervision and control of the 
IRS to perform a strictly limited function--collection activity, which 
is not intimately related to the public interest in a manner that 
mandates the use of federal employees.
    Mr. Chairman, there are a number of federal agencies that contract 
with PCAs for debt collection services, and with documented success. 
The Department of Education has utilized PCAs to collect on delinquent 
student loans in the mid-1980's. Gary Hopkins, Director of Collections 
for Federal Student Aid at the Department of Education stated that, 
``From outsourcing we gain expertise and the ability to have continuous 
improvement and stay current with technology.'' More recently, the 
Department of the Treasury, as part of it's own debt program, began to 
contract with PCAs for non-tax collection services. Since the program's 
inception in 1998, PCAs have collected $109 million, more than half of 
it during the last two years. Richard L. Gregg, Commissioner for 
Financial Management Services at the Department of Treasury, recently 
testified to Congress that the ``Treasury's debt program is one that is 
both robust and effective, one that has consistently met or exceeded 
its performance measures.'' The Securities and Exchange Commission 
recently revealed that it, too, is contemplating a plan to contract 
with PCAs to enhance its collection activities.
Myths Regarding the Outsourcing of Tax Collections
    Given the successful track record many federal agencies have had 
contracting with professional debt collectors from the private sector, 
one would hope that support for the IRS outsourcing initiative would be 
unanimous. However, there seem to be a few myths surrounding the 
privatization of federal tax collection that need to be dispelled. One 
argument I've heard raised against allowing the IRS to contract with 
private sector debt collectors stems from concern that debt collectors 
will abuse citizens, or that the privacy of taxpayer information will 
not be protected. Such assertions indicate a lack of understanding of 
the many federal and state laws that strictly regulate the activities 
of private debt collectors.
    The primary federal laws governing the practices of debt collectors 
include the Fair Debt Collection Practices Act, the Fair Credit 
Reporting Act, the Federal Trade Commission Act, the Gramm-Leach-Bliley 
Act, and the Health Insurance Portability and Accountability Act, as 
well as numerous state and local statutes. Collectors winning a 
contract under the draft RFI would also be subject to the Taxpayer Bill 
of Rights, the Federal Claims Collection Act, and the Privacy Act of 
1974. In addition to this statutory and regulatory framework of 
consumer protection laws, ACA collection agency members must also 
adhere to rigorous ethical standards and guidelines established by our 
association. A copy of ACA's Code of Ethics is attached to my testimony 
for your review. A number of these laws, and specifically, the Fair 
Debt Collection Practices Act, impose duties and restrictions on 
private sector debt collectors that do not apply to IRS employees. It 
is the intention of the IRS that all federal tax debt collections 
activities performed by private contractors be subject to the Fair Debt 
Collection Practices Act, to afford taxpayers consumer protections in 
addition to those currently governing the collection efforts of IRS 
staff.
    With regard to the privacy of taxpayer information, I can state 
confidently that no other topic has received as much attention by the 
IRS in drafting the parameters of an outsourcing project. In addition 
to extending the Fair Debt Collection Practices Act to those 
contractors who work with the IRS on this project, there are very 
stringent contractual requirements pertaining to the contractors' 
operations in performing IRS collections. The outsourcing proposal, as 
crafted by the IRS, requires that all facilities and data and corporate 
systems meet threshold requirements for capacity, encryption, record 
retention, and data transfer. Other security requirements include: 
registration with the Department of Defense central database; on-site 
security measures, including the maintenance of restricted areas and 
limited access; background investigations; and reporting and auditing 
requirements.
    Debt collectors deal responsibly with sensitive information 
requiring the utmost care to protect consumer privacy all the time. 
Perhaps one of the best examples I can point to right now is the 
significant amount of collection of medical debts being done by private 
debt collectors. This is because health care providers are among the 
very small minority of businesses that offer services on credit, other 
than through credit cards. One's health information is arguably as 
sensitive and private as that information retained by the IRS for tax 
purposes. Recent regulations pursuant to the Health Insurance 
Portability and Accountability Act (HIPAA), may serve as a model to the 
IRS in finalizing its outsourcing proposal. The HIPAA privacy, security 
and electronic transaction rules safeguard confidential medical 
information to facilitate the collection of medical debts while 
protecting highly sensitive information. As a result of their 
compliance with HIPAA, most collection agencies have the type of 
safeguards in place to ensure compliance with the proposed privacy 
standards for this outsourcing project. In short, the requirement under 
HIPAA of only allowing collection agencies access to that information 
minimally necessary to perform collection functions could serve as a 
blueprint for resolving taxpayer data privacy concerns.
    In recent years, privacy requirements for financial information 
have also been put into place under the Gramm-Leach-Bliley Act. Debt 
collectors are intimately familiar with these requirements because they 
service banks and credit card issuers, as well as other entities 
governed by Gramm-Leach-Bliley. Even without these regulations, 
collectors have long understood the need to protect consumer privacy 
and to maintain rigorous controls to ensure that private consumer 
information remains private.
    Another concern that has been raised is doubt over the ability of 
the IRS to ensure that private debt collectors are operating properly 
when contacting taxpayers. In these days of advanced technology, it 
will be possible for the IRS to monitor most debt collectors in real 
time. Most debt collectors who service large clients allow those 
clients to monitor phone conversations while they are happening and to 
see how collectors are updating computer records during the calls. This 
can be accomplished through the telephone and computer technology that 
is available today. In addition, the IRS can send auditors to audit 
collection activity at any time.
    Buttressing the IRS's monitoring will be the panoply of watchdogs 
that keep an eye on debt collectors. For example, approximately 34 
states have licensing and/or registration requirements for debt 
collectors. These state agencies monitor debt collectors to varying 
degrees. Some states send examiners to ensure that debt collectors 
comply with their laws. Others require debt collectors to provide 
consumers with contact information for the state regulatory agency to 
make it easier for consumers to file complaints about collectors. Under 
the new proposal, State Attorneys General and the Federal Trade 
Commission, would be included in the list of those monitoring the 
activities of the IRS's contracted private debt collectors. This would 
be an added layer of protection as these agencies currently have no 
power over IRS collections. Properly drafted, the enabling legislation 
would afford private citizens with individual enforcement power 
currently unavailable.
    Mr. Chairman, I hope this information has helped to persuade those 
doubting the wisdom of granting the IRS outsourcing authority for 
collections that their concerns are unfounded. Assuming my narrative 
has been successful, I would like to end my testimony with a few 
thoughts for your consideration.
    The IRS has done a commendable job in researching the strengths and 
capabilities of the private sector collection industry, and shaping a 
proposal whereby the IRS could partner with the private sector for 
certain collection activities. Certainly, all possible measures for 
protecting taxpayer privacy have been incorporated in the draft RFI. 
However, I would remind you that in order for this project to be 
successful, the collection agencies must have an opportunity to make 
money. The IRS must give collectors accounts for which there is a 
reasonable chance for recovery. While collectors can do much to locate 
taxpayers for whom there is no current address or phone number, they 
should not only be given accounts where the IRS has been unable to 
locate the tax debtors. Similarly, collectors should be given newer 
accounts in addition to those that have been outstanding for years. 
Proper identification of cases that should be placed with the PCAs for 
collection will be key to this program's success. The Government 
Accounting Office made a similar assessment in its May 7, 2003 
testimony before the Appropriations Committee when citing a shortcoming 
from the 1996 outsourcing pilot project.
    Secondly, I would strongly urge the IRS to take steps to make some 
of this outsourcing contract available to small, minority and women-
owned collection agencies. The number of contractors contemplated by 
the IRS is very limited in scope--10 agencies with 2 additional 
contracts set-aside for small businesses. With the large volume of 
collection files needing attention, and the technology available to aid 
the IRS in monitoring it's contractors, they should consider expanding 
the number of contractors. At the very least, the IRS should reconsider 
or clarify its prohibition on subcontracting any ``core functions.'' It 
is very common in the private collection industry for certain specific 
services, such as the provision of forms and correspondence mailing 
services, dialer software, and skiptracing, to be subcontracted to 
another business. This subcontracting is routinely done by PCAs, large 
and small, without compromising the security of the information shared 
with third-party subcontractors.
    Prohibiting the subcontracting of any such activities as a ``core 
function'' of the contract would be particularly deleterious to small 
businesses. Businesses frequently outsource functions such as letter 
mailing. This allows them to focus on other aspects of the collection 
process and provides cost-effective alternatives to purchasing or 
leasing expensive hardware and software. Subcontracting agreements 
contain provisions to account for the protection and security of 
information shared with third party subcontractors. With some minor 
modifications to the RFI, I believe the IRS could satisfy its concern 
with diminished control or oversight associated with subcontracting 
core functions, without prohibiting the use of subcontractors.
    Mr. Chairman, the collection industry has a great deal to offer the 
Federal Government and the taxpayers that support it. That fact is well 
documented as the expertise of the professional collection industry has 
been tapped to enhance federal collections' activities in numerous 
agencies. Adoption of H.R. 1169 would be an important next step in 
allowing the IRS to similarly harness the debt collection industry's 
technology and expertise. While this role would be of a very limited 
scope in comparison to the vast responsibilities borne by the IRS and 
its dedicated employees, it would assist the IRS in managing their 
human resources to increase activity in those areas that can only be 
performed by IRS employees. Bringing needed federal revenue into the 
Treasury, and making progress in the huge backlog of collections on 
overdue tax debt would serve to reinvigorate the IRS. I urge the 
Subcommittee's support of this important measure, H.R. 1169, and I 
would be happy to answer any questions the members may have at the 
appropriate time. Thank you, Mr. Chairman.

                                 

    Chairman HOUGHTON. Well, thank you very much. Just as a 
note, we have just been joined by a very distinguished Member 
of our Committee, Mr. Foley of Florida. We are delighted to 
have you here, and we will proceed with the questions, and then 
you can chime in when you want. Okay. Now, Mr. Smith.

   STATEMENT OF DEXTER SMITH, SENIOR VICE PRESIDENT, ALLIED 
       INTERNATIONAL CREDIT CORPORATION, ATLANTA, GEORGIA

    Mr. SMITH. Mr. Chairman, Congressman Pomeroy, Mr. Foley, 
thank you for this opportunity to testify before the 
Subcommittee on Oversight. I am Dexter Smith, Senior Vice 
President at Allied International Credit Corporation (US), with 
our U.S. headquarters in Atlanta, Georgia. As our name implies, 
we are an international company with experience collecting 
Federal debt in the United States, Canada, and the United 
Kingdom.
    In 2002, we handled more than 1.6 million collection 
accounts valued at over $11.5 billion. Currently, we partner 
with the Education Department in collecting defaulted student 
loans which is considered to be more similar to the IRS 
proposal than any other collections contract in the industry.
    Allied International Credit endorses the proposal before 
the Subcommittee. We believe it protects taxpayer rights and 
privacy, preserves the jobs of current IRS employees, and most 
importantly strengthens citizens' faith in the integrity and 
fairness of the tax system.
    We believe that the substantial resources and private 
sector best practices brought to the table by the debt 
collection companies will help the IRS advance its goal of 
providing top quality service to each taxpayer by bringing 
additional resources to bear in each individual case and 
ensuring fairness and shortening the resolution time.
    The proposal will provide top quality service to all 
taxpayers by increasing the number of successfully closed cases 
which will increase the level of overall compliance. We believe 
that the proposal will support a quality workforce and 
ultimately increase employee morale because it will allow IRS 
employees to focus on accounts more suited to their training 
and tools.
    A program that successfully shrinks accounts receivable 
will give employees a sense that the agency is better 
accomplishing its mission. Under the proposal, in addition to 
all the taxpayer rights provisions in the Internal Revenue 
Code, the private companies would be subject to all the 
requirements of the FDCPA. Failure to comply with these 
stringent requirements subjects our company to legal 
liabilities and ultimately bankruptcy.
    In order to ensure full compliance, the IRS plans to put in 
place a strenuous performance measurement program that will 
monitor all telephone contacts with taxpayers, conduct taxpayer 
surveys, and audit company records. In protecting taxpayer 
privacy, the proposal would deputize participating companies 
under section 6103, placing a great responsibility on us to 
maintain the privacy of taxpayer information.
    The private sector companies would not have access to 
return information. While the information shared with the 
companies would be limited to the name, Social Security Number, 
amount of debt, penalties, interest and payment history, 
unauthorized disclosure would bear the same dire consequences 
as disclosing return information.
    All private sector staff working on this contract would be 
fingerprinted and undergo a thorough Federal background check. 
At Allied International Credit, we ensure a quality work staff 
by focusing our recruiting efforts at local colleges, churches 
and the military.
    It is important to state that under the proposal, not a 
single job currently performed by IRS employees would be lost 
due to the program. In fact, the business case provides that 
the program would result in an additional 70 full-time 
employees at the IRS and should be seen as supplementation of 
the current IRS resources, not a replacement of current 
employees.
    On a similar issue, some commentators have stated that 
simply hiring additional IRS employees would be cheaper. In the 
very narrow field of finding debtors, skip tracing, contacting 
them and counseling them through payment procedures, the 
private sector brings state-of-the-art practices and tools to 
the table. This is our core business and we do it as 
efficiently and effectively as anyone. Otherwise, we could not 
stay in business very long.
    In closing, our recommendation for the Committee is to 
provide the IRS guidance and enough flexibility to resolve any 
issue arising down the road without mandating a one-size-fits-
all solution.
    We would like to state our strong belief that passage of 
the proposal allowing private debt collection companies to 
partner with the IRS will not only raise billions of dollars in 
a fair and equitable manner, but will restore people's 
confidence that all taxpayers are paying their fair share.
    Thank you once again for affording me this opportunity to 
testify before the Subcommittee today.
    [The prepared statement of Mr. Smith follows:]
Statement of Dexter Smith, Senior Vice President, Allied International 
                  Credit Corporation, Atlanta, Georgia
    Thank you for this opportunity to testify before the Committee on 
Ways and Means Subcommittee on Oversight. Over the past few months, I 
have appreciated the opportunity to work with the members of this 
committee and your staffs to enact legislation clarifying the ability 
of the IRS to partner with the private sector to collect debts owed to 
the people of this country.
    I am Dexter Smith, Senior Vice President at Allied International 
Credit Corp. (US) (Allied International Credit) with our U.S. 
headquarters in Atlanta, Georgia. As our name implies, we are an 
international company with experience collecting debt in the US, Canada 
and the United Kingdom. In 2002, we handled more than 1.6 million 
collection accounts, valued at over $11.5 billion. Currently, we 
partner with the Department of Education in collecting student loan 
debts.
    If this legislation is enacted, we believe we could bring 
internationally recognized business processes, state-of-the-art 
technology, and most importantly highly trained and professionally 
qualified people to the job of shrinking the currently ballooning 
accounts receivable at the Internal Revenue Service.
    Allied International Credit endorses the proposal before the 
Subcommittee today and believes that the proposal strongly supports the 
mission and strategic goals of the Internal Revenue Service as directed 
by Congress under the Internal Revenue Service Restructuring and Reform 
Act of 1998; while at the same time protecting taxpayer rights and 
privacy, preserving the jobs of current IRS employees, and most 
importantly strengthening citizen's faith in the integrity and fairness 
of the tax system.
    Top quality service to each taxpayer--The proposal will support IRS 
efforts to provide prompt, professional, and helpful treatment to each 
taxpayer, even in cases where additional taxes may be due. We feel that 
the substantial resources and private sector best practices brought to 
the table by the debt collection companies will help the IRS advance 
this important goal by increasing the number of cases resolved and 
shortening the resolution time of each case. Further, because the added 
resources of the private companies will substantially shorten the cycle 
for collecting outstanding debts, penalties and interest will be 
reduced in the long run. Finally, because the program will promote a 
greater reliance on case management, rather than on harsh collection 
activities such as seizures, levies, and garnishments the program will 
make the tax compliance system fairer and more tolerable to taxpayers.
    Top quality service to all taxpayers--The IRS strives to increase 
fairness of compliance and increase overall compliance. We believe 
strongly that with this proposal will come a substantial increase in 
the number of successfully closed cases, which will increase the 
fairness, and level of overall compliance. There will be a strong 
message that if you owe, you will not be ignored, increasing the 
incentive for taxpayers to meet their obligations sooner rather than 
later.
    Productivity through a quality work environment--The IRS endeavors 
constantly to increase employee job satisfaction. We believe that the 
proposal will increase employee morale because it will allow IRS 
employees to focus on accounts more suited to their training and 
technology tools. The skip tracing skills of the private companies such 
as Allied International Credit will present IRS employees with new 
contact information that will allow them to focus on cases requiring 
their expertise and enforcement powers such as law enforcement and 
actions against property. Elimination or a significant reduction of 
case backlogs will provide a greater sense of accomplishment. In short, 
if every employee along the IRS tax pipeline knows that their efforts 
are more effectively resulting in taxpayers meeting their obligations, 
they will have a better overall satisfaction in their work.
    Protecting Taxpayer Rights--Under the proposal the rules governing 
taxpayer rights would provide for the proverbial belt and suspenders. 
The private sector employees would be subject to all rules applicable 
to IRS employees, plus more. In addition to mandating that all private 
sector employees would be subject to rules governing automatic firing 
and the taxpayer bill of rights, the private companies would be subject 
to all the requirements of the Fair Debt Collection Practices Act 
(FDCPA). For instance, under current law, FDCPA prohibits collection 
agencies from communications with taxpayers at an unusual or 
inconvenient time or place, or any conduct that is harassing, 
oppressive or abusive. Failure to comply with these stringent 
requirements subjects our company to legal liabilities, and ultimately 
bankruptcy if we fail to comply.
    In order to ensure full compliance with taxpayer rights 
protections, the Internal Revenue Service plans to put in place a 
strenuous performance measurement program that will monitor all 
contacts with taxpayers, including live monitoring of telephone 
contacts, review recorded conversations, taxpayer surveys, audits of 
company records and periodic reviews of collection performance.
    At Allied International Credit, as with many in the industry, we 
consider these requirements to be just a starting point. Our management 
objectives go one-step further: we strive to treat the people we 
contact like customers. We are deeply aware of the sensitivity of 
``public debt'' and have established a solid background and experience 
in delivering respectful collections services to taxpayer debtors. We 
know that there are many reasons people are unable to meet their 
obligations, none of them easy. Our employees are measured and rewarded 
for their fair and equitable treatment of everyone we contact in the 
course of our business. Each one is well versed in the latest thinking 
on debt management and counseling. As just one example of our emphasis 
and forward thinking in this area, we have created a special web site, 
www.payandrelax.com.
    Protecting Taxpayer Privacy--Equally important is the priority the 
program places on protecting taxpayer privacy. Confidentiality of 
taxpayer data is at the heart of our voluntary system of self-
assessment. In short if people do not believe that the financial 
information they provide the IRS is going to be kept from prying eyes, 
taxpayers may not be as forthcoming with the data they provide to the 
agency.
    Once again, we believe the industry is up to the job. The proposal 
would deputize participating companies under section 6103, placing a 
great responsibility on us to maintain the integrity of taxpayer 
information. While the information shared with the companies would be 
limited to the name, social security number, amount of debt, penalties 
and interest and past history of payment, disclosure would bear the 
same dire consequences as disclosing return information. Namely, Allied 
International Credit and any company contracting to provide these 
services would be subject to private law suits, criminal fines, and 
even imprisonment. I can assure you that the shareholders of my company 
would take the requirements of section 6103 with the utmost 
seriousness.
    How do we propose to maintain the strictest compliance with the 
spirit as well as the letter of this essential law? Once again, we 
start with the quality of our workforce. We focus our recruiting 
efforts at local colleges, churches and military bases. People working 
this account would undergo a completed and certified background check, 
including finger printing. Our training on all statutory and contract 
requirements is focused, strenuous and continuous. Finally, we use a 
balanced matrix of measurements to reward and advance our employees 
similar to the system established under Commissioner Rossotti for all 
IRS employees.
    Partnering with the current IRS workforce--Allied International 
Credit has experience partnering with governmental union and non-union 
employees throughout the world. Initially, these workforces have been 
understandably reticent about contracting out debt collection. Our 
experience shows that in a short time, strong partnerships are formed 
that provide greater job satisfaction for all employees involved. Part 
of that process is educating employees on the details of the program 
and working with their representatives to foster a collaborative, win-
win environment.
    It is important to state upfront that under the proposal no jobs 
currently performed by IRS employees will be outsourced. Not a single 
job would be lost due to the program. In fact, the business case 
provides that the program would result in an additional 70 FTEs at the 
agency. The program should be seen as a supplementation of current IRS 
resources, not a replacement of current employees. In fact, the 
Administration's budget provides for 887 additional FTEs to augment 
current enforcement and taxpayer service resources. Once the program is 
successfully implemented as proposed, all indications from the IRS are 
the program should substantially increase the need for additional 
revenue officers. Additional revenue officers will be required to work 
those cases where, the private collection company has found the 
taxpayer and identified his or her assets, had to remit the case back 
to the IRS for enforcement actions because the taxpayer refuses to pay 
voluntarily.
    On a similar issue, some commentators have stated that simply 
hiring additional IRS employees would be cheaper. First, it is 
important to compare apples to apples and oranges to oranges. The 
private sector brings state-of-the-art practices and tools to the table 
in the very narrow field of finding debtors (skip tracing), contacting 
them and counseling them through payment procedures. This is one of our 
core businesses. In this narrow, but very important aspect of debt 
collection, the private sector brings the best efficiencies and 
practices existing today. The IRS currently employs professionally 
trained Revenue Officers with the authority to contact taxpayers and, 
if necessary, to seize assets and contact third parties for collection 
of the debt. Some could argue that these harsher measures are ``more 
efficient'' than entering into payment agreements, but we believe that 
it is better policy to provide debt counseling and help taxpayers 
voluntarily meet their obligations, saving the harsher property and 
wage seizures to only uncooperative debtors.
    Finally, this proposal would provide the agency with the resources 
of as many as 12 private companies in as short a time as three months. 
Even if the funds were available, the IRS would be hard-pressed to 
hire, train and provide tools for equivalent number of employees over 
many numbers of years. In short, the program will provide the agency 
with the maximum flexibility to hire and, frankly, dismiss immense 
resources as needed.
    Use of Enforcement Results--Opponents of this proposal have pointed 
out that the Restructuring and Reform Act prohibits the use of 
``enforcement results'' to evaluate employees or the use of production 
quotas or goals. It also requires that the Commissioner establish 
Balanced Performance Measurements in line with a new IRS Mission 
statement. The Conference report states, ``In no case should measures 
be used which rank employees or groups of employees based solely on 
enforcement results.''
    The first level focus of the Restructuring and Reform Act was on 
the strong police powers exercised by the IRS to seize property, levy 
on bank accounts, and enforce third party garnishments of wages. These 
powers, which received the highest scrutiny by Congress, will not be 
passed to private collection companies. The private collection 
companies under the contract would have no enforcement powers or 
ability to contact 3rd parties for payment. The second level 
focus of the Act was on how the IRS interacts with all taxpayers on a 
daily basis. Clearly, Congress intended all employees, and consequently 
any outside contractors of the agency, to treat taxpayers as customers, 
with courtesy and respect. They recognized that, while the employees of 
the agency respond strongly to how they are measured on the job, proper 
measurements would in most cases result in proper treatment of 
taxpayers
    With this in mind, former Commissioner Charles Rossotti invested a 
substantial amount of time and resources developing, with input from 
Congress, a very sophisticated measurement system that properly 
balanced efficiency and productivity with fair treatment of taxpayers.
    The Draft Request for Quote (RFQ) also sets out very specific 
balanced performance measurements that are almost identical to the 
measurements developed and used for IRS employees. The performance 
measurements in the RFQ would dictate how much the private companies 
would make and whether or not their contracts could be terminated for 
inadequate performance. The metrics would include overall amounts 
collected, customer satisfaction as measured by independent surveys, 
and overall quality as measured by phone monitoring. In all regards, 
the private debt collection companies would be measured in a similar 
fashion to IRS employees not engaged in enforcement actions.
    Issue for Review--While we substantially support HR 1169 as 
introduced, there are a number of issues that should be reviewed by the 
committee and resolved with guidance in either the statutory language 
or the committee's report. First, most if not all private debt 
collection companies focus on their core business of finding, 
contacting and counseling people owing debt. A number of the more 
collateral elements of the business are outsourced to other private 
companies. These important services include letter and notice writing 
and the maintaining of data banks for skip tracing. It is our 
understanding based on public meetings with the Internal Revenue 
Service that they interpret section 6103(n)--the law governing 
disclosure to contractors--as not allowing them the ability to disclose 
to a second tier of contractors. They have also voiced concerns about 
being able to manage additional layers of contractors even if the law 
did allow for a second tier of contractors. We are afraid that not 
resolving this issue could add significantly to the cost by eliminating 
many able companies from being able to compete for the contract.
    In the case of businesses providing letters or notice writing 
services, they are often small, many times minority owned, family 
businesses. While many companies could bring this activity internally, 
most would prefer to continue to concentrate on their core business, 
while at the same time supporting local small businesses. This would 
have a significant negative impact on the amount of revenue collected.
    On the issue of using outside data banks, it would be much more 
problematic bringing these services internally. As you can imagine, in 
order to keep these data sources updated they must be continuously 
refreshed with new information. It would add significantly to the cost 
and decrease the efficiency of our business to manage the various data 
banks necessary for doing our business.
    Our recommendation for the Committee is to provide the IRS with 
guidance and enough flexibility to resolve this issue down the road 
without mandating a one-size-fits-all solution. For instance, in the 
case of letter services, the IRS may want to contract directly with 
companies to provide these services to the debt collection companies. 
By doing so, they would solve their second-tier contracting problem and 
would be able to manage privacy issues directly. On the other hand, the 
data bank problem would probably best be resolved by certifying 
anonymity of the data run through the systems, similar to what must 
occur with data banks used currently by the IRS. Mostly, I raise this 
issue for public discussion because ignoring it will only result in 
increasing the cost and slowing down implementation of the program.
    Finally, many of the private companies interested in working with 
the IRS on this project are concerned that the IRS may not be given 
enough flexibility to grow and evolve the program over time. While it 
is important to focus initially on the collection of a smaller batch of 
financial accounts receivable, after a number of years of experience 
under their belt the agency may want to expand what they define as 
financial receivables. It may want the companies to focus on older, 
harder to collect debt. Or, it may choose to have the companies focus 
their attention on the newest accounts. My point is that any 
restrictions on amounts to be paid or on the type of debt to be 
collected will only tie the hands of the agency down the line to shape 
the program in the best interest of taxpayers. We urge the Committee to 
provide guidance to the Department of Treasury and the IRS to create a 
robust program--we believe that $30 billion in the first few years is 
quite doable--but also that Congress refrain from placing too many 
restrictions on how the ``experts'' at IRS run the program.
    After all, the intent of the proposal is to establish an effective 
legislative and management framework to support maximum recovery of 
outstanding tax debt.
    Help Restore faith in the Tax System--In closing, we would like to 
state our strong belief that passage of the proposal allowing private 
debt collection companies to partner with the IRS, will not only raise 
billions of dollars in a fair and equitable manner, but will help 
contribute to restoring taxpayers' faith in the integrity of the tax 
system. According to the latest annual report of the IRS Oversight 
Board, currently 60 percent of identified tax debts are not being 
pursued. By collecting these debts in the most humane fashion possible, 
while at the same time visibly shrinking the accounts receivable at the 
IRS for the first time in history, citizens will have more confidence 
in the fairness of the tax system. It will restore people's confidence 
that all taxpayers are paying their fair share. Thank you once again 
for affording me with this opportunity to testify before the 
Subcommittee today.

                                 

    Chairman HOUGHTON. Thank you, Mr. Smith. Now, Mr. Shaver.

     STATEMENT OF JON D. SHAVER, CHIEF OPERATING OFFICER, 
 DIVERSIFIED COLLECTION SERVICES, INC., SAN LEANDRO, CALIFORNIA

    Mr. SHAVER. Mr. Chairman, Mr. Pomeroy, Mr. Foley, thank you 
for the opportunity to be here today. My name is Jon Shaver, 
and I am Chief Operating Officer at DCS, headquartered in San 
Leandro, California. We have offices in Grants Pass, Oregon; 
Lathrop, California; and San Angelo, Texas.
    I would like to make a few comments in the time I have 
available today. I have submitted more extensive comments in 
writing for the record.
    The DCS is a debt collection firm that specializes 
exclusively in the collection of Federal and State debt. We are 
recognized in our industry as the benchmarking standard, 
consistently producing the best results for our clients. Our 
performance superiority is the result of our state-of-the-art 
technology, the professionalism of our staff, and knowledge 
gained from a quarter of a century practicing in the government 
debt arena.
    We served following evaluation and selection in a national 
competitive process as a subject matter expert to advise the 
IRS with regard to its prospective contact collection services 
project.
    In our experience, no government agency has ever conducted 
such a thorough and comprehensive planning and development 
process prior to implementation of a contract collection 
services project. The IRS deserves recognition and commendation 
for its process, and the results which are reflected in its 
draft plan.
    We are a Member of a national industry coalition whose 
members include the major firms working for Federal and State 
governments in recovery of defaulted and delinquent government 
debt, including taxes.
    We strongly support H.R. 1169. The experience of the 
Federal Government in planning and implementing supplemental 
contract collection services contracts has been excellent. 
Since 1990, for example, we have contracted with the Education 
Department for collection of defaulted student loans.
    Today, the Education Department oversees a portfolio of 
nearly $13 billion and its contractors return hundreds of 
millions of dollars to the government each year. Many of the 
accounts in this portfolio, by the way, were previously 
designated as uncollectible.
    The Treasury Department, pursuant to the Debt Collection 
Improvement Act (P.L. 104-134), is currently placing about $4.5 
billion in non-tax Federal debt with contractors, again with 
outstanding results.
    Performance-based contracting, strict standards, public 
accountability, and a blending of the best capabilities of the 
government and private sectors in a partnership pursuing the 
public interest is a recipe for success, one which we endorse 
for application in the case of the IRS problem with delinquent 
tax accounts receivable.
    Forty-two States now contact for supplemental collection 
services in the collection of delinquent individual and 
corporate income taxes. Those conducting well-planned 
professional programs are achieving excellent recoveries while 
ensuring fair treatment of all taxpayers through careful 
attention to privacy protection and due process.
    The States have shown that use of contractors in tax 
collection, while the States retain the unique enforcement 
powers of government, is an effective and useful arrangement.
    The private sector specializes in finding and contacting 
delinquent taxpayers and debtors, then working out voluntary 
repayment arrangements. It has no enforcement power of any kind 
nor would it under the provisions of this bill. It is precisely 
because of the lack of governmental powers that we are so 
successful. We have had to learn to find and work with 
taxpayers absent any direct threat of lien, levy, seizure or 
other adverse sanction.
    Enactment of H.R. 1169 will produce positive results for 
the Federal Government. Delinquent taxes will be collected from 
individuals and corporations and otherwise unrealized revenue 
returned to the government.
    A sense of fair play will be restored to the tax system. 
Voluntary compliance will likely increase as attention is paid 
to delinquent tax accounts receivable.
    Thousands of private sector tax-paying jobs will be created 
without eliminating any IRS collection jobs. Taxpayer privacy 
will be protected. Taxpayer due process will be ensured, indeed 
may well be improved, as unresolved, unattended to accounts are 
acted upon and resolved either through payment, administrative 
resolution or appropriate action taken by IRS.
    Working together, the Federal Government and private sector 
can truly partner again, as it has for many years in the 
Education Department and the Treasury Department, producing 
jobs, additional needed revenue, greater fairness in and 
compliance with the tax collection and administration system 
and confidence by the public that their government is paying 
attention to its and their business. We urge the Committee to 
act favorably on H.R. 1169. Thank you.
    [The prepared statement of Mr. Shaver follows:]
   Statement of Jon D. Shaver, Chief Operating Officer, Diversified 
           Collection Services, Inc., San Leandro, California
    Mr. Chairman and Members, good afternoon. My name is Jon Shaver. I 
am Chief Operating Officer at Diversified Collection Services, Inc. 
(DCS) headquartered in San Leandro, California. We have offices in 
Grants Pass, Oregon; Lathrop, California; and San Angelo, Texas.
DIVERSIFIED COLLECTION SERVICES BACKGROUND INFORMATION
    DCS specializes in assisting federal and state government agencies 
in recovery of delinquent and defaulted debt, both tax and non-tax. In 
our industry, we are recognized for producing the best results for our 
clients and are considered the benchmarking standard against which the 
performance of other firms is measured. Our performance superiority is 
a result of our state of the art technology, the professionalism of our 
staff, and the knowledge gained from over a quarter century of practice 
in the government debt collection arena. For the Federal Government, we 
have been effectively collecting defaulted student loans since 1990 
pursuant to several contracts managed by the U.S. Department of 
Education. Additionally, we are now in our second contract with the 
U.S. Department of the Treasury, where our work focuses on recovering 
non-tax debts owed the Federal Government.
    In addition to our work with the Federal Government, we also 
provide collection services for numerous federally chartered state 
student loan guarantee agencies. Lastly, we contract with numerous 
states to provide supplemental collection services for the recovery of 
delinquent tax accounts receivable.
HOW THE PRIVATE COLLECTION INDUSTRY WORKS
    The private collection industry, almost exclusively, provides its 
services to clients--whether government or private sector--on a 
contingent fee basis. That is, we receive payment generally only in 
those instances where we produce a successful resolution result. In 
most instances, resolutions are in the form of payments but, in the 
government debt arena, we are also often compensated for administrative 
resolutions as well. An administrative resolution is one that closes a 
case without a payment--examples include for reasons of death, 
permanent disability, eligible bankruptcy, defunct corporations, and so 
on.
FEDERAL CONTRACT COLLECTIONS EXPERIENCE HAS BEEN EXCELLENT
    The experience of the Federal Government with contract collection 
services has been outstanding. Today, the U.S. Department of Education, 
pursuant to the requirements of the Higher Education Act, manages a 
nearly $13 billion dollar defaulted student loan portfolio--many of 
these loans being previously designated as uncollectible--and is 
recovering hundreds of millions of dollars per year from it. The U.S. 
Department of the Treasury, pursuant to the Debt Collection Improvement 
Act, is currently placing more than $4.5 billion in non-tax federal 
debts for collection with outstanding results. These programs encompass 
all debt--with some special international exceptions--except delinquent 
taxes, owed to the government of the United States. The government's 
experience has been positive as these contracted efforts embody best 
industry and government collection and contract oversight practices, 
along with a very public accounting and accountability process. Strict 
standards, performance based contracting, public accountability, and a 
blending of the best capabilities of government and the private sector 
in a partnership pursuing the public interest is a recipe for success--
one which we endorse for application in the case of the IRS's major 
problem with delinquent tax accounts receivable.
WE RESPECT THE DEBTORS AND TAXPAYERS WITH WHOM WE WORK
    We are aware that, because of taxpayer abuses by IRS in the past, 
there is concern about the application of the industry standard of 
contingent fee compensation. We make careful effort here to point out 
that private industry has no reputation for taxpayer abuse. We do not 
have power to threaten, intimidate, or harass as a result of 
enforcement powers. We do not determine debts owed. We are legally 
required to work with and assist taxpayers who dispute their tax debts. 
Taxpayers with whom we deal have immediate access to remedies that can 
strongly sanction improper conduct. The private debt collection 
industry has decades of experience in consumer protection and 
respecting due process.
TWENTY-FIVE YEARS OF CONSUMER PROTECTION
    This year marks the twenty-fifth anniversary of the landmark Fair 
Debt Collection Practices Act, the template for today's consumer 
protection standards. The private consumer sector has a mature and 
robust body of consumer debt protection law in place that the private 
collection industry conforms to lock-step. If we were to fail to honor 
these laws, we would lose contracts, be subject to civil penalties, 
lose our reputations, and ultimately go out of existence. Actual 
experience shows that our behavior is just the opposite of the 
stereotypical view. Our industry makes literally millions of contacts 
per year, with only an occasional compliance problem.
    Finally, while many people would prefer that we not contact them 
and remind them of their obligations, there are many that have thanked 
us for our professionalism and for relieving them of the worry and 
adverse effects of having unpaid government obligations hanging over 
them.
    We are an industry that relies on providing information, 
communication, and assistance in the decision-making relating to debt 
resolution for both individuals and corporations. We have no power of 
any kind, neither to harass or intimidate anyone nor to take any 
enforcement action resulting in involuntary surrender of property or 
assets. Our effectiveness is achieved because we are better at finding 
missing people and corporations than is the government and in 
communicating with them in an effort to find ways to assist them in 
voluntarily resolving their obligations.
SERVICE AS A SUBJECT MATTER EXPERT TO THE IRS
    Because the depth and breadth of our experience, we were selected 
through a national competitive review process to consult with the 
Internal Revenue Service, along with two other national collection 
services firms, regarding its prospective supplemental contract 
collection services project. This project, which would require the 
authority and provisions contained in H.R. 1169, would involve the 
IRS's use of private collection firms to supplement the collection 
function of the IRS. More specifically, it would involve limited 
collection activities by private firms to recover delinquent tax 
accounts receivable in business and corporate cases where the 
delinquent tax obligation is undisputed by the taxpayer.
    With more than twenty-five years of experience in federal and state 
contracting for collection services as context, we can say 
unequivocally that the planning and program development process 
employed by the IRS staff in developing the contract collections 
support program is the best, most thorough, and complete process ever 
conducted. Examination of industry and other government best practices, 
consultation with industry as to the practicality of certain concepts, 
an overarching concern for taxpayer privacy protection, assurance of 
taxpayer due process, and a strongly focused sense of fairness and 
equity toward all taxpayers are among the highlights of the exemplary 
effort of the IRS relating to this project. IRS's preparation and 
dissemination for public review and comment of a comprehensive and 
detailed draft Request for Information should give Congress and the 
public comfort that the IRS has been careful and deliberate in its 
planning. The scope and intent of the project is clear and is intended 
to use the private sector only on a limited basis to do what it does 
best--find and contact delinquent individual and corporate taxpayers 
and provide them with information and assistance on how to best 
voluntarily resolve their tax delinquencies.
DCS IS A MEMBER OF A NATIONAL INDUSTRY COALITION
    DCS is a member of a broad-based national coalition of private 
sector collection and debt recovery firms that strongly support the 
idea of supplemental contract collection services for the IRS and that, 
accordingly, supports H.R. 1169. We in industry have had ample time to 
publicly discuss the IRS draft Request For Information, the process by 
which it was developed, the effects of placing the volume of delinquent 
federal tax accounts receivable on the capacity of the private sector, 
and other related issues.
WHAT WILL BE ACCOMPLISHED IF H.R. 1169 IS PASSED?
    DCS, consistent with the opinion of others in our industry, 
believes firmly that the supplemental contract collection services 
program envisioned by the IRS and as reflected in the language of H.R. 
1169 will do several things:

     LRestore a sense of fairness to the tax system--although 
some may not like paying taxes, all will be treated fairly and 
consistently.
     LImprove voluntary compliance and disincentivize the 
waiting game. No individual or corporation will be rewarded by simply 
``outwaiting'' an overburdened IRS until the statute of limitations 
runs its course.
     LFind missing taxpayers--by bringing the technological 
superiority and flexibility of the private sector to bear on the 
problems of finding and contacting ``skipped'' taxpayers; that is, 
those who have moved and are unlocatable by the IRS. Simply put, the 
private sector's proprietary tools for finding and working with such 
individuals and corporations are unparalleled.
     LEnhance IRS's level of customer service to all 
taxpayers--private contractors will locate and contact each delinquent 
individual and corporation and work through the process of achieving a 
voluntary financial or administrative resolution where possible. 
Additionally, private firms will be readily accessible to taxpayers and 
will maintain a continuous relationship with those in repayment 
arrangements, assisting them as needed throughout the repayment 
process. IRS staff will be able to focus on complex cases requiring 
their special training and expertise using tools uniquely available to 
them.
     LProduce revenue for the government, very likely in excess 
of the government's current estimates of recovery.
     LCreate needed jobs--thousands of private sector tax-
paying jobs will be created without transferring or eliminating 
existing or authorized federal tax collector positions--our private 
sector effort will be limited to resolving the backlog of delinquent 
tax receivables and will in no way be involved with current year 
receivables. Moreover, the private sector will only have authority to 
work out voluntary arrangements with taxpayers as no enforcement 
authority will be conveyed whatsoever.
LKEY ASPECTS OF TAX COLLECTION ARE NOT INHERENTLY GOVERNMENTAL
    We have occasionally encountered, during our many discussions with 
members of Congress concerning H.R. 1169, the notion that tax 
collection is an ``inherently governmental'' function that ought not be 
contracted for. While we would agree that seizing an individual's or 
corporation's assets, implementing a lien or levy, or conducting a 
criminal investigation are clearly functions that ought to be limited 
to the role of government, we are unconvinced that finding and talking 
to taxpayers about tax debt owed the government is the exclusive domain 
of government. Our view in this regard is held by forty-states in the 
United States, all of whom contract for supplemental collection 
services in the recovery of delinquent individual and corporate tax 
debt.
THE EXPERIENCE OF FORTY-TWO STATES IS INSTRUCTIVE
    The states recognize, from long experience, that the private sector 
has an important and useful contribution to make in the recovery of 
delinquent tax debt, even though the scope of engagement of private 
collection firms in the service of the states is limited to the same 
role that the IRS envisions for its program--that is, finding and 
contacting delinquent taxpayers and working through voluntary repayment 
plans with them or referring back to the IRS for an appropriate 
administrative resolution (hardship, death, disability, innocent 
spouse, etc.) or other action. The experiences of the states vary based 
on what type of supplemental collection support program they conduct 
and depending on the extent to which best practices are embedded in 
their programs. Those conducting well-planned, professional programs 
are achieving excellent recoveries and ensuring that all taxpayers are 
treated fairly, with intense focus on ensuring taxpayer privacy and due 
process protection. Nearly all of the states have in place well-
developed Taxpayer Bills of Rights and additionally, the fundamental 
consumer protections embedded in the federal Fair Debt Collection 
Practices Act are made applicable to states' taxpayers by means of 
contractual provision.
LTAXPAYER PRIVACY, DUE PROCESS RIGHTS, AND CONFIDENTIALITY WILL BE 
        PROTECTED
    A fundamental concern of Congress with regard to IRS contract 
collection services has been and continues to be taxpayer privacy, due 
process protection, and data security and confidentiality. These issues 
are also of concern to the IRS, as reflected in its draft Request For 
Information document, and to the private sector that would be 
responsible for compliance. We are confident that the data security and 
confidentiality safeguard provisions that the IRS envisions are readily 
implementable, auditable, and practical. We are certain that abiding by 
the requirements for due process and professional treatment of all 
taxpayers is readily achievable. How do we know? We know because we 
have been providing similar levels of protection for our other state 
and federal customers and their taxpayers, borrowers, and debtors for 
many years. While we are particularly sensitive to the issues of 
taxpayer abuse that Congress has periodically addressed through the 
Taxpayer Bills of Rights and the Restructuring and Reform Act of 1998, 
we are nonetheless confident that we can meet the strict standards that 
Congress and the IRS will impose through the provisions of H.R. 1169 
and contracts issued pursuant to it. Moreover, we will continue to 
apply the consumer protection standards that other applicable federal 
statutes require while performing tax collection services for the 
Federal Government.
THE IRS CONTRACT COLLECTION SUPPORT PROGRAM IS FEASIBLE
    Finally, we would offer our view that the supplemental contract 
collection support activity envisioned in the bill is practical and 
feasible. As noted earlier, the private sector stands ready to assist 
the government in this undertaking, having in place the technical and 
people capability and capacity as well as the means to quickly expand 
both in service to the IRS. The program that H.R. 1169 would authorize 
and that is reflected in IRS's publicly vetted plan document is one 
that reflects learning from past incomplete efforts, as well as the 
very best practices reflected in other successful federal and state 
public debt collection work.
RECOMMENDATIONS TO IMPROVE THE CURRENT BILL
    While the fundamental provisions of H.R. 1169 are solid, we would 
suggest that the Committee consider amending the bill to expand the 
scope of the value of tax accounts that would be placed for collection. 
The IRS, in its draft Request For Information, has identified at least 
$30 billion in receivables that would benefit from the efforts of the 
private sector. Extending the scope from $13 to $30 billion would 
ensure that a more balanced portfolio, including mid-balance and high-
balance accounts would be placed for collection. Moreover, the 
government would receive significantly greater revenues. Our industry 
has been consistent on this recommendation and we make it again here, 
subject to the provision that implementation would be administratively 
feasible and that the implementation would be within a three year 
period from date of enactment of H.R. 1169.
    We have also suggested some technical changes to ensure that there 
is greater clarity with respect to ensuring that existing laws not be 
in conflict as a result of contracting procedures or requirements and 
that there be an administrative process available to taxpayers, similar 
to that in place for the IRS, to resolve disputes quickly and without 
litigation. We would note quickly that no taxpayer would be precluded 
from litigation under existing federal law; rather, this provision 
would simply standardize and harmonize remedies for complaint 
resolution.
    Our recommended language has been submitted to staff for your 
consideration.
H.R. 1169 IS A GOOD GOVERNMENT MEASURE
    Good government opportunities may be many, according to some 
observers. However, few are as clear as this one. Working together, the 
government and private sector can truly partner and produce jobs, 
additional revenue, greater fairness in the tax collection and 
administration system, and confidence by the public that their 
government is paying attention to its business.
    Thank you for this opportunity to hear our views on this matter. I 
would welcome any questions that you may have.

                                 

    Chairman HOUGHTON. Thank you, Mr. Shaver, very much. Ms. 
Wu.

   STATEMENT OF CHI CHI WU, ATTORNEY, NATIONAL CONSUMER LAW 
                 CENTER, BOSTON, MASSACHUSETTS

    Ms. WU. Mr. Chairman, Representative Pomeroy and 
Representative Foley, the National Consumer Law Center thanks 
you for inviting us today to testify regarding the proposal to 
employ private debt collectors to collect IRS tax debts.
    As consumer law specialists, we have over 30 years of 
experience in debt collection matters, and it is from that 
perspective that we raise grave concerns about this proposal.
    The debt collection industry has a record of aggressive 
members who abuse and harass consumers. While there are many 
debt collectors who obey the law, there is a significant 
minority who do not. Don't just take our word for it. A FTC 
report said the debt collection industry is the FTC's single-
most complained about industry for 4 years running. Over 25,000 
complaints in 2002 and the FTC says this is the tip of the 
iceberg.
    What kind of complaints are we talking about? Threats of 
violence, obscenities, racial slurs, midnight calls, lewd 
language, threats of immediate arrest and imprisonment and debt 
collectors posing as government officials.
    Now, we have heard it said that the Education Department's 
use of private collectors is a success story and a model for 
the IRS. I am sorry to tell you from the consumer perspective 
this is not true. There certainly have been abuses in the 
student loan context. Private collectors have misrepresented 
themselves as the Education Department. They have overcharged 
consumers for collection fees, used misleading telegrams, 
browbeat borrowers into unaffordable payment plans despite the 
protections of the Higher Education Act (P.L. 89-329), and 
threatened to offset Supplemental Security Income (SSI) 
benefits even though SSI benefits are protected from offset.
    Now, some of the abuses in the student loan context have 
specifically arisen because of the fact that a Federal 
Government program is involved. Student loan borrowers have 
many rights such as discharges, exemptions and deferrals, 
creating a complex scheme, but many private collector employees 
don't know enough about the scheme, resulting in consumers 
being deprived of important options that they are entitled to.
    Based on this experience, we believe that IRS collection of 
its own debts will not only be more cost effective, but it will 
ensure that taxpayer rights are better protected. The IRS 
employees understand tax law, tax procedure, and taxpayer 
rights.
    Now, if you insist on going forward with this proposal, it 
must be significantly revised to include strict taxpayer 
protections in the statutory authorization. I will mention a 
few.
    First, private collectors cannot be compensated on the 
basis of contingency alone, because it creates too potent a 
motivation for collectors to engage in aggressive tactics while 
ignoring taxpayer rights. That protection must be in the 
statute. Financially distressed and low income tax payers 
eligible for special IRS protection should not be targeted by 
private tax collectors. Studies have shown that many consumers 
fall behind on their debts not because they are deadbeats, but 
because something unexpected and catastrophic has happened: a 
serious illness, a death in the family, the loss of a job. To 
sic private collectors on these already vulnerable families is 
simply unconscionable.
    Let us not be under any illusion that the private 
collectors are going to go after the high-flying tax cheats. It 
is not the modus operandi of private collectors to handle 
complex tax shelters, fraudulent property transfers, or 
discover hidden assets.
    Private collectors must not be permitted to use the 
powerful administrative remedies of levies, liens, and 
garnishments. Such protections must be in the statute and there 
must be prohibitions against any threats of such administrative 
remedies.
    Private collectors must be covered by all of the 
protections in the FDCPA. H.R. 1169 currently does not do that. 
It applies the fair tax collection rights at section 6304 of 
the IRS code. This is not adequate because certain critical 
protections are missing from the IRS version, and currently the 
FDCPA does not apply to tax debts. They are not considered 
consumer debts under that act.
    Private collectors must be required to return a case to the 
IRS if there is contested liability or if the taxpayer seeks a 
settlement or a payment plan. That last point is very important 
because payment plans involve the exercise of discretion. We 
have heard too many horror stories in the student loan context 
of borrowers being browbeat into payment plans they cannot 
afford, the payment plans fail, and it creates more financial 
distress for the taxpayer.
    Taxpayers must be given adequate disclosures of their 
rights, remedies, and there should be a prominent disclosure 
that the collector is not the IRS but a private contractor and 
is not entitled to use IRS special administrative remedies.
    There must be a strict and meaningful oversight system over 
private collections including a toll-free complaint line, 
privacy rights of taxpayers must be stringently protected, and 
last but not least, there should be a private right of action 
for taxpayers to sue private tax collectors who violate their 
rights with significant penalties for violations. This will 
complement limited IRS resources and oversight.
    Use of section 7433 of the IRS code as currently proposed 
is inadequate because that provides only for actual damages 
which alone will not be enough to deter abuse. Private 
collectors will shrug off lawsuits as a slap on the wrist. Only 
when we have strong private attorney general enforcement with 
public oversight can we even attempt to have a private debt 
collection scheme that balances collections with fairness to 
taxpayers. Thank you for the opportunity to testify today.
    [The prepared statement of Ms. Wu follows:]
   Statement of Chi Chi Wu, Attorney, National Consumer Law Center, 
                         Boston, Massachusetts
    Mr. Chairman, Representative Pomeroy, and Members of the 
Subcommittee, the National Consumer Law Center thanks you for inviting 
us to testify today regarding the proposal to employ private debt 
collectors to collect IRS tax debts. We offer our testimony here on 
behalf of our low income clients, as well as the Consumer Federation of 
America.(1)
---------------------------------------------------------------------------
    \(1)\ The Consumer Federation of America is a nonprofit association 
of almost 300 pro-consumer groups, with a combined membership of 50 
million people. CFA was founded in 1968 to advance consumers' interests 
through advocacy and education.
---------------------------------------------------------------------------
    The National Consumer Law Center is a nonprofit organization 
specializing in consumer issues on behalf of low-income people. We work 
with thousands of legal services, government and private attorneys, as 
well as community groups and organizations, from all states who 
represent low-income and elderly individuals on consumer issues. As a 
result of our daily contact with these advocates, we have seen many 
examples of harsh and abusive debt collection practices against low-
income people in almost every state in the union. It is from this 
vantage point--many years of observing the harassment against the less 
sophisticated and less powerful in our communities--that we supply 
these comments.(2)
---------------------------------------------------------------------------
    \(2)\ In addition, NCLC publishes and annually supplements sixteen 
practice treatises which describe the law currently applicable to all 
types of consumer transactions, including Fair Debt Collection (4th ed. 
2000 and Supp.) and Student Loan Law (2d ed. 2002).
---------------------------------------------------------------------------
    The use of private debt collectors to collect tax debt raises a 
number of serious concerns. We believe the IRS should not use private 
debt collectors, for a number of reasons:

     LThe debt collection industry has a record of aggressive 
members who abuse and harass consumers. The potential of exposing 
millions of taxpayers to collector abuse in the name of the United 
States will undermine the sense of faith and fairness in our government 
and tax administration.
     LIRS collection of its own debts will be more cost 
efficient, and it will ensure that taxpayers rights are better 
protected. IRS employees understand tax law, tax procedure, available 
payment options, and taxpayer rights and remedies.

    If this proposal does go forward and private collectors are used, 
the proposal must be significantly revised to include strict taxpayers 
protections, such as:

     LPrivate tax collectors cannot be compensated on the basis 
of contingency or commission alone. Financially distressed taxpayers 
eligible for special IRS protections should not be targeted by private 
tax collectors.
     LPrivate tax collectors must not be permitted to use the 
powerful array of special administrative remedies that Congress has 
granted the IRS.
     LPrivate tax collectors must be covered by all of the 
protections in the federal Fair Debt Collection Practices Act, 
including the requirement to stop contacting a consumer if a cease 
communication letter is sent.
     LPrivate collectors must be required to return a case to 
the IRS if there is contested liability or the taxpayer seeks a 
settlement or payment plan.
     LTaxpayers who are subjected to private tax collection 
must be informed of all of their rights, remedies, and available 
options.
     LThe privacy rights of taxpayers must be stringently 
protected.
     LThe IRS must institute a strict and meaningful oversight 
system over private collections, including a toll-free complaint line.
     LThere must be a private right of action for taxpayers to 
sue private tax collectors who violate their rights, with significant 
penalties for violations.
Debt Collection Industry's Record of Abuse
    While there are many debt collectors who obey the law, there is a 
significant minority who do not. These collectors pound away at 
Americans who've fallen behind on their debts with tactics that can be 
both frightening and illegal. In addition to the horror stories we at 
the National Consumer Law Center know about, statistics from the 
Federal Trade Commission tell a similar story. In 2001, the latest year 
available, the FTC received 15,819 consumer complaints about debt 
collection agencies--giving debt collectors the impressive title of the 
FTC's most complained-about industry for the third year 
running.(3) Furthermore, the FTC report characterizes this 
the tip of the iceberg, stating: ``The Commission continues to believe 
that the number of consumers who complain to the agency represents a 
relatively small percentage of the total number of consumers who 
actually encounter problems with debt collectors.''
---------------------------------------------------------------------------
    \(3)\ Federal Trade Commission, Annual Report: Fair Debt Collection 
Practices Act (June 2002)
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    What kind of misconduct has been documented in the debt collection 
industry? The FTC report cites harassment, threats of violence, racial 
slurs, calling consumers' work places, revealing alleged debts to third 
parties and demanding excessive payments. At the National Consumer Law 
Center, we hear about midnight calls, obscene and lewd language, 
threats of immediate arrest and imprisonment, bogus threats to seize 
property without judicial process, and debt collectors posing as 
government officials.(4)
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    \(4)\ See, e.g. Jean Chatzy, Stop Calling Me!, Time Magazine, March 
10, 2003, at 68; Andrea Coombes, Debtor Abuse, CBS Marketwatch.com, 
February 20, 2003, available at www.CBSmarketwatch.com.
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History of Collection Abuses for Student Loans
    Some have said that the Department of Education's privatization of 
collections is a success story and should be a model for the IRS. I'm 
sorry to tell you that from the consumer perspective, this is not true. 
Many of the debt collection abuses I speak of have occurred in the 
student loan context. Private collectors of student loans have 
repeatedly deliberately deceived consumers by misrepresenting 
themselves as the Department of Education. They've overcharged 
consumers for collection fees, used misleading telegrams to trick 
borrowers, browbeaten borrowers into unaffordable payment plans, 
threatened them with actions that collectors can't take, and pressured 
consumers to borrow from relatives.
    Moreover, one of the three collection agencies that IRS has chosen 
to ask for advice on privatizing tax collections has been the subject 
of repeated lawsuits over its student loan collections.(5) 
Another company expected to bid on this proposal has been known to 
misrepresent itself to consumers by using the Department of Education's 
name on its stationary and to intimidate and confuse consumers with its 
claim of affiliation with the IRS.(6)
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    \(5)\ See Romine v. Diversified Collection Services, 155 F.3d 1142 
(9th Cir. 1998); Kort v. Diversified Collection Services, 2001 WL 
881449 (N.D. Ill. August 2, 2001); Farley v. Diversified Collection 
Services, 1999 WL 965496 (N.D. Ill. September 30, 1999).
    \(6)\ See Peter v. GC Services, 310 F.3d 344 (5th Cir. 2002); 
Gammon v. GC Services, 27 F.3d 1254 (7th Cir. 1994) (debt collector 
used its status as IRS software vendor to imply to credit card debtors 
that it had special access to IRS).
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    Some of the abuses in the student loan context have specifically 
arisen because of the fact a Federal Government program is involved. 
Student loan borrowers have many important rights, such as discharges, 
deferments, different payment options, and exemptions, creating a 
complex scheme for collections. Yet many private collectors do not have 
enough knowledge about these schemes, which results in consumers being 
deprived of important options to which they are legally entitled. Even 
worse, some private collectors misrepresent these rights or steer 
consumers into options more profitable for the collector. For example, 
collectors have been known to strong-arm student loan borrowers into 
agreeing to payment plans that the borrowers could not afford and did 
not want, despite the consumer's rights under the Higher Education Act 
to a reasonable and affordable payment plan.(7) Collectors 
have threatened to offset federal benefits for SSI recipients, even 
though SSI benefits are protected. They steer consumers into loan 
refinancing options which may not be appropriate for the consumers. 
Some collectors aggressively threaten wage garnishments, failing to 
inform or misrepresenting the rights of consumers to hearings and 
exemptions. Others charge collection fees that exceed the amounts 
authorized by Department of Education regulations.(8)
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    \(7)\ See, e.g., Arroyo v. Solomon and Solomon, 2001 WL 1590520 
(E.D.N.Y. Nov. 16, 2001).
    \(8)\ See, e.g., Padilla v. Payco General American Credits, 161 
F.Supp.2d 264 (S.D.N.Y. 2001).
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Tax Debts Will Be Collected More Efficiently and Fairly by IRS 
        Employees
    The administrative scheme and rights of taxpayers under tax law is 
just as complicated as that under student loan law, if not more so. The 
potential for collectors to misunderstand or misrepresent these rights 
or steer taxpayers away from options that do not as richly compensate 
the collector is even more worrisome. Of course, the complexity of the 
tax scheme raises the simple question--why not give the IRS adequate 
resources to do its job. The IRS is uniquely qualified to collect 
taxes--its employees understand tax law, tax procedure, available 
payment options, and taxpayer rights and remedies. If IRS is not being 
given by the Congress the resources it needs to do additional 
collections, Congress should provide adequate resources to the IRS, and 
not give up precious tax dollars and the well-being of taxpayers to an 
aggressive industry well-known for abuses amongst its ranks.
    Furthermore, this proposal will not provide more money to Treasury, 
or it will do so on the backs of those least able to defend themselves. 
Collection agencies will want the easiest, freshest, least complicated 
cases. These are the same cases, however, that IRS could easily handle. 
Such ``cherry picking'' will ultimately mean fewer, not more, tax 
dollars in the coffers of Treasury.
    As for those high flying tax cheats, the public should not be under 
the illusion that private collectors will solve that problem. It is not 
the modus operandi of private collectors to handle complex tax 
shelters, fraudulent property transfers, or discover hidden assets. 
They will not want to deal with millionaire tax dodgers with phalanxes 
of high-priced lawyers. Private debt collectors will want cases 
involving middle and working class wage earners, whose salaries are 
easily garnishable and who are unable to afford legal representation.
Collector Compensation Should Not Be Based on Contingency Alone
    While not perfect, another reason IRS employees are preferable to 
private debt collectors is that IRS employees do not have the powerful 
incentives that encourage them to pursue measures that are not in the 
best interests of both taxpayers and the tax system. The current 
proposal to pay collectors 25% is a recipe for abuse and harassment. 
Even though the collectors' fees are not added on top of the tax debt, 
a 25% contingency system provides a potent motivation to collectors to 
engage in aggressive tactics, while ignoring taxpayer rights. After 
all, every dollar collected from a taxpayer means 25 cents for the 
collector, which inevitably will spur certain collectors to push the 
envelope and the law. In addition, collectors will steer taxpayers away 
from less profitable options to which the taxpayer is entitled. One 
simply cannot have a proposal to use private debt collectors that is 
fair to taxpayers if the compensation structure is based on contingency 
alone.
LFinancially Distressed Taxpayers Should Not Be Targeted by Private Tax 
        Collectors
    Many taxpayers who owe tax debts are not deadbeats. Studies have 
shown that overwhelmingly consumers fall behind on their debts because 
something unexpected and catastrophic happened--a serious illness, a 
death in the family, the loss of a job. Very few consumers deliberately 
avoid their debts when they have the ability to pay them. The majority 
of debtors are your friends, relatives, and neighbors--good people who 
want to pay their debts but simply can't and still stay afloat, and who 
have every intention of paying once they get back on their feet. To let 
loose private hired guns on these already vulnerable families will only 
cause increased family distress and social costs that can be 
substantial.
    Thus, if IRS is permitted to farm out its collections to private 
debt collectors, a critical issue will be the selection of which 
taxpayers will be subject to that collection. Currently, there are 
significant protections for low-income and financially-distressed 
taxpayers, including the availability of ``currently not collectible'' 
status. It would undermine the fundamental fairness of tax 
administration to permit private debt collectors to target families 
that qualify for taxpayer protections based on their sheer poverty. 
Without clear safeguards keeping private collectors targeted at higher 
income tax delinquents, private collectors will have few scruples about 
using strong pressure for payments from financially distressed 
households. IRS employees are reputed to be strong collectors but most 
will work with families that have fallen on hard times.
Taxpayer's Rights Must Be Protected
    Other strict protections must be included in any legislation 
permitting private tax collection, to avoid the abuses we've seen in 
the student loan area. First, taxpayers must unequivocally, clearly and 
conspicuously be informed of all their rights and the types of relief 
available to them. As mentioned earlier, student loan private 
collectors have an abysmal record of according consumer loan rights, 
such as fraudulent school discharges to fraud victims, loan deferments 
to returning students. Thus private debt collectors must be required to 
provide a copy of IRS Publication 1 (Your Rights as a Taxpayer) and 
Publication 594 (The IRS Collection Process) with the first written 
communication or within 5 days of the first oral communication.
    Private collectors cannot be permitted to use IRS administrative 
remedies, such as non-judicial levies, liens, and garnishment. In the 
student loan context, the use of administrative garnishments has given 
collectors an overwhelming weapon with which to wring submission from 
borrowers, using threats to bully those who are entitled to discharges 
or other remedies. Imagine what private debt collectors, some of whom 
are already known for making bogus threats to seize homes to frighten 
consumers, will do if they actually have the power to place non-
judicial liens on a taxpayer's home. Not only should collectors not 
have special administrative remedies, there must be strict prohibitions 
against collectors representing or implying that they have the right to 
use such remedies, with significant penalties for violation. A false 
threat is just as devastating for unsophisticated taxpayers.
LPrivate Tax Collectors Must be Covered By ALL of the Protections Under 
        Federal Debt Collection Law
    Private collectors of IRS debt must be covered by Fair Debt 
Collection Practices Act (FDCPA).(9) The FDCPA provides the 
most important protection for consumers from abusive or unfair actions 
by debt collectors. While a few states have adopted similar statutes, 
in the overwhelming majority of states, the FDCPA remains the primary 
law specifically delineating the permissible activities of debt 
collectors. The finding articulated by Congress in 1978 remains valid 
today, in that ``[e]xisting laws and procedures [other than the FDCPA] 
for redressing these injuries are inadequate to protect consumers'' 15 
U.S.C.  1692(b).
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    \(9)\ Private collectors of tax debts are currently mostly likely 
not covered under the FDCPA because tax arrears are not considered 
consumer ``debts'' under that Act. See Pollice v. National Tax Funding, 
225 F.3d 379 (3rd Cir. 2000); Beggs v. Rossi, 145 F.3d 511 (2nd Cir. 
1998).
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    The FDCPA establishes general standards of proscribed conduct, 
defines and restricts abusive collection acts, and provides specific 
rights for consumers.
    The standards protect a consumer from invasion of privacy, 
harassment, abuse, false or deceptive representations, and unfair or 
unconscionable collection methods.

     LSpecific acts that are prohibited include late night or 
repetitive phone calls and false threats of legal action.
     LThe Act gives a consumer the right to require a collector 
to stop all collection contacts.
     LIt requires a collector to deal with a consumer's 
attorney when the consumer has one.
     LIt gives a consumer the right to require a collector to 
verify the existence, legality, or amount of a disputed debt it is 
attempting to collect.
     LThe courts require strict adherence to the Act's explicit 
terms to accomplish the remedial and preventative goals of Congress.

    In fact, the FDCPA was the model for the fair tax collection rights 
at 26 U.S.C.  6304. However, certain critical FDCPA protections are 
missing from section 6304, and mere application of that section as 
currently proposed is not enough to protect consumers.(10) 
In particular, private collectors must be subject to section 1692c(c) 
of the FDCPA, which requires that they cease contacting a consumer, 
with certain exceptions, if the consumer sends a written notification 
stating that the consumer wishes the debt collector to cease further 
communication with the consumer. This is the single most important 
``release valve'' for distressed families to avoid harassment and get 
an aggressive collection agency off their backs immediately, without 
need to resort to a lawsuit or a cumbersome complaint process. When a 
consumer is being harassed by a debt collector, even a few weeks delay 
can cause unbelievable stress and anxiety on his or her family. Of 
course, the IRS will have the option of taking the case back or 
pursuing administrative or legal remedies if the consumer has sent a 
cease communication letter.
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    \(10)\ The omission of certain requirements in 26 U.S.C.  6304 is 
not surprising since that section was intended to apply to IRS 
collectors, i.e., the original creditor. Original creditors are usually 
subject to fewer requirements than third party collectors. However, 
since the IRS is proposing to use third party collectors, all of the 
requirements of the FDCPA must apply to those entities.
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LPrivate Tax Collectors Should Not Be Permitted to Handle Contested 
        Liability, Offers-in-Compromise, or Payment Plan Negotiation
    Another important right not present in 26 U.S.C.  6304 is the 
right to validation of a debt. Section 1692g of the FDCPA gives the 
consumers the right to dispute a debt or its amount, and requires the 
debt collector to go back to the creditor to verify the debt. For tax 
debts, we believe there should be a special validation requirement, in 
that if the consumer disputes liability or amount, the case must be 
returned back to IRS. Private debt collectors cannot be permitted to 
handle issues of contested tax liability. Unsophisticated taxpayers 
must be protected from paying amounts that are not actually owed--an 
accurate determination of tax liability is beyond the ability of most 
consumers and will not be in the interest or within the skills of the 
private tax collector.
    Furthermore, the case must be returned to IRS if the taxpayer wants 
a payment plan or settlement--these options cannot be negotiated by 
collector. As discussed earlier, private collectors have a history of 
browbeating consumers into payment plans they cannot afford. Not only 
will an unrealistic payment plan result in more taxpayer distress and 
ultimately prove a failure, but it will undermine the ability of the 
taxpayer to ensure that she can pay this year's tax obligation, thus 
subverting current tax compliance to line the private collector's 
pockets.
    Under the FDCPA, consumers must be given certain notices, including 
information about the right to have the debt validated. Because of the 
unique nature of tax debts and the options available to taxpayers, 
taxpayers must be given additional information in plain language so 
that they are informed of their taxpayer rights. This notice must 
inform taxpayers of the right to return the case to IRS if the 
consumer: 1) disputes liability or amount of liability; 2) wants to 
apply for an Offer-in-Compromise; or 3) wants a payment plan. In 
addition, the written communication should include notice of the 
taxpayer's FDCPA rights, including the right to send a cease 
communication letter. It should include a prominent disclosure that the 
collector is not the IRS, but a private contractor and is not entitled 
to use special IRS administrative remedies. Finally, as discussed 
above, copies of IRS Publication 1 and 594 should accompany the written 
communication.
Taxpayer Privacy Must Be Protected
    Another concern is the privacy rights of taxpayers. The IRS treats 
personal tax information as confidential and private. There must be 
strict prohibitions against use or sharing of IRS data for purposes 
other than collection of federal tax debt. This prohibition must 
include sharing of information internally within a private collection 
agency and with affiliates or credit bureaus. The current proposal 
would impose on private collectors the same restrictions against 
dissemination of taxpayer information as IRS employees are currently 
subject to. However, even when privacy protections exist, private 
contractors have an abysmal record of protecting the confidentiality of 
taxpayer information.(11) It is not difficult to posit that 
taxpayer privacy will be compromised as tax returns are shared with 
increasing number of collectors, many of whom may have other debts they 
are pursuing against the taxpayer, such as state tax 
debts(12) or consumer credit debts. After all, if a taxpayer 
is unable to pay his federal tax debts, it is likely he cannot pay his 
state tax debts or his credit cards debts--and the information in the 
IRS database will be temptingly available for the private collector to 
use to collect those debts as well.
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    \(11)\ See, e.g., Office of the Inspector General, Social Security 
Administration, Federal Agencies' Control over the Access, Disclosure 
and Use of Social Security Numbers by External Entities, February 2003.
    \(12)\ An unanswered issue is how federal-state information sharing 
agreements on tax collection will play out when private debt collectors 
are involved.
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LThe IRS Must Establish a Strict Oversight Program and a Meaningful 
        Complaint Process
    Private debt collectors have never been completely successful with 
clamping down on the bullying culture within their ranks. If there are 
those debt collectors who have no compunction against violating the 
FDCPA and other laws, even official IRS prohibitions may not be 
adequate. This is a risky experiment, at best, that the IRS is 
proposing. Thus, the IRS must establish a stringent oversight and 
monitoring program for its private collection program. There must be 
frequent audits and compliance reviews with real penalties for poor 
performance in respecting taxpayer rights. Employees of private debt 
collectors must be required to give out their real names and some sort 
of identifying information, so that rogue employees can be identified. 
One tactic used in the debt collection industry is that employees will 
refuse to give their names or will give false names so that consumers 
and their attorneys cannot track down the employee who actually 
perpetrated abuse. This permits the debt collection agency to disclaim 
responsibility for and knowledge of abusive employees.
    There must be a toll-free complaint line and staff assigned 
specifically to deal with complaints. Furthermore, taxpayer complaints 
must be weighted seriously against a private collector. Many debt 
collection complaints are based on oral communications. The IRS must 
not be permitted to discount taxpayer complaints on the basis that 
``it's just your word against theirs.''
LTaxpayers Must Have the Right to Take Legal Action Against Private 
        Collectors Who Violate Their Rights
    In conjunction with a stringent IRS oversight program, there must 
be a private right of action for private collector violations, with 
significant penalties. To use the current scheme under IRC, 26 U.S.C.  
7433 is inadequate. Section 7433 only provides for actual damages; it 
does not provide for any statutory damages or the right to file class 
actions. The primary ``actual damages'' suffered by most victims of 
abusive debt collectors are those that flow from mental distress. Loss 
of sleep, anxiety, stress, and worry may be very hard to prove months 
and years later, and are always difficult to place a monetary value on. 
Also the cost and discomfort to the injured consumer of getting on the 
witness stand and reliving the collector's abuse during a former period 
of financial distress in order to prove actual damages deters many 
consumers. Without statutory damages or class actions, actual damages 
will not be adequate to deter abuse. Private collectors will shrug off 
lawsuits as a slap on the wrist or a cost of business. Only strong 
public oversight with private enforcement can ensure that we will have 
a private debt collection scheme that balances collections with 
fairness to taxpayers.
Conclusion
    Based upon over 30 years of experience on behalf of consumers in 
debt collection matters, we at NCLC have grave concerns about the 
current proposal to permit IRS use of private debt collectors. The 
experience in the student loan context would predict, not a shining 
success as some have promised, but a legacy of taxpayers being 
harassed, deprived of their lawful rights and options, and mislead. 
Taxpayer abuse by private tax debt collectors will not reflect well on 
the IRS, our tax administration, or our government.
    If this proposal is to go forward, it must be significantly revised 
to include strict taxpayers protections and a meaningful oversight 
system. Private debt collectors must not be permitted to use the 
special collection powers of the IRS, negotiate payment plans or 
settlements, deal with contested liability, or even hint that they can 
do any of the above. Private debt collectors should never be sicced on 
financially distressed low-income taxpayers. Private debt collectors 
must be bound by ALL of the requirements of the federal Fair Debt 
Collection Practices Act. Taxpayers must be informed of all of their 
rights and options in dealing with tax debt. Taxpayer privacy must be 
respected. Private tax collectors who violate the law must be subject 
to both meaningful sanctions by IRS as well as private enforcement. 
Only with all of these protections will we have a chance of avoiding 
the abuses that have plagued student loan collections as well as debt 
collection in the private sector.
    Thank you for the opportunity to testify today.

                                 

    Chairman HOUGHTON. Well, thank you very much, Ms. Wu. I 
have just got a couple of questions, one really to the three 
people, the head of the association and Mr. Smith and Mr. 
Shaver, and then I would like to ask one of you, Ms. Wu.
    When you embark on a program like this, you are looking at 
three things. You are looking at costs, you are looking at 
return, and you are looking at service. So, really what 
abilities do your agencies have that the IRS does not have in 
this particular process of collections?
    Mr. SMITH. Are you addressing that to me, sir?
    Chairman HOUGHTON. Sure. Anybody, because you are 
representing the industry.
    Mr. SHAVER. Mr. Chairman, the private sector has, as I 
commented, at least in my oral remarks, superiority in the 
technological field. Our primary capability that separates us 
from government in the arena of collection and specifically 
those accounts that are difficult to find and collect is our 
ability to locate individuals. That is number one.
    Number two, I also commented that we have no enforcement 
capability. We have no ability to threaten people into 
submission. We do not adjudicate the tax determination. We do 
not initiate any enforcement activities, and so consequently 
whether it is in the area of tax collection or student loan or 
in any other area of debt collection, we have had to learn how 
to talk to people, communicate with them about their options, 
and our success only comes about when there is a voluntary plan 
to either make a payment in full or partial payment, an 
installment program or something of that sort. Those I think 
are two exceptional hallmarks of the private debt collection 
sector.
    Chairman HOUGHTON. Okay. Thank you. Do you have any 
comments, Mr. Smith or Ms. Andersen?
    Mr. SMITH. I would like to add that in the private sector, 
the collection agencies create a culture of success amongst its 
employees by beyond just the fact of compensation from a 
commission structure, and that in and of itself helps to create 
a more superior product when it comes to servicing our 
customers.
    For example, we have employees share option plans that we 
bring to bear in respect to rewarding employees in the overall 
good of the performance of the agency under the particular 
contracting question. So, for example, we do not believe that 
there would be an issue, as Ms. Wu has already touched on, in 
respect to just being paid commission. This is a balanced 
matrix approach, and that is very important that we keep that 
in mind, and we think that the PCAs could do a superior job 
because of that balanced matrix performance measurement.
    Chairman HOUGHTON. Good. Well, I assume that you agree with 
that; is that right, Ms. Andersen?
    Ms. ANDERSEN. I certainly agree with their testimony. I 
would also like to add that there are several other motivators 
for collection agencies in terms of compliance with the law. 
One obvious one, I suppose, is the desire to perform adequately 
on any contract for any creditor. It also is to decrease any 
potential litigation against the agency.
    My point is that an optimally run collection agency will 
have weekly appraisals performed internally where they 
literally look at any complaints, any disputes, any 
nonconformities with their collection activities, and what this 
results in is immediate remedial action in terms of correcting 
any problems with the messages left on machines, with the 
communications shared with consumers, with the collectors' 
tactics, with any actual communication deficiencies, whether 
it's in the written communication or the oral communication.
    I would like to underscore that, in the modern collection 
agency, the goal is to understand the needs of the consumer and 
to collect debt based on that understanding--as opposed to a 
more traditional approach as has been suggested, where 
collection is done under threat.
    Chairman HOUGHTON. All right. Well, thank you very much. 
Just very quickly, because my time has run out, Ms. Wu, you are 
worried about collectors being compensated solely on the basis 
of the amount they collect. If I understand it, there is a 
process there which sort of insulates that type of individual 
impetus to try to collect more and more and more and hurt the 
taxpayer, this thing called a balanced scorecard.
    Also, when the results come in and the collections are 
made, they go directly to the IRS and then come back to the 
company. They don't go to the individual. The company decides 
what portion the individual will get.
    Now, you can say that if somebody is very effective, he 
will get a different bonus, or he might get opportunities for 
advancement in the company, but basically my impression is 
there is a pretty good immunization that goes on here.
    Ms. WU. Well, from what I understood from the National 
Taxpayer Advocate's comments, and I may be wrong, I just heard 
them for the first time, is that there would be this balanced 
scorecard, but compensation would be on the basis of 
contingency. So, that there might be incentives for customer 
service, but when it comes down to the bottom line, it is 
contingency and contingency only, and that is risky for 
consumer, for taxpayer rights. That really creates incentives.
    It creates incentives not just for the agency but for the 
individual employees, because the individual employees are paid 
on the basis of commissions, and so they have the incentive to 
be as aggressive as possible. So, you may have an agency where 
not every single employee is engaged in aggressive tactics but 
some are, and the issue is if you have enough of those, if you 
have thousands out of the millions of taxpayers being contacted 
who have horror stories about aggressive tactics, that will 
undermine the sense of fairness in our government and our tax 
administration.
    Also, even with a balanced scorecard approach to 
compensation, I believe it should be in the statute. The 
statutory formulation right now is contingency.
    Chairman HOUGHTON. All right. Thank you very much. Mr. 
Pomeroy.
    Mr. POMEROY. I congratulate the panel. It has been very 
interesting. Let me begin by just affirming for you my own 
support of your industry. Now whether or not your industry 
ought to be doing public debt collection, that is the question 
before us. Whether your industry ought to be doing private debt 
collection, I believe you play a critical part in the 
marketplace. People ought to pay what they owe.
    Specialized techniques and infrastructure of developing 
debt collections obviously is a very important part of making 
the whole commercial world work, and so make no mistake about 
where I am coming from. I think you are an integral part of the 
marketplace. I commend you for what you do.
    The question before us: should the IRS start just taking 
over debt over here? First, let us talk about student loan debt 
just for a minute as whether it offers any precedential value 
or not. To me it's not as surprising that the Federal 
Government has enlisted private collectors for student loan 
debt as it is that the Federal Government is writing student 
loans in the first place. The Federal Government is basically 
discharging a private function: loans and loan administration.
    So, the fact that in the exercise of that function, it 
would outsource debt collection seems to me entirely 
reasonable. Basically it's a private life function the Federal 
Government is doing in the first place, as opposed to tax 
collection.
    Let us talk for a minute about that. I am not very familiar 
with this industry. Mr. Smith, you indicate that you are have 
operations in three countries with your company.
    Mr. SMITH. Yes, Congressman.
    Mr. POMEROY. Is it a U.S. domiciled company?
    Mr. SMITH. We are a Toronto-based company from a global 
perspective. However, 100 percent of all of our business for 
the Federal Government student loan contract is operated out of 
the United States, and we are incorporated in the State of 
Delaware, and 100 percent of all the employees staffed are U.S. 
citizens.
    Mr. POMEROY. How about other debt? Do you get across 
border, outsourced, you know you locate call centers wherever, 
within the United States, outside the United States?
    Mr. SMITH. Yes, many organizations within our industry have 
multiple sites throughout the country as well as the world. As 
you know, of course, we are becoming more of a global economy, 
and it is just best practices to do so. In respect to the 
United States, we have Atlanta and Phoenix.
    Mr. POMEROY. Things we might want to keep an eye on is this 
might not just involve then discharging debt collection or tax 
collection over to the private sector, but U.S. tax collection 
to outside of the border, other nationalities, other countries, 
could be, unless we tighten it up within the contract.
    Mr. SMITH. No, that is not what we would include in our 
proposal, Congressman, and that is not the tact that we have 
taken with the Education Department, as well we have been 
awarded the contract by the Education Department with full 
understanding that we are a global organization.
    Mr. POMEROY. These things have a----
    Mr. SMITH. As well as approved by the U.S. General Services 
Administration.
    Mr. POMEROY. The public perception matters. I hate the 
thought of a town meeting back in Bismarck where I am talking 
about this Canadian firm that we have hired to collect U.S. 
taxpayer debt. It just doesn't sit well with me somehow.
    These techniques are quite interesting, and Mr. Shaver, you 
indicate that the lack of government powers is why you are so 
successful. I suppose you mean you have had to become more 
creative. How would you exercise your authority on behalf of 
the Federal Government? How would your firm in collecting debt? 
Would you have your private employees identify themselves as 
private employees or would there be an inference that they are 
working for the Federal Government or the IRS in their 
collection calls?
    Mr. SHAVER. Typically we identify that we are a private 
firm under contract to whoever the client may be. We are 
contacting whoever the individual is with respect to either a 
specific student loan obligation or a Treasury Department 
obligation, tax debt, this type of thing.
    Mr. POMEROY. Would there be mailings that you would 
incorporate as part of your collection effort?
    Mr. SHAVER. I would think so, yes.
    Mr. POMEROY. Would they be also similarly identified making 
it very clear that it was a private contracting entity, or 
would this private firm be providing mailing that appeared to 
be public?
    Mr. SHAVER. Our understanding is clear at this point that 
it is the intent of the IRS to provide us with a specific 
language that would be conveyed to taxpayers, but it would be 
on our letterhead as a contractor in the service of government.
    Mr. POMEROY. My early days as an insurance regulator, I was 
often cracking down on agents that would send things looking 
like they were a Medicare offer.
    Mr. SHAVER. I understand. We do not do that, and do not 
misrepresent our position.
    Mr. POMEROY. You also indicate, Mr. Shaver, and this is a 
point that really my gripe is not with you on this, but you 
indicate this is going to restore a sense of fair play to the 
U.S. taxpayer. I don't think so if basically the only new 
enforcement effort that we are talking about is this private 
outsourced activity involving that pool of taxpayer debt that 
is not fully collected but has been partially paid.
    Again, not the difficult tax collection issues, not the tax 
shelters, not these other things. In my opinion, this is going 
to whack the middle-income taxpayer disproportionately to any 
other income segments of the taxpaying public.
    Mr. SHAVER. I absolutely understand your concern, and let 
me say this about complex cases. We resolve some fairly complex 
commercial debt cases for the Treasury Department on a regular 
basis, and we are prepared to take on the caseload that IRS is 
given authority to assign to us to resolve.
    My comments with regard to restoring a sense of tax 
fairness may just simply be the opinion of me and several other 
people with whom I work and discuss these matters. I pay my 
taxes. It may be impolitic in this house to say I don't always 
like to do that, but nonetheless I pay my taxes.
    I want my neighbors to pay their share of the taxes and in 
cases where there are economic hardships, innocent spouse 
issues, those kinds of things, those matters ought to be 
resolved and not left lingering. There are resolution means 
administratively available for those kinds of cases to be 
resolved.
    Mr. POMEROY. I totally agree with you. I really do. I think 
your industry helps people deal with that which they must do: 
pay what they owe. In the end they sleep better at night for 
it. It is the right thing to do.
    Now, again, whether or not that effort by the Federal 
Government through its IRS ought to be given to others or 
whether we ought to staff up and do it, that is the question 
before us. I believe we ought to staff up and do it, as you 
obviously have been able to gauge from my comments today. I 
understand, however, your significant contribution and helping 
people accept their accountability for their responsibilities.
    Ms. Wu, I don't have a question for you. My time is up, but 
I think that you play a very important role as well, because in 
the tension that is in the marketplace in terms of collection 
activities, we need to have a pushback to make sure we are 
doing this within the bounds of acceptable play, so I commend 
you for your efforts as well.
    Ms. WU. Thank you, sir.
    Mr. POMEROY. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you very much. Mr. Foley.
    Mr. FOLEY. Thank you, Mr. Chairman. I am very encouraged 
about the conversations. There are some obvious levels of 
concern. I have had my identity stolen, and credit run up on my 
account, and despite my best efforts with a collection agency--
I repeatedly told them the story that I wasn't the person that 
they were trying to pursue. Each time they said fill out forms 
and send in the information; 3 or 4 days later, I would get 
someone else calling who was new to the case, and so I was 
browbeat day after day after day for a $786 charge that was 
made out in my name from Target.
    So, I am somewhat sensitive to Ms. Wu's concerns, because I 
want to make certain as we are establishing a system by which 
we can forcefully get people to comply with the laws, but in 
cases like mine where I consistently was able to advocate the 
person who applied for this credit is not me, they stole my 
Social Security, they have a different address in Pompano, I 
have never lived there, and yet I went through probably a year 
and a half of what I considered unmitigated harassment, calling 
the house, calling different and sundry people.
    So, there are points in time when you start getting 
concerned are overzealous people trying to collect their wages 
or their debts when they have the wrong person? Will they ever 
give into the fact that they have made a mistake or somebody 
has made a mistake, there is fraud?
    After a year and a half, I finally got it off my record, 
but I thought to myself, here I am a Member of Congress, I have 
the capabilities of calling people, I have the capabilities of 
talking. I could not imagine if I was a poor guy working all 
day, trying to raise a family, coming home at night, having to 
deal with this now, considering it is the fraudulent start.
    So, I think we have got to establish that those provisions 
are, in fact, in this documentation. I would not mind if you 
would submit for the record your employment applications as to 
what you consider important when you hire somebody for debt 
collection, if you would supply that for us, criteria for 
employment, the actual application, educational requirements. 
Things of that nature I think would be helpful to see exactly 
how you pursue employees.
    I assume we are not talking Wharton grads here that are 
going to be on the phone?
    Ms. ANDERSEN. Might you also be interested in written 
testimony in response to your question about some 
characteristics of an optimum collection agency?
    Mr. FOLEY. Yes.
    Ms. ANDERSEN. Factors that may be considered?
    Mr. FOLEY. Yes.
    Ms. ANDERSEN. Okay.
    [The information is being retained in the Committee files.]
    Mr. FOLEY. These are important because the IRS, as you will 
remember, in Philadelphia recently had a firm that they had 
retained who was supposed to be processing IRS tax returns, and 
they apparently stuck them in a drawer and never quite got to 
them. So, in addition to collecting, we obviously ought to be 
processing these things. So, we are very, very cognizant of the 
fact.
    Ms. Wu, you raised some questions, too, and I understood 
those, but they are part of the bill. Many of the concerns that 
you laid out are part of the bill, but you seem to be 
strenuously opposing the measure even with the safeguards that 
you ask be in here. They are here, so I am curious whether you 
like the proposal at all?
    Ms. WU. Well, first of all, I would like to say that not 
all the safeguard I have proposed are in the bill. As I 
mentioned, there are some distinctions between application of 
the fair tax rights at 6403 of the IRS code and application of 
the FDCPA itself. There are some critical distinctions, as 
there should be, because the FDCPA applies to third-party debt 
collectors, whereas section 6403 applies to the IRS.
    The IRS is the original creditor. Original creditors are 
subject to fewer requirements than third-party debt collectors, 
but when you are talking about third-party debt collectors, you 
need all of the protections of the FDCPA. You need all of the 
remedies in the FDCPA including statutory damages and class 
actions.
    Right now the proposal is to impose the remedies of section 
7433 of the IRS code which only provide for actual damages. 
There are other points, too. I think, contingency based 
compensation alone, it should not exist, and it should be 
prohibited in the statute.
    Even with those protections, I have grave concerns about 
the use of private tax collectors to collect tax debts. Even 
with all of the protections of Federal laws, there are 
collection agencies and collection employees that engage in 
abusive tactics and as I said before, if you start getting 
those, even if it just a percentage of the actual collections 
that go on, it will undermine the sense of fairness in our 
government if a collector in the name of the United States 
starts screaming obscenities or calls at 4 a.m. in the morning, 
that reflects on the Federal Government.
    So, yes, I have serious doubts about the bill even if 
everything that I suggest in my testimony were to be in place.
    Mr. FOLEY. You do agree that those of us who pay our taxes 
should expect others to pay them as well?
    Ms. WU. I agree, of course, everyone should pay their 
taxes. I think collection is best done by IRS employees who 
understand the collection process. They understand tax law. 
They understand tax procedure. They understand the different 
rights and remedies available to taxpayers. This has been one 
of the big problems in the student loan area, where folks who 
are entitled to special remedies, because, for example, they 
have been the victim of some sort of fraud. In this case, it 
would be trade school fraud schools that open up, don't really 
provide an education, and shut down, and the borrowers are left 
holding the bag. You know Congress recognized this; the 
department recognized this. There are discharges available.
    These students or these borrowers don't always get informed 
of their rights to a discharge. Instead, they get steered into 
private loan consolidations because the private loan 
consolidations frankly benefit the collector, and so, that 
borrower who had certain rights didn't know about their rights, 
was not informed of their rights, and ended up paying money 
that they should not have.
    Mr. FOLEY. Let me ask you, though, a fundamental question. 
Would you assume, though, then if we had a government employee, 
an IRS employee making the phone call for collection purpose, 
you are assuming though that that IRS person, that employee, 
would understand the full complexities of the Tax Code.
    Ms. WU. Well, they would have a better chance of it. The 
IRS is in the shoes of the original creditor. Original 
creditors certainly have been known to commit abuses, too, but 
it does not mean the situation is going to get better placed in 
the hands of a third-party debt collector.
    Mr. FOLEY. Well, just to dispel the notion, one of our 
colleagues on the Committee, Clay Shaw, is a Certified Public 
Accountant and a lawyer, and he has somebody else do his taxes. 
That is pretty much what is happening in the complexities of 
the Code, so I am not sure the employees of the IRS are more 
capable of defining or understanding. That is why I am not so 
reluctant to look at a private vendor for purposes of 
collecting.
    Ms. WU. I think an IRS employee has a better chance of 
understanding all the complexities or at least they will have 
more training and experience. One of the things I might suggest 
that you ask for is not only the employment qualifications for 
employees, but also their salaries and the turnover rate, 
because from what I understand some agencies have a fair amount 
of turnover and so even with training when you have a lot of 
turnover, you lose experience and especially with something as 
complicated as tax laws and procedures, losing that experience 
will mean less knowledge, and that will ultimately not be to 
the benefit of the taxpayer.
    Mr. FOLEY. Mr. Chairman, could you indulge me one further?
    Chairman HOUGHTON. Go ahead.
    Mr. FOLEY. Thank you. In regards to the accusation of 
somebody swearing on the phone, yelling and harassing, that is 
something of interest to me having gone through this. I almost 
now wish I would have paid the person's bill, the $785, because 
it may have been far cheaper than putting up with the 
harassment that I received.
    How do you screen people and how do you monitor their 
calling activities? If a person obviously is arrear in their 
payments, I guess you automatically assume to some degree they 
are a bad person. So, if they call and complain about 
harassment, would you accept that as a fact or would you assume 
that it is just this person once again trying to skirt their 
responsibilities? How do you determine your employees?
    Ms. ANDERSEN. First of all, I am with the trade association 
so I do not actually perform debt collection services. I am the 
general counsel of the association that really provides 
training opportunities for companies.
    Mr. FOLEY. If Mr. Shaver would like, whoever would like?
    Ms. ANDERSEN. No, but I would not like to lose my chance to 
respond because it is absolutely critical for you to understand 
that in the training that we do provide, there is a script, 
which includes a strong message to the debt collectors that 
there is not a presumption that consumers are deadbeats. There 
is, in fact, an understanding that many people are literally 
strapped with resources. I would say that if I can offer 
nothing else to this testimony; I do want to dispel the notion 
that debt collectors come to work, licensed in as many as 34 
States thinking that the people they are going to communicate 
with are either bad people or deadbeats or any of the 
stereotypes that you would like to overlay on those 
individuals, because that is not the current formula for 
success, if you will, in terms of collecting debts.
    I would say that it is because of the beauty of the FDCPA 
that Ms. Wu is able to talk about certain abuses that have come 
to light. I would suggest that that is because there is a 
complaint resolution process for consumers to access, and there 
is a private cause of action under the FDCPA afforded to 
consumers. When you take those opportunities/protections away, 
perhaps we will not know about those abuses, and to me that 
would be the real loss for the American public.
    Mr. FOLEY. Mr. Shaver.
    Mr. SHAVER. We have an extensive training program that 
begins the day a person comes in the door and is hired and 
continues for the first 2 years of their employment. Quite 
literally every single day that that person is on the job in 
the first 2 years is structured.
    We have supervisors who routinely and regularly and daily 
monitor the performance and the dialog that collectors have 
with debtors and taxpayers. In our particular company, I can 
tell you, the behavior that you described that was directed to 
you would result in an immediate termination, period. We do not 
tolerate that behavior in our agency.
    I would suggest if there were a contractor and there were 
repeated incidents, meaning it was a cultural problem with the 
contractor, that they should not work for the government, they 
should not be in this business. This is not a business where 
people are threatened, intimidated, harassed, and abused into 
repaying their obligations.
    Mr. FOLEY. They have to have some script like that? It 
cannot be, hey, how are you doing, hope you are well.
    Mr. SHAVER. Mr. Foley, I invite you and the Members of the 
Committee, your staff, to come and visit any of our locations 
at any time unannounced, walk in and see what these folks do. 
They are professional. They are more in what I would call a 
sales kind of approach or counseling approach where information 
is provided. I do not want to dismiss the experiences that Ms. 
Wu has reported to you.
    What I do want to say is that I think she made the 
distinction between a minority of collection agencies that 
behave that way. They should not be tolerated. We have no 
tolerance for that behavior in our industry.
    Mr. FOLEY. I think that is what we need to get at. We have 
to make certain as we pursue this thought process.
    Mr. SHAVER. Absolutely.
    Mr. FOLEY. It is the minority that always gets us in 
trouble. It is that one or two outside the norm that causes 
everyone to have a blemish. As we are bringing this bill 
forward, I want these things to be mindful, because if you are 
one of the 5 or 10 percent that have had a horrific experience, 
then you are somewhat loathe to place this opportunity on 
someone else because it does sting and it is painful and it is 
argumentative and it is debilitating, and particularly when it 
is not your fault, it is even more of this.
    You are thinking to yourself that poor person who really 
went and charged on my Target or--not even on my Target--they 
went and charged and got the merchandise. They are scot free. 
They are enjoying the goods that they have stolen virtually 
from Target and nobody is chasing them. The police do not have 
time for it. There is no opportunity to go after those bad 
people.
    The poor person in my end of the world who is wrongly used 
as the victim ends up having to deal with it. So, I guess my 
caveat is I am willing to pursue and proceed, but Ms. Wu brings 
some very important cogent points to bear, and I hope we all 
use those as we move this legislation forward.
    Chairman HOUGHTON. Okay. Thanks, Mr. Foley. Mr. Pomeroy.
    Mr. POMEROY. Mr. Shaver, I am aware of some prior 
litigation involving some of your business practices, 
specifically involving Western Union. I believe the practice 
would be people would get a Western Union telegram, they call 
back in, because the message was to respond by calling, and 
then that would provide a telephone number for the individual, 
otherwise unlisted telephone number, and that your firm 
provided these numbers to other debt collection services, and 
there was some litigation about that practice. Is that a fair 
or grossly unfair characterization of what occurred?
    Mr. SHAVER. I think it is a characterization that is more 
or less accurate. Let me say two things. We like every business 
in America today are litigated and I literally know of no 
business acquaintance in a private firm that does not deal with 
litigation as a means of dispute resolution. Having said that--
--
    Mr. POMEROY. I agree with you, and I would expect that your 
business is inherently at highest risk for this kind of 
litigation.
    Mr. SHAVER. Well, we do, as you can imagine, deal with 
people that would rather that we do not talk to them, and 
occasionally they will use a variety of means to discourage us 
from doing so including litigating.
    There are a couple kinds of problems that occur under FDCPA 
protections. There are errors of commission where someone does 
something wrong and it is a violation of a specific 
requirement, and it is done by an individual, and there are 
errors that are systemic, meaning that every collection 
business today relies and has to rely on some form of 
technology.
    There can be instances, not in our particular case, but 
there have been instances where technology failures lead to 
multiple letters being sent to someone, or a call being made 
outside of the scope of the time restrictions on making calls 
to individuals and so on.
    Where we find that there are any violations or problems 
systemically with any aspect of FDCPA, we seek to correct those 
as quickly as possible, simply to avoid any future exposure and 
risk.
    Mr. POMEROY. It is kind of like I think that you are an 
excellent panel, and that you are articulate representatives of 
a very legitimate, indeed an important industry. Whether or not 
we ought to enlist this industry for collecting taxes owed by 
U.S. taxpayers, the panel itself does I think give rise to some 
question.
    Mr. Smith's company is Canadian owned. Your prior business 
practice involved eliciting telephone numbers under certainly 
less than disclosing if not misrepresenting circumstances, and 
then providing those to others.
    Mr. SHAVER. Can I offer a clarification, Mr. Pomeroy?
    Mr. POMEROY. Sure.
    Mr. SHAVER. We were sued in that particular litigation as a 
customer of Western Union, buying a service that they offered. 
The matter was resolved and they neither offer the service nor 
do we participate in it.
    Mr. POMEROY. Right. I do understand that. I am worried 
about misrepresentation of the Federal Government and the 
relationship with the Federal Government by private parties. I 
appreciate your clarification. It does allay a bit of the 
concern that I had from just looking at the case. It does go to 
show you if we go down this road, we had better write in 
protections that make it very clear with our private partners 
what the safeguards must be.
    We need to oversee it vigorously. I believe it was Mr. 
Smith that mentioned additional 70 IRS people might be required 
to do this. Well, if they are on average collecting $900 
million, close to a billion dollars each if we put those 70 
people to collecting debt, we would maybe get the best return 
for the value for the taxpayer.
    Well, it is not a discussion we are going to conclude 
today, but I think that we have had a fair opportunity to raise 
the questions that I have had. Thank you, Mr. Chairman. Thank 
you, panel.
    Chairman HOUGHTON. Okay. Thanks, Mr. Pomeroy. Thanks very 
much for coming.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
                     Statement of COLLECTCORP, Inc.
Company Background
    COLLECTCORP, Inc. has been in the business of debt collection since 
1978, specifically with respect to accounts receivable outsourcing, 
early-out programs, and third party collection recoveries. The company 
has enjoyed the respect of those in the industry for a number of years 
as a result of its long history, reputation, and management style. We 
hold to a philosophy of working with the largest debt grantors in North 
America, which affords us a unique opportunity to maximize collectible 
debt while keeping our client base small. This mind-set has proven to 
be tremendously successful. With fewer than 30 clients, we have 
accepted over $2.5 billion for collection in the past 12 months. Our 
work is exclusively limited to the banking and finance industry, as 
well we work with government agencies throughout North America. In 
fact, 41% of our collections work over the past 12 months was derived 
from government clients, making government collections and banking/
finance collections our largest areas of business activity. COLLECTCORP 
has established itself to be an undisputed leader with respect to third 
party collection recoveries for both the private and public sector.
The IRS and Debt Collection
    The IRS knows how lengthy and difficult the collection process can 
be. It is estimated that within the past three years, the amount of 
uncollected individual IRS tax revenue has risen from $7 billion to 
approximately $13 billion. The IRS is not able to recover this amount 
without additional resources and new approaches to collections.
    While the outstanding tax money comes from taxpayers of all income 
brackets, the majority of the backlogged cases account for a small 
percentage of revenue outstanding. It is estimated that approximately 
\2/3\ of the backlogged cases account for 10% of the missing revenue 
while the remaining \1/3\ account for 90% of outstanding revenue. The 
IRS needs to be able to focus on the \1/3\ of their cases that account 
for most of the revenue, which requires an amount of time and effort 
that the IRS does not have when it is saddled with the other \2/3\. 
Furthermore, the number of backlogged cases and uncollected revenue is 
continuing to increase at an alarming rate.
Private Collection Agencies
    Private collection agencies can be used to support the IRS's 
collection efforts. The IRS has an opportunity to free up resources 
through outsourcing to focus the remaining resources on the most 
important backlogged cases. The private collection agencies would focus 
their resources on collecting the debts that reap the smallest returns, 
which would allow the IRS to aggressively pursue the smaller number of 
cases that yield much higher returns. In other words, the IRS would 
direct its attention to the more high profile cases, such as tax 
shelters, while leaving the agencies to the lower profile cases, such 
as people who just chose not to pay their taxes. COLLECTCORP fully 
supports the Administration's initiative and believes that the use of 
private collection companies is a reasonable addition to the IRS's 
collection efforts.
    Our main concern, however, lies in the selection process: the IRS 
needs to closely scrutinize those agencies it is considering for 
collection work. Each collection agency employs different collection 
strategies for individual client needs and utilizes different 
approaches to maximize net collections with differing cost structures 
and commission rates. Consequently, in order to better assess the 
ultimate performance of an agency, a greater emphasis in the evaluation 
criteria should be placed on ``how the work will be done'' rather than 
``how much it will cost''. The criteria for selection must be rigid in 
order to maintain a sense of stability, increase consumer confidence, 
and allay fears of privacy invasion. Particular to privacy, all 
employees should be made to sign both a Confidentiality Agreement and a 
Notice and Acknowledgement of Federal Tax Information and 
Confidentiality of Child Support Information. COLLECTCORP has a full 
time Security Officer that ensures full compliance on all security 
matters including licensing, security clearances, facilities, and 
database. The application of these security requirements is verified by 
our Quality Assurance Department prior to the commencement of the 
contract. The Project Manager then signs off on the project after 
having reviewed a report from the Security Officer and verification 
from the Quality Assurance team. Such privacy measures need to be 
considered when choosing a private collection agency.
    Moreover, there is always a danger of putting one's eggs in too few 
baskets. COLLECTCORP believes that the key to the success of the IRS 
collection outsourcing initiative is to spread the case load amongst a 
large enough pool to be diverse. It has been our experience in working 
with government clients that fiscal and operational objectives can be 
more readily achieved when more than one agency is employed. The 
benefit achieved by using a multiple number of agencies is enhanced 
competition. With more competition, greater returns are realized as 
each agency strives to outperform its competitor. Furthermore, the IRS 
can maximize results by assigning more accounts to those firms that 
perform well and fewer accounts to those that perform poorly. In the 
end, the IRS would benefit from the use of the maximum number of 
agencies your system could administer.
Conclusion
    Many states and other government agencies have used private 
collection companies in the past with much success. The use of such 
agencies would allow the IRS to focus its resources where they are most 
needed while making valuable progress in increasing debt collection and 
decreasing IRS case workloads. If implemented properly through the use 
of multiple agencies that are selected based on how they plan to 
achieve the IRS's objectives and not based on cost, private collection 
agencies would be a practical and efficient addition to the IRS's 
current collection process.

                                 

   Statement of U.S. Army Brigadier General Ret. Robert S. Young, GC 
                      Services, LP, Houston, Texas
    Good morning, Mr. Chairman. My name is General Robert Young. I 
served in the United States Army from 1943 to 1982, the last seven 
years of that time as a Brigadier General. Currently, as Senior Vice 
President of GC Services LP, I run the Washington, DC operations of one 
of the largest private collection companies in the United States. I 
have been associated with GC since 1982.
    Chairman Houghton, I want to thank you for introducing H.R. 1169. 
This legislation addresses an important and growing problem in the 
United States--the increasing backlog of taxes that have not been paid 
to the U.S. Internal Revenue Service.
    GC has a long history with the IRS and its collection of taxes. GC 
has worked with the IRS for more than twenty years. In fact, GC was the 
general contractor for IRS's Automated Collection System, was the 
principal subcontractor for the IRS Integrated Collection System, and 
was one of five collection companies hired by the IRS to participate in 
its outsourcing pilot project in 1996-1997. GC has a history of 
completing projects for the IRS on time and within budget--a rarity 
among IRS contractors. GC also has an extensive history collecting 
state taxes since the mid-1980s and currently collects taxes for the 
states of: Colorado, Illinois, Kansas, Louisiana, Massachusetts, 
Michigan, Missouri, Oklahoma, Ohio, South Carolina, Utah, and Virginia.
    The use of private collection companies to collect delinquent tax 
debts would be a sound addition to the IRS's current collection 
efforts. The IRS needs private collectors. Since 1999, the IRS has not 
even attempted to collect approximately $13 billion per year in 
delinquent taxes. The General Accounting Office reported last year that 
the IRS has had ``dramatic'' declines in collection programs since 
1996. For example, coverage by telephone and field collection programs 
declined by 15% and 45% between 1996 and 2001. By 2001, according to 
GAO, the IRS was deferring collection action on 1 out of 3 assigned 
delinquencies.
    Other government agencies have had success using private collection 
companies. Numerous states use private collectors. My company alone 
collects taxes for twelve states. One of our longest-running tax 
collection contracts is with the State of Michigan and that effort has 
been tremendously successful from day one. In fact, Michigan recovered 
its initial development cost on the Michigan Automated Collection 
System in 1986 within the first four months of the system's operation. 
Since then, GC has collected a total of $1.7 billion for Michigan.
    We also perform collection work for other state debts and for 
municipalities. One of the areas in which private collectors have shown 
particularly good results is in the area of child support collections. 
GAO reviewed private child support collection efforts in 1996 and found 
that for all eleven private contracts it reviewed (covering nine 
states), the states had net revenues from their privatized child 
support collection efforts. In fact, in every state GAO studied that 
fully privatized child support collections, privatized offices 
performed as well as, or better than, public offices in locating 
noncustodial parents, establishing paternity and support orders, and 
collecting support owed.
    One issue that is raised when states consider using private 
companies to collect taxes is privacy. Taxpayer privacy is important 
and we take it very seriously. Private collectors can and do protect 
taxpayer privacy. For example, the IRS will require private collectors 
to adhere to the same privacy protections as public collectors 
including all prohibitions against the disclosure of information in tax 
returns. Private collectors will be required to undergo background 
checks just like public employees and private collectors will be 
subject to penalties if they violate privacy provisions. I was the 
Project Manager for GC during the IRS outsourcing pilot in 1996-1997 
and I can tell you that the IRS thoroughly and successfully tested its 
system of privacy protections during the pilot. It is important to 
protect privacy, but privacy concerns are not a reason to keep the IRS 
from using this necessary tool--private collectors--to address its 
backlog of delinquent taxes.
    It should also be recognized that giving private collectors IRS 
information is not a novel concept. Private child support collectors in 
the states already have access to IRS information as authorized by the 
Personal Responsibility and Work Opportunity Reconciliation Act of 
1996. The IRS also has employed other types of contractors over the 
years--such as computer and technical support people--who have the 
potential to access IRS data and have the responsibility to protect 
such data. Privately employed individuals have access to IRS 
information and protect it.
    By allowing the backlog of delinquent taxes to grow, we not only 
lose the uncollected funds, but reduce the incentives for taxpayers to 
do the right thing and pay their taxes on time. Perceptions that other 
people get away with not paying taxes undermines our entire tax system. 
When that happens we all suffer because we have a larger and larger 
deficit to overcome. Private collectors also would take some of the 
workload off of current IRS employees allowing the IRS to focus on the 
most egregious cases of illegal tax avoidance such as off shore tax 
shelters and the like. Passing H.R. 1169 is a good way to help reverse 
the growing backlog of delinquent taxes and make sure everyone pays 
what they owe.
    I thank the Committee for holding this hearing to consider this 
important issue and I urge you to support H.R. 1169.

                                 

 Statement of Donald B. Kramer, Esq., Kramer & Frank, PC, Saint Louis, 
                                Missouri
    I wish to call to the attention of the Committee that any 
legislation relating to the use of ``private collectors'' should 
include ``collection law firms''. There are more than 500 collection 
law firms in the United States who engage in the collection of 
delinquent accounts as a major part of their practice. These firms 
employ more than 3,500 skilled collectors. The law firms are controlled 
by the ethics and guidelines established by the Supreme Courts in their 
states, and by professional ethics. When a ``pilot'' program was 
conducted several years ago by the Justice Department, the private 
collection law firms were able to recover a greater percentage of the 
accounts than the U.S. Attorneys. Congress should not ignore this. 
These law firms should be given the leeway to collect accounts for the 
IRS as they do for the nation's largest lenders, on a contingent fee 
basis. There is an association of retail collection law firms, called 
the National Association of Retail Collection Attorneys, which enables 
Congress to communicate with the nation's finest collection law firms 
in an easy fashion. Thanks for your consideration of this information.

                                 

 Statement of the National Society of Accountants, Alexandria, Virginia
    The National Society of Accountants (NSA) is pleased to submit 
comments on the proposal to allow the Internal Revenue Service (IRS) to 
use private debt collection agencies (PCA) to collect outstanding tax 
debt. The outsourcing of federal tax debt collection represents a major 
change in federal tax administration policy. We congratulate Chairman 
Houghton for holding this hearing to facilitate an open dialog on the 
merits of the proposal.
    NSA and its affiliated state organizations represent approximately 
30,000 accountants, tax practitioners, business advisors and financial 
planners providing services to more than 19 million individuals and 
small businesses. Most NSA members are sole practitioners or partners 
in small- to mid-sized firms. NSA members agree to adhere to a strict 
code of ethics and professional conduct.
    NSA recognizes the need for the IRS to improve its collection 
processes to reduce the mounting increase in delinquent tax debt. 
Fundamental fairness demands that all taxpayers who meet their tax 
obligations be confident that their neighbors are paying their fair 
share. While the Administration's proposal to use PCAs to collect a 
portion of this debt is innovative, we believe that implementation and 
management of such a program is fraught with danger and risk for all 
taxpayers. We prefer that Congress increase funding for IRS collection 
activities (including added staffing and adequate training) rather than 
outsource this vital activity.
    First and foremost, we are concerned that the use of PCAs may erode 
taxpayer rights and protections. While it is true that H. R. 1169, as 
introduced, prohibits individuals while performing services under a 
qualified collection contract ``. . . from committing any act or 
omission which employees of the Internal Revenue Service are prohibited 
from committing in the performance of similar services,'' much of the 
actual taxpayer protections would be addressed through IRS management 
of the program and in the contracts with the PCAs. Because the IRS 
record in contract negotiation and management leaves much to be 
desired, we fear that once again good intentions will not translate 
into sound contracts.
    The testimony of Commissioner Everson and the National Taxpayer 
Advocate (NTA) details various steps that the IRS will undertake to 
protect taxpayer rights and to provide assurance that oversight of PCAs 
will be stringent. The NTA states that this oversight will include live 
call monitoring in addition to taping of calls and that IRS will have 
an on-sight presence at each PCA.
    We believe such safeguards are appropriate but question whether the 
IRS will have sufficient commitment and resources to maintain the level 
of oversight necessary to protect the public over the long-term. Often 
the IRS must divert resources from existing programs to fund emergency 
projects and to implement legislative changes (i.e. the generation of 
refund checks mandated by the Economic Growth and Tax Relief 
Reconciliation Act of 2001) not contemplated in the IRS annual 
appropriation. The proposed program must be shielded from any such 
reallocation of resources.
    NSA feels strongly that to prevent confusion over taxpayer rights, 
many of the protections described by the IRS should be incorporated in 
the authorizing legislation. To address concerns over IRS contract 
negotiation skills, the IRS should be required to develop a model PCA 
contract and solicit comments from practitioners and other interested 
parties. The actual signed contract between the IRS and a PCA should be 
made available for public inspection.
    H.R. 1169 absolves the Federal Government from liability for any 
act or omission of any person performing services under a qualified 
collection contract. We are concerned that this blanket absolution 
appears to give the IRS a very large escape hatch. By freeing the IRS 
from any responsibility for the program, it sends the wrong signal to 
taxpayers and undermines the IRS commitment to protect taxpayer rights. 
This provision may also cause harm to low-income taxpayers, and others, 
who may lack the resources to sue a PCA for damages caused by improper 
collection activities. We believe this provision should be deleted from 
the bill.
    In an ideal world, the IRS would have the staffing and the funding 
to properly manage the collection of outstanding federal tax debt 
without resorting to third party collection agencies. Should Congress 
decide to allow the use of PCAs, continuing close oversight of this 
program by this Committee is vital.
    NSA thanks the Chairman for the opportunity to provide our 
comments.

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