[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                 THE INTERNAL REVENUE SERVICE'S USE OF
                  PRIVATE DEBT COLLECTION COMPANIES TO
                      COLLECT FEDERAL INCOME TAXES

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 23, 2007

                               __________

                           Serial No. 110-43

                               __________

         Printed for the use of the Committee on Ways and Means
















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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

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                            C O N T E N T S

                               __________
                                                                   Page

Advisory of May 16, announcing the hearing.......................     2

                               WITNESSES

Nina E. Olson, National Taxpayer Advocate, Internal Revenue 
  Service........................................................    42
Colleen M. Kelley, President, National Treasury Employees Union, 
  accompanied by Elizabeth Paray.................................    70

                                 ______

Kevin M. Brown, Acting Commissioner, Internal Revenue Service....    78
Thomas R. Penaluna, President & Chief Executive Officer, The CBE 
  Group, Inc., Waterloo, Iowa....................................    87
Gregory D. Kutz, Managing Director, Forensic Audits and Special 
  Investigations, U.S. Government Accountability Office, 
  accompanied by John J. Ryan, Assistant Director................    92

                       SUBMISSIONS FOR THE RECORD

ACA International, statement.....................................   138
American Association of People with Disabilities, statement......   142
James Wallace, Allied International Credit, statement............   143
Rothman, statement...............................................   144
Sierra Group, statement..........................................   145
Tax Fairness Coalition, statement................................   147





















 
                 THE INTERNAL REVENUE SERVICE'S USE OF
                  PRIVATE DEBT COLLECTION COMPANIES TO
                      COLLECT FEDERAL INCOME TAXES

                              ----------                              


                        WEDNESDAY, MAY 23, 2007

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:12 a.m., in 
room 1100, Longworth House Office Building, Hon. Charles B. 
Rangel (Chairman of the Committee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
May 23, 2007
FC-12

             Chairman Rangel Announces Hearing on Internal

            Revenue Service's Use of Private Debt Collection

               Companies to Collect Federal Income Taxes

    House Ways and Means Committee Chairman Charles B. Rangel today 
announced that the Committee will hold a hearing on the Internal 
Revenue Service's use of private debt collection companies to collect 
Federal income taxes. The hearing will be held on Wednesday, May 23, 
2007, in 1100 Longworth House Office Building, beginning at 10 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony will be from invited witnesses only. Witnesses at the hearing 
will include representatives of the Internal Revenue Service (IRS), 
National Taxpayer Advocate, U.S. Government Accounting Office, National 
Treasury Employees Union, and contractors involved in the collection of 
Federal income taxes. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    On March 22, 2007, Committee Chairman Rangel launched an 
investigation into the IRS's use of private debt collection companies 
citing complaints from taxpayers, instances of harassment and 
violations of law, and the inability of taxpayers to hold the Federal 
Government liable for the actions of a collection contractor. Further, 
Chairman Rangel urged the Commissioner not to proceed with awarding 
additional contracts.
      
    The Committee will focus on issues related to whether: (1) Federal 
income tax collection is a fundamental governmental function and, as 
such, should not be contracted to the private sector as a profit-making 
venture; (2) the IRS can collect Federal income taxes more efficiently 
and effectively than private debt collection companies; (3) taxpayers 
are subject to confusion, questionable private debt collection company 
tactics, harassment, and abuse due to the use of private debt 
collectors; (4) adequate options are available to the IRS to address 
uncollected taxes in the accounts receivable inventory; (5) the program 
is ready for expansion and new private debt collection contracts should 
be awarded in the coming months; and (6) Internal Revenue Code section 
6306 should be repealed.
      
    In announcing the hearing, Chairman Rangel stated: ``The IRS use of 
private companies to collect Federal income taxes is an affront to the 
integrity of our tax system. The collection of Federal taxes is a basic 
governmental function and one that should not be assigned to profit-
making businesses. The outsourcing of IRS tax collection to the private 
sector carries an unacceptably large risk that taxpayer rights will be 
trampled and their personal identities stolen. It is unacceptable that 
taxpayers are footing the bill for a program that pays private 
companies up to a 25 percent bounty when the IRS can do the same job 
for pennies on the dollar.''
      

FOCUS OF THE HEARING:

      
    As part of the American Jobs Creation Act of 2004 (P.L. 108-357), 
the Congress enacted Internal Revenue Code section 6306 authorizing the 
IRS to enter into contracts with debt collection companies for the 
purpose of collecting Federal income taxes. The provision allows for 
the IRS to pay a commission of up to 25 percent of amounts collected. 
Last year, the IRS awarded contracts to three debt collection 
companies: Pioneer Credit Recovery, Inc., The CBE Group, Inc. and 
Linebarger Goggin Blair and Sampson, LLP. In September 2006, the three 
companies began contacting taxpayers and collecting Federal income 
taxes. After six months, the IRS renewed contracts for two of the 
companies. The IRS intends to award additional contracts in late 2007.
      
    The use of private debt collectors for Federal income tax purposes 
continues to be controversial. The IRS Taxpayer Advocate, various 
consumer interest groups, IRS employees, and others have expressed 
concern that the use of private companies to collect Federal taxes is 
inappropriate and that the tax law provision should be repealed. 
Others, including private debt collection companies, have argued that 
the private debt collectors collect money that would go uncollected.
      

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    Chairman RANGEL. The hearing will come to order. We want to 
thank all of our witnesses that have been consolidated into one 
panel to expedite the hearing, and to share with the Internal 
Revenue Service that many Members of Congress have received 
many complaints from their constituents as a result of their 
decision to designate private debt collectors in lieu of 
collectors that work for, and have been are trained by, the 
Internal Revenue Service. I think it is generally accepted that 
there is a special relationship between taxpayers and the 
Internal Revenue Service, and I think that relationship is 
violated when it is turned over to entrepreneurs who get paid 
based on the amount of money that they are able to extract from 
the taxpayer.
    In addition to that, there are some rights of privacy that 
are involved that many of us believe are very special to that 
relationship between the Internal Revenue Service and the 
taxpayers. So, today we are going to explore what has been 
going on, probably make some changes. What I would like to do 
is yield to the Ranking Member, Jim McCrery, for purposes of 
making an opening statement, and then yield whatever time I may 
have to the Chairman of the Subcommittee on Oversight, John 
Lewis, who has had extensive hearings in this area.
    Mr. McCrery.
    Mr. MCCRERY. Thank you, Mr. Chairman. I will make brief 
comments and then as you will, I will yield to my Ranking 
Member of the Subcommittee for further opening remarks. I think 
what we will find today is some mixed testimony about some of 
the tactics and so forth, but I would urge all of us to listen 
carefully to everything that is said today, either by the 
witnesses or by submitted testimony that could be written or 
oral and make sure that we listen to everything and not just 
pieces or parts. I think that will give us a good view of the 
reality of this situation, and I look forward to hearing the 
witnesses and being able to probe a little more deeply into 
some of these issues surrounding this, and at this time Mr. 
Rangel if you want to yield to your Chairman, then I will yield 
to my Ranking Member.
    Chairman RANGEL. Thank you. Let me first thank John Lewis 
and his staff for the excellent job they have done in looking 
into this issue on behalf of the Congress, and we look forward 
to your statement, Mr. Lewis.
    Mr. LEWIS. Well, thank you very much, Mr. Chairman. Thank 
you for holding this hearing today. Today, Mr. Chairman, the 
Committee is repeating history. We are again reviewing whether 
private debt collectors should be used to collect Federal 
taxes. This is not a new question for the Committee on Ways and 
Means. Mr. Chairman, I have in my hand a copy of the record of 
the Committee on Ways and Means from 1874. This is a report of 
the Committee. This is not something that I am making up. It 
came from the Library locked up, and one of our staff members 
found this report. The Committee, in 1874, repealed the 
authority to use private tax collectors, and as stated in that 
report, in this report, the Committee is the opinion that any 
system of framing the collection of any portion of the revenue 
of the government is fundamentally wrong. No necessity for such 
laws exist. The Internal Revenue Bureau is possessed of 
foreknowledge of the laws relating to the collection of the 
revenue and has all the machinery necessary for their full and 
complete enforcement. The Committee, in view of the facts, 
believe that the law should be repealed and the contract made 
the reunder should be revoked and annulled.
    These words are true today 130 years later. The collection 
of Federal income taxes is a core government function. Let me 
repeat. The collection of Federal income taxes is a core 
government function. It is the mission and purpose of the IRS. 
Today's program can never work. Taxpayers and the American 
public deserve better. To date, the collectors have made nearly 
1 million calls in attempt to reach 35,000 taxpayers. Those 
calls have been subject to harassment, confusion and abuse. Mr. 
Chairman, I ask that a partial list of taxpayer complaints be 
included in the record.
    Chairman RANGEL. Without objection.
    Mr. LEWIS. Mr. Chairman, I also want to play five calls 
between an IRS private collector and one taxpayer. I want all 
of my colleagues to hear what our constituents are facing as 
the private collectors attempt to find the correct person owing 
taxes. Asked that the transcript of these calls be included in 
the record and that we play them for the members to hear.
    Chairman RANGEL. Without objection.
    [The prepared statement of Mr. Lewis follows:]
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

                                 

    Mr. LEWIS. The cat and mouse game you are about to hear had 
caught over 300,000 members of the public over the last 6 
months. All but 10,000 of these were innocent parties who did 
not owe any tax. Social Security numbers, along with tax 
information, must be protected to prevent identity theft and 
ensure the integrity of our tax system. I ask who is in charge 
here, what have we done. We must end this. Now, Mr. Chairman, I 
ask that the audio be played.
    Chairman RANGEL. At this time however I would like to yield 
to Mr. Ramstad----
    [Audio starts.]
    We will suspend the time on this presentation and recognize 
Mr. Ramstad, the Ranking Member of the Committee that had 
hearings on this subject matter.
    Mr. RAMSTAD. I thank the Chairman for calling this hearing, 
and I thank the Ranking Member for yielding. As we all know, 
Congress granted the IRS authority to contract with private 
collection agencies to bring in taxes owed for two principle 
reasons. First of all, to improve enforcement in a proven way 
to boost compliance by tax delinquents and second to promote 
fairness for Americans who already paid their share of the tax 
burden.
    We should not allow the actions of tax deadbeats to 
continue unchecked, and I think everyone agrees, we need to 
close the tax gap in this country. By helping to reduce 
uncollected Federal tax liabilities, this program does just 
that. It has already been proven to help close the tax gap. 
During the next 10 years, in fact, the program is projected to 
collect between $1.5 billion and $2.2 billion that would 
otherwise go uncollected, to continue to widen the tax gap. 
After commissions that can yield up to $2 billion of revenue 
toward closing the tax gap. This program certainly does not 
diminish the important work of IRS employees. In fact, it 
allows IRS employees to focus their attention on more difficult 
cases that require their expanded enforcement efforts while the 
private collection agencies focus on lower priority cases, 
cases in which the taxpayers already have admitted they owe the 
tax.
    Each and every case here, there is an admission by the 
taxpayer of tax liability. After a competitive procurement 
process, background checks and other safeguards were put in 
place in this statute. The first cases were assigned for 
private collection September of last year. Since then, just 
since September of 2006, close to $20 million has been 
collected. This is money again that would otherwise go 
uncollected. This program is also boosting other IRS 
enforcement efforts. The IRS, in fact, may retain up to 25 
percent of the amount collected for additional collection 
enforcement activities. Given the parameters in which the IRS 
is operating, the service has already retained close to $4 
million in new funds for collection activities, and it may 
receive more than $500 million during the next 10 years. This 
is real money that is being saved the American taxpayer.
    The private debt collection program has been carefully 
developed with extensive oversight from the IRS, and I commend 
the Commissioner and the service for that oversight. Private 
collection agencies are held to the same high standards for the 
protection of taxpayer rights as IRS employees. I would like to 
later answer some of the allegations and the anecdotal evidence 
that we saw earlier. But we all know that violations of 
taxpayer rights--if taxpayers are violated in this process, 
they can result in large fines and even imprisonment under the 
statute.
    So, we need to enforce the law if there are abuses. In 
fact, private collection agents have an additional layer of 
liability because they could be sued under the Fair Debt 
Collection Practices Act unlike, of course, IRS employees.
    Given the sensitive nature of this work, Congress must have 
information about the operations of the program. What is 
working, what is not working, what needs to be fixed or 
improved. That is the reason I believe for this hearing today. 
As the IRS oversight board noted last week, the program seems 
to be working well. Those are their words, the board's words. 
But it should continue to be monitored closely, also the 
board's words, and I don't think anybody on this dais or in 
this room would disagree.
    Mr. Chairman, let me close by saying since the Treasury 
Inspector General for tax administration is not represented 
here today, I ask unanimous consent that the March 27, 2007 
report, entitled The Private Debt Collection Program Was 
Effectively Implemented But Some Follow-Up Actions Are Still 
Necessary be submitted for the record.
    Chairman RANGEL. Without objection.
    [The information follows:]
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

    Mr. RAMSTAD. One issue this hearing will explore is whether 
the collection of taxes is an essential government function, an 
issue already raised by my distinguished colleagues on the 
other side. Contrary to the assertion that it is not, a number 
of Federal and more than 40 State agencies are currently using 
private collection agencies to collect overdue income taxes and 
other debts including student loan payments and alcohol and 
cigarette taxes. So, this private debt collection function is 
hardly a novel function to be contracted to the private sector. 
I believe that dismantling the private debt collection program 
would be a mistake, it would be a step backward in our efforts 
to close the tax gap, and I hope we don't retreat on that front 
at this critical juncture. Again, I thank the Chair and I yield 
back.
    Chairman RANGEL. Thank you, Mr. Ramstad. We will now 
proceed. The first witness will be Nina Olson, National 
Taxpayer Advocate, Internal Revenue Service. You can present 
your testimony as you like. You have 5 minutes and your entire 
statement will be entered into the record by unanimous consent.

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

    Ms. OLSON. Thank you, Mr. Chairman, Ranking Member Mr. 
McCrery, and Members of the Committee. Thank you for inviting 
me today to testify about the IRS' private debt collection 
initiative. I will limit my oral testimony to five points.
    First, there is no good business case for this initiative. 
Second, there were few very easy cases, IRS collection cases 
for the private collection agencies or PCAs to work. Third, the 
IRS collects taxes better than the PCAs. Fourth, the PCA's 
approach to taxpayers raises significant concerns for tax 
administration. Fifth, taxes are different from other debts and 
therefore should not be treated like those other debts.
    In May 2003, I appeared before a Ways and Means 
Subcommittee on Oversight hearing and outlined my concerns 
about the IRS' then proposal to contract out the collection of 
certain categories of tax debt to private collection agencies. 
While in 2003, I had IRS assurances that my concerns would be 
addressed, as time passed and the IRS implemented the program, 
my concerns multiplied, not lessened. These concerns led me to 
call for repeal of the private debt collection authority in my 
annual report to Congress in 2006. I believe the right approach 
to any collection case must address dual goals. First, to 
ensure that the taxpayer is able to comply with the tax laws so 
as not to exacerbate the noncompliance. Second, to collect the 
tax after taking into account the taxpayer's particular facts 
and circumstances.
    In my view, PCAs fail at both these goals. PCAs must 
maximize profit for their shareholders by collecting the most 
past due dollars at the least expense to the companies. PCAs do 
not have the ability or the authority to consider the 
taxpayers' individual circumstances. Such consideration 
involves the exercise of judgment and discretion and thus 
cannot be delegated by the government to third parties. The IRS 
projects that the PDC initiative will bring in between $1.5 and 
$2.2 billion in gross revenue before commissions over 10 years. 
The midpoint of that 10-year range is $1.85 billion which 
translates to an average of $185 million a year on a gross 
basis before commissions and IRS administrative costs.
    Here is how the gross annualized PDC revenue stacks up to 
the IRS' most recent annual estimate of the gross tax gap. Now 
I asked my staff to make the PDC bar glow orange so you can see 
it better and you can see how successful that was. The IRS 
estimates that it will spend about $71 million in startup and 
outgoing maintenance costs on this program through fiscal year 
2007. If we applied the $71 million and allocated it to the 
ACS, the Automated Collection System, we estimate that these 
funds would bring in about $1.4 billion as compared to the 
$19.5 million brought in by the PDC initiative to date.
    The IRS estimates that PCAs at a steady state will have a 
return on investment of 4 to 1. IRS ACS employees on the other 
hand have a steady state return on investment of 20 to 1. 
Proponents of the PCA initiative have consistently stated that 
the IRS has a significant number of accounts in which taxpayers 
could be induced into paying what they owe by a simple phone 
call. The mere fact that there may be a substantial pool of 
cases that effectively result in revenue if only someone 
contacted the taxpayer does not mean PCAs are best qualified to 
handle these cases.
    The assigned inventory turns out to be far more complex 
than the IRS ever expected. The cases that come into the 
taxpayer advocate service from PCAs show that the concept of an 
easy tax case is a fallacy. We have earned income tax cases, 
identity theft, innocent spouse penalty and interest abatement 
foreign tax credit and financial hardship cases.
    In fact, the shortage of easy inventory is driving the IRS 
to assign inventory with the types of complexities that were 
never intended to be worked by the private collectors. 
Expanding the inventory beyond the primary criteria to actual 
ACS cases, cases involving U.S. territories and possessions to 
business cases, to nonfilers and to older cases decreases the 
likelihood that the PCAs will be actually able to collect any 
payment from the taxpayer, increases the likelihood that the 
PCAs will make mistakes, and increases the likelihood that the 
PCA will pressure the taxpayer to agree to an unreasonable 
payment arrangement.
    PCAs utilize a psychological technique to collect the 
maximum amount from taxpayers while IRS collection employees 
are trained to address the three Cs, cause, cure and 
compliance, PCAs in their training materials use language like 
close the deal and psychological pause, the next person to 
speak loses. We have slides showing quotes from actual training 
materials. Now we are not selling Florida swampland here and 
taxpayers are not marks. We are also not in the NBA finals 
talking about the next person who speaks loses. We are talking 
about Federal taxes. These are the life blood of government 
which we ask taxpayers to come forward and pay. The 
consequences of playing around with taxpayer morale are great. 
I believe the PDC program risks too much for too little and 
therefore I would urge Congress to terminate this program now. 
Thank you.
    [The prepared statement of Ms. Olson follows:]
   Prepared Statement of Nina E. Olson, National Taxpayer Advocate, 
                        Internal Revenue Service
    Mr. Chairman, Ranking Member McCrery, and distinguished Members of 
the Committee:
    Thank you for inviting me to testify today about the Internal 
Revenue Service's private debt collection (PDC) initiative.\1\
---------------------------------------------------------------------------
    \1\ The views expressed herein are solely those of the National 
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the 
Secretary of the Treasury and reports to the Commissioner of Internal 
Revenue. The statute establishing the position directs the National 
Taxpayer Advocate to present an independent taxpayer perspective that 
does not necessarily reflect the position of the IRS, the Treasury 
Department, or the Office of Management and Budget. Accordingly, 
congressional testimony requested from the National Taxpayer Advocate 
is not submitted to the IRS, the Treasury Department, or the Office of 
Management and Budget for prior approval. However, we have provided 
courtesy copies of this statement to both the IRS and the Treasury 
Department in advance of this hearing.
---------------------------------------------------------------------------
    Because there is so much risk to taxpayers and tax administrators 
inherent in this program, I have personally devoted a large amount of 
my time since the fall of 2002 to oversight of the PDC initiative. 
Since 2004, my office has had at least one full-time employee dedicated 
solely to tracking this initiative, and for prolonged periods, as many 
as five Taxpayer Advocate Service (TAS) employees have simultaneously 
tracked different aspects of the program. As a result of this daily 
involvement, we have concluded that the PDC initiative is a waste of 
the government's valuable resources and risks much for a potential 
increase in tax collection that is negligible, at best, and that in 
reality may be costing the government more than it receives through 
this program.
    In May 2003, I appeared before a Ways and Means Oversight 
Subcommittee hearing and outlined my concerns about the IRS's then-
proposal to contract out the collection of certain categories of tax 
debt to private collection agencies (PCAs). At that time, I was 
uncomfortable with the concept, based both on my own experience 
representing taxpayers before PCAs in state tax disputes and on the 
problems inherent in the IRS proposal. While in 2003 I had IRS 
assurances that my concerns would be addressed, as time passed and the 
IRS implemented the program, my concerns multiplied, not lessened. 
These concerns led me to call for repeal of the PDC authority under 
Internal Revenue Code (IRC) Sec. 6306 in my 2006 Annual Report to 
Congress.\2\
---------------------------------------------------------------------------
    \2\ IRC Sec. 6306(b)(4) authorizes the Secretary of the Treasury to 
hire PCAs to perform the following functions with respect to the 
collection of tax:
---------------------------------------------------------------------------
    Despite my opposition to the concept of outsourcing Federal tax 
collection, I want to acknowledge the dedication and hard work of 
employees in the Department of the Treasury and the IRS in developing 
and implementing this initiative. At the time the program was 
developed, senior officials at the Treasury Department asked me to 
participate in its development, despite my conceptual concerns, to help 
protect taxpayer rights to the maximum extent possible. More recently, 
IRS personnel charged with implementing the program have worked 
tirelessly and in good faith to make the program work, and members of 
my staff have been included in some of the implementation decisions. 
These employees have given their all to make the program work, and I 
want to make clear that my criticism of the program is in no way 
intended to be a criticism of their work.
I.  Tax Collection Requires the Exercise of Discretion, and Only the 
        Government Is Constitutionally Permitted to Exercise that 
        Discretion.
A.  The Overriding Objective of IRS Enforcement Actions Should Be to 
        Maximize Long-Term Tax Compliance.
    We are in agreement, of course, that taxpayers who owe back tax 
debts should be held accountable. As I outlined in my 2006 Annual 
Report to Congress, however, I am concerned that the current collection 
strategy of the IRS does not maximize the government's long-term 
collection of revenue. The IRS's current collection strategy virtually 
ignores an entire category of collection cases. In fact, the IRS's 
failure to work these cases is one of the strongest rationales for 
utilizing private collection agencies (PCAs). But having recognized 
this shortfall, we still must ask two questions:

     What is the right way to handle these cases?
     What is the most cost effective way to do so?

    I believe that the right approach to any collection case must 
address dual goals: first, to ensure that the taxpayer is able to 
comply with the tax laws, so as not to exacerbate the noncompliance; 
and second, to collect the tax after taking into account the taxpayer's 
particular facts and circumstances. In my view, PCAs fail at both of 
these goals. On the first count, the fiduciary duty of a private 
company is to maximize profits for its shareholders, which can only be 
achieved here by collecting the most past-due dollars at the least 
expense to the company. As the PDC initiative is structured, the 
objective of maximizing current and future compliance does not fit into 
the business model; PCAs are compensated solely on the basis of 
collecting past debts. On the second issue, PCAs do not have the 
ability or the authority to consider the taxpayer's individual 
circumstances. Such consideration involves the exercise of judgment and 
discretion, and thus cannot be delegated by the government to third 
parties.
B.  Under the U.S. Constitution, Tax Collection Is Considered an 
        Inherently Governmental Activity and Generally Cannot Be 
        Outsourced.
    As early as 1819, the United States Supreme Court recognized that 
the Federal Government's taxing power is ancillary to its sovereignty. 
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.'' \3\ 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. . . .'' \4\ An inherently 
governmental function cannot be delegated by the government to private 
parties.\5\ A ministerial function, however, may be delegated to 
private parties.\6\
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    \3\ Marshall v. McColloch, 17 U.S. 316, 429 (1819).
    \4\ OMB Circular No. A-76 Sec. 6(e) (1999). The current version of 
OMB Circular No. A-76 states 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.'' OMB 
Circular No. A-76 (Revised), Attachment A Sec. (B)(1)(a) (May 29, 
2003).
    \5\ Carter v. Carter Coal Co., 298 U.S. 238 (1936).
    \6\ 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. Sec. 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 maintains close oversight and 
control. The head of the delegating agency must retain the authority to 
resolve disputes, compromise claims or terminate the collection 
action.\7\ Finally, the Federal Government cannot dilute the rights and 
protections taxpayers otherwise enjoy merely by contracting out certain 
functions to private parties.
---------------------------------------------------------------------------
    \7\ 31 U.S.C. Sec. 3718(a).
---------------------------------------------------------------------------
    In 1998, the Federal Activities Inventory Reform (FAIR) Act was 
enacted to encourage competitive sourcing, a process whereby Federal 
agencies identify commercial functions being performed by the agencies, 
develop a business case to determine whether the private sector can 
efficiently compete with the agencies, and if so, determine the most 
efficient organization to perform the function. However, the law 
specifically precludes the contracting out of inherently governmental 
functions.\8\ The IRS and the Office of Management and Budget (OMB) 
have long considered the collection of taxes to be an inherently 
governmental function,\9\ and have never certified the type of work 
being performed by the private collectors as commercial.\10\
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    \8\ Federal Activities Inventory Reform (FAIR) Act of 1998, Pub. L. 
No. 105-270, 112 Stat. 2362 (codified as amended at 31 U.S.C.A. 
Sec. 501, Note Sec. 5 (2)(b)) (providing that a function is 
``inherently governmental'' under the statute if it is ``so intimately 
related to the public interest as to require performance by Federal 
Government employees.''). Examples of inherently governmental functions 
include actions: (1) ``to bind the United States to take or not take 
some action;'' (2) ``to determine, protect and advance United States . 
. . interests;'' and (3) ``to significantly affect the . . . property 
of private persons.'' Id.
    \9\ OMB Circular A-76 sets forth the standards under which Federal 
work is subject to competitive sourcing. As it existed in 1999, the 
collection of taxes was specifically listed as an inherently 
governmental function. In 2003, OMB Circular A-76 was revised to remove 
all specific examples of inherently governmental functions; see also 
General Accounting Office, IRS: Issues Affecting IRS's Private Debt 
Collection Pilot (Jul. 18, 1997) (indicating that the IRS and the 
Department of the Treasury have long considered the collection of taxes 
to be an inherently governmental function).
    \10\ Internal Revenue Service FAIR Act certifications, available at 
http://www.treas.gov/offices/management/dcfo/procurement/fair/
inventories/index.html.
---------------------------------------------------------------------------
    The underlying premise of the PDC initiative is that certain tax 
collection activities are not inherently governmental--that simply 
asking the taxpayer to pay the tax in full, or over a relatively short 
period, does not involve the exercise of judgment or discretion.
    Since the implementation of the PDC initiative, this premise has 
been roundly disproved. There are few ``easy'' tax collection cases--in 
fact, the designation of certain cases as ``easy'' itself reflects an 
IRS-centric view of the cases, as opposed to a taxpayer-centric view. 
No taxpayer views his or her tax collection case as easy, and it is 
because of the many questions and concerns these taxpayers raise during 
the resolution of their cases--even if they take a short amount of time 
to resolve--and the impact of those questions and concerns on the 
taxpayers' continuing tax compliance that IRS employees should be the 
ones to interact with the taxpayer.
    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.\11\ 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. These 
qualitative differences between tax debts and other government accounts 
militate against contracting out the collection of Federal tax debt.
---------------------------------------------------------------------------
    \11\ Bull v. United States, 295 U.S. 247, 259 (1935).
---------------------------------------------------------------------------
II.  The Business Case for the PDC Program Is So Weak that the Program 
        May Actually Lose Money.
    The government has advanced several rationales and justifications 
for its use of private debt collectors to collect Federal taxes, 
including:

     Use of private collectors is a cost efficient and 
effective method to collect receivables that the IRS could not 
otherwise reach with its existing resources;\12\
---------------------------------------------------------------------------
    \12\ Private Debt Collection: Hearing Before the Subcomm. on 
Oversight, House Comm. on Ways and Means, 108th Cong., 1st Sess. (May 
13, 2003) (statement of Mark W. Everson, Commissioner of Internal 
Revenue).
---------------------------------------------------------------------------
     Private collectors will work the ``easy'' cases, thereby 
ensuring that they will not engage in ``inherently governmental'' 
activities and that the IRS will be able to focus on more complex work; 
\13\ and
---------------------------------------------------------------------------
    \13\ Id.
---------------------------------------------------------------------------
     Other Federal agencies have successfully used PCAs.\14\
---------------------------------------------------------------------------
    \14\ Id.

    Moreover, the IRS assured Congress that taxpayer protections would 
be ``woven'' throughout the program, ``that PCAs would be prohibited 
from threatening or intimidating taxpayers,'' and that ``the PCAs would 
be governed by all of the same rules by which IRS employees are held 
accountable.'' \15\
---------------------------------------------------------------------------
    \15\ Id.
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A.  The Amount of Revenue the PDC Program Is Projected to Raise Is 
        Minimal.
    The IRS projects the initial phases of the initiative (Release 1.1 
and Release 1.2) will cost $78 million and will bring in approximately 
$134 million in gross revenue through FY 2008.\16\ The IRS is using 43 
of its own employees to monitor 81 of the PCAs' employees.\17\ From 
September 2006 through April 19, 2007, the PCAs have collected $19.5 
million in gross revenue. Of that gross revenue, only $15.5 million was 
paid in response to a PCA contact. $4.0 million--or about 20 percent of 
gross revenue--was collected by the IRS directly for only the cost of a 
stamp. Commissions actually paid on this $15.5 million further limit 
the PCAs contribution to reducing the tax gap by another $3.4 million, 
down to $12.1 million.\18\
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    \16\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 15.
    \17\ Data furnished by the IRS Filing and Payment Compliance 
Modernization Project Office (May 2007).
    \18\ Internal Revenue Service, Private Debt Collection (PDC) 
Performance Update--Briefing for House Ways and Means Committee (May 
18, 2007).
---------------------------------------------------------------------------
    The IRS projects that the PDC initiative will bring in between $1.5 
and $2.2 billion in gross revenue (before commissions) over ten 
years.\19\ The midpoint of that ten-year range is $1.85 billion, which 
translates to an average of $185 million a year on a gross basis 
(before commissions and IRS administrative costs). Here is how the 
gross annualized PDC revenue stacks up to the IRS's most recent annual 
estimate of the gross tax gap: \20\
---------------------------------------------------------------------------
    \19\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 14.
    \20\ The most recent IRS estimate of the gross tax was $345 billion 
and was made in 2001.
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

B.  The Opportunity Cost of Funding the PDC Program Instead of Hiring 
        More IRS Collection Personnel Is Enormous, Resulting in a 
        Significant Net Revenue Loss to the Treasury.
    The IRS estimates that it will spend about $71 million in startup 
and ongoing maintenance costs through FY 2007.\21\ If we applied this 
$71 million and allocated it to the IRS Automated Collection System 
(ACS), we estimate that these funds would bring in about $1.4 billion, 
as compared to the $19.5 million brought in by the PDC initiative to 
date.\22\
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    \21\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 15. These estimated costs include 
startup and ongoing maintenance from the PDC Project Office, oversight, 
administration, and IT costs from FY 04 projected through FY 07. These 
estimated costs do not include infrastructure assessments for any MITS 
costs or costs associated with the TAS oversight or casework arising 
from the PDC initiative.
    \22\ The dollars spent on the PDC initiative could instead have 
been used to fund new ACS employees. We computed the fully loaded cost 
of an average ACS employee at about $75,000 (assuming GS-8, step 5). A 
new employee would cost somewhat less. Based on IRS expenditures of $71 
million, the number of new ACS employees that could have been funded by 
the PDC initiative (about 942) was multiplied by the current average 
dollars collected by an ACS employee per year (about $1.49 million) to 
estimate the revenue that could have been garnered by ACS in one year.
---------------------------------------------------------------------------
    This translates to a return-on-investment on the average ACS 
employee of about 20:1. The total dollars collected by ACS reflects the 
collections of both fully trained and new employees who underwent 
training during the year. The return is generally higher for trained 
employees and lower for newly hired employees. If the IRS were to hire 
942 new employees, the return would predictably be lower than 20:1 
during the initial training period. On the other hand, the amount of 
appropriated funds the IRS has spent on the PDC program to date has 
been greater than $71 million because infrastructure costs and certain 
indirect costs (e.g., the full costs TAS has incurred) have not been 
included. If infrastructure and all related costs were included and 
also applied to fund additional ACS collection personnel, the number of 
employees the IRS could hire would be considerably greater than 942, 
resulting in higher potential revenue collections.
    The IRS contends that the costs it is incurring to administer the 
PDC program will decline in the future. Even if the costs decline 
dramatically, the IRS still likely would be better off spending the 
funds on hiring more IRS collection personnel. In FY 2008, the IRS 
estimates that program, business project, contractor, and MITS costs 
will be $7.35 million.\23\ If we instead applied that $7.35 million to 
ACS, the IRS would collect about $146 million. By comparison, the IRS 
projects that the PCA initiative will bring in $88 million in gross 
revenue in FY 2008. Thus, if the IRS applied its actual costs of 
program maintenance and supervision to ACS instead of the PCA 
initiative, the public fisc would be ahead by $58 million for one year.
---------------------------------------------------------------------------
    \23\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 15. These estimated costs exclude all 
infrastructure assessments.
---------------------------------------------------------------------------
    However, I am not persuaded that oversight costs or infrastructure 
costs for this initiative will decrease over time. First, so many 
program processes are manual that it will probably take ten years to 
achieve a truly automated system. Second, as discussed below, because 
there are no easy cases to send out to the PCAs, the IRS will have to 
reprogram its case assignment standards frequently to allow for cases 
under ever-expanding criteria. Third, based on experience to date, we 
will have periodic turnover of PCAs--we have already ended our contract 
with one of the three original agencies--and I suspect we would 
periodically be bringing one agency on and taking another off-line. 
Finally, as the Joint Committee on Taxation noted:
    The use of private debt collectors may free up IRS resources to 
focus on other taxpayer delinquencies, thereby increasing total 
collections. On the other hand, the use of private debt collectors also 
raises concerns about the ability of the IRS to properly supervise 
these contractors and protect taxpayer privacy. The IRS has a finite 
amount of resources to devote to contractor supervision. As the number 
of private debt collectors increases, the ability of the IRS to closely 
supervise those collectors and ensure that the collectors are using 
appropriate safeguards and computer security decreases. As a result, 
the potential for abuse of taxpayer return information could 
increase.\24\
---------------------------------------------------------------------------
    \24\ Joint Committee on Taxation, Present Law and Background 
Relating to Permitting Private Sector Debt Collection Companies to 
Collect Tax Debts, JCX-49-03 (May 12, 2003) at 5-6.
---------------------------------------------------------------------------
C.  The IRS Embarked on the PDC Program without Undertaking Adequate 
        Studies on the Cost Efficiency of the Program
    To date the IRS has not conducted an adequate analysis of the 
return on investment of the PCA initiative, nor has it developed an 
adequate method of comparing the cost of PCA collection to the cost of 
IRS collection. My office is attempting to work with the Small 
Business/Self-Employed Operating Division to develop just such a test. 
Moreover, the IRS is currently not collecting the necessary data to 
truly understand the direct and downstream costs of this initiative. 
For example, the IRS now projects that 24 Full Time Equivalents 
(FTEs)--consisting of a total of approximately 43 employees--will work 
on the PCA initiative for FY 2007. However, this number does not 
include TAS employees working on PDC implementation or taxpayer cases, 
or Modernization & Information Technology Services (MITS) employees 
working on infrastructure improvements and routine servicing, or 
finance employees--much less IRS personnel responding to general phone 
calls to IRS toll-free numbers or contacts through the Taxpayer 
Assistance Centers.\25\ Thus, the current employee and FTE counts are 
fluid and are not being tracked well. To get a better handle on the 
total FTE working on this initiative agency-wide, we are recommending 
that the IRS track PCA initiative time in the same manner that EITC 
initiative time is tracked, including separate time-keeping codes for 
all components of the IRS.
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    \25\ The IRS's information technology office (MITS) identified 101 
FTEs as devoted to the PDC initiative, attributable to start-up costs 
incurred now as part of Release 1.2. MITS Filing and Payment Compliance 
Release 1.2, Transition Management Plan, dated Nov. 22, 2006.
---------------------------------------------------------------------------
    The IRS is currently attempting to design a test that will compare 
the cost of the PCA initiative with the cost of (a) ACS employees' 
working three types of the ``next best case'' per IRS analysis and (b) 
ACS employees' working cases from potential PCA inventory.\26\ I have 
recommended that a true comparison of PCA effectiveness to IRS 
effectiveness would entail using IRS employees with limited authority 
similar to the PCA employees to work PCA inventory. This test would 
involve the use of alternate databases and the Internet to locate 
current taxpayer addresses and phone numbers and would involve outbound 
calling. The IRS maintains that it would not work PCA inventory if it 
had funds to work additional cases. Unfortunately, the IRS has not 
conducted the necessary analysis to determine whether it would be more 
profitable to work these lower dollar cases earlier in the process, 
thereby eliminating many cases that are now worked in later years when 
they have grown much larger and complex.\27\
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    \26\ IRS Filing & Payment Compliance, Private Debt Collection Cost 
Effectiveness Briefing (Feb. 20, 2007).
    \27\ For an in-depth analysis of current IRS collection strategy 
and recommendations for improvement, see National Taxpayer Advocate 
2006 Annual Report to Congress at 80-82.
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III.  Despite IRS Representations to the Contrary, There Is No Such 
        Thing as an ``Easy'' Tax Collection Case, and Even by the IRS's 
        Standards, There Are Far Fewer Such Cases than Originally 
        Thought.
    ``The cases the IRS would refer to PCAs are those where the 
taxpayer would likely pay the outstanding tax liability if contacted by 
telephone.'' \28\
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    \28\ Private Debt Collection: Hearing Before the Subcomm. on 
Oversight, House Comm. on Ways and Means, 108th Cong., 1st Sess. (May 
13, 2003) (statement of Mark W. Everson, Commissioner of Internal 
Revenue).
---------------------------------------------------------------------------
    Proponents of the PCA initiative have consistently stated that the 
IRS has a significant number of accounts in which taxpayers could be 
induced into paying what they owe by a simple phone call.\29\ In fact, 
the assigned inventory turned out to be far more complex than the IRS 
ever expected. In the first batch of inventory identified for possible 
assignment to private collectors, for example, there was a high 
incidence of shelved delinquent tax return investigations.\30\ Under 
the IRS's traditional collection practices as well as the PDC-required 
procedures, taxpayers cannot obtain installment agreements if they are 
not compliant for other tax years, i.e., they have not paid taxes or 
filed returns.\31\ While the IRS plans to include this more complicated 
type of case in Release 1.2 when its systems can communicate the 
existence of the delinquent return to the private collector assigned to 
the account, it did not anticipate that such cases would be among the 
``simple'' Release 1.1 inventory. In two different statistical 
samplings of the Release 1.1 inventory, the IRS learned that in over 30 
percent of the cases there were unresolved delinquent tax return 
investigations in the taxpayers' filing histories.\32\ Thus, the IRS 
removed 15,500 cases from the initial 42,800 to be assigned to the 
collectors and used other inventory, including older cases, to make up 
for the deficit.\33\
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    \29\ See Department of the Treasury, General Explanation of the 
Administration's Fiscal Year 2004 Revenue Proposals 99 (February 2003), 
stating:
    \30\ A shelved delinquent tax return investigation is an 
investigation of a taxpayer's failure to file a tax return for one or 
more years that have been closed as unresolved.
    \31\ See IRM 5.14.1 (July 2005); and IRS Private Collection Agency 
Policies and Procedures Guide (Sept. 2006) at 31.
    \32\ Internal Revenue Service, Partial Production Log (March 16, 
2006).
    \33\ Internal Revenue Service, Filing & Payment Compliance Advisory 
Council Presentation (Jul. 31, 2006) at 9.
---------------------------------------------------------------------------
    The IRS also had to substitute older inventory when it identified 
two other unexpected case characteristics. In July 2006, the IRS 
eliminated another 10,000 cases from the potential inventory because 
payments on those accounts, which were thought to be voluntary, turned 
out to be involuntary levy payments.\34\ Additionally, the IRS learned 
that its systems could not transfer updated account information 
identifying taxpayers as being represented by tax professionals. When 
the taxpayer files Form 2848, Power of Attorney, with the IRS, the IRS 
and private collectors under this initiative must contact the taxpayer 
only through the authorized representative. Consequently, it removed 
from inventory 5,500 accounts that were intended for assignment to 
private collectors.\35\ Thus, as of this date, taxpayers who have the 
resources to have obtained representation are exempt from this 
initiative. Or stated another way, taxpayers who are unrepresented and 
vulnerable are disproportionately likely to be contacted by PCAs.
---------------------------------------------------------------------------
    \34\ The initial criteria for assignable inventory in Release 1.1 
limited inventory to cases where the taxpayer indicated the amount is 
due on a tax return and cases where the tax has been assessed and the 
taxpayer has made three or more voluntary payments on the tax. Private 
Debt Collection: Hearing Before the Subcomm. on Oversight, House Comm. 
on Ways and Means, 108th Cong., 1st Sess. (May 13, 2003) (statement of 
Mark W. Everson, Commissioner of Internal Revenue).
    \35\ Internal Revenue Service, Filing & Payment Compliance Advisory 
Council Presentation (Jul. 31, 2006) at 9.
---------------------------------------------------------------------------
    TAS ran its own comparison of the Adjusted Gross Income (AGI) 
levels of taxpayers whose cases were assigned to a PCA and taxpayers 
whose cases were assigned to IRS collection personnel. The median 
income of taxpayers whose cases were assigned to a PCA was 
significantly less than the median income of taxpayers whose cases were 
assigned to IRS collection personnel. Moreover, 23 percent of the PCA 
taxpayer population is projected to receive the Earned Income Tax 
Credit (EITC) as compared to 19 percent of the total IRS collection 
population.\36\ These findings heighten concerns that lower income 
taxpayers are disproportionately represented in PCA case 
assignments.\37\
---------------------------------------------------------------------------
    \36\ IRS Compliance Data Warehouse, Accounts Receivable Dollar 
Inventory (ARDI) (CY 2007, first quarter) and Individual Returns 
Transaction File (TY 2005).
    \37\ Among cases scheduled for assignment to a PCA during the first 
quarter of FY 2007 and also having a Tax Year 2005 return filed (based 
on match of primary SSN), median adjusted gross income was $24,000, 
while median adjusted gross income was $31,565 among cases not 
scheduled for assignment to a PCA. It should be noted that only 36 
percent of PCA cases and 56 percent of non-PCA cases showed the filing 
of a Tax Year 2005 Individual Income Tax Return.
---------------------------------------------------------------------------
A.  The Absence of ``Easy'' Cases Has Forced the IRS to Outsource 
        ``Harder'' Cases, Which Will Prove Harder to Collect on.
    The shortage of the promised ``easy'' inventory is driving the IRS 
to assign inventory with the types of complexities that were never 
intended to be worked by private collectors. As described above, the 
IRS plans to assign accounts known to be nonfilers in Release 1.2. 
Utilizing private collectors to interact with taxpayers about their 
obligation to file tax returns raises multiple problems, including the 
lack of training of private collection employees as to which taxpayers 
are required to file tax returns. Depending on the taxpayers' 
circumstances, they may be under no legal obligation to file tax 
returns.\38\ Private collectors have not been trained to determine when 
filing is required and when it is not. In fact, since such a 
determination requires the exercise of judgment and discretion, the 
authority to make a determination of a filing requirement cannot be 
delegated to a non-governmental employee.
---------------------------------------------------------------------------
    \38\ See IRS Publication 501, Exemptions, Standard Deduction and 
Filing Information; IRS Publication 17, Your Federal Income Tax for 
Individuals.
---------------------------------------------------------------------------
    But the case criteria expansion does not stop there. The IRS says 
that it has 132,000 case modules available that meet ``primary'' 
inventory criteria, which are enough to meet the anticipated case 
assignments through January or February 2008. In order to send out the 
necessary cases for the remainder of FY 2008 and into FY 2009, the IRS 
is looking at a pool of over 690,000 cases ``that do not meet primary 
placement criteria that could be assigned without additional 
programming and another 383,000 that have been identified if additional 
programming was performed.'' \39\ Moreover, the IRS states that 
``programming must begin within the next few months so that enough 
inventory is available for the future.'' \40\
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    \39\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council Deck (May 1, 2007) at 9.
    \40\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council Deck (May 1, 2007) at 11.
---------------------------------------------------------------------------
    I am concerned about the use of the phrase ``primary placement 
criteria'' in the IRS's analysis above. This phrase implies that 
Congress understood that IRS intended all along to expand the inventory 
criteria from those ``easy'' cases that only required a phone call to 
resolve, into older cases, nonfiler cases, or U.S. territory and 
possessions cases. Yet we can find no public document or discussion of 
this expansion, either in the initial 2003 congressional hearings or in 
the legislative history. The Joint Committee on Taxation described the 
Administration's budget proposal as follows:
    The proposal generally applies to any type of tax imposed under the 
Internal Revenue Code. The Treasury anticipates that the focus in 
implementing the proposal will be: (a) taxpayers who have filed a 
return showing a balance due but who have failed to pay that balance in 
full; and (b) taxpayers who have been assessed additional tax by the 
IRS and who have made several voluntary payments toward satisfying 
their obligation but have not paid in full. The Treasury anticipates 
that the IRS will commence implementation of the proposal with debts 
owed by individuals.\41\
---------------------------------------------------------------------------
    \41\ Joint Committee on Taxation, Present Law and Background 
Relating to Permitting Private Sector Debt Collection Companies to 
Collect Tax Debts, JCX-49-03 (May 12, 2003).
---------------------------------------------------------------------------
    In Appendix D, we describe the cases that the IRS plans to send, or 
is considering sending, to the PCAs in order to meet IRS revenue 
projections for the project. Of these expanded categories, we are 
particularly concerned about the potential assignment of Automated 
Collection System (ACS) cases. These are cases in which the IRS has 
already made some sort of determination that a case has the potential 
for enforcement activity and therefore is in the queue for assignment 
to an IRS ACS employee. Despite former Commissioner Everson's explicit 
assurances to the Ways and Means Oversight Subcommittee that ``[t]he 
IRS would not refer to PCAs cases for which there is any indication 
that enforcement action would be required to collect the tax 
liabilities,'' \42\ the IRS is now anticipating that it must send out 
these cases to meet the revenue targets it has established for the 
program.
---------------------------------------------------------------------------
    \42\ Private Debt Collection: Hearing Before the Subcomm. on 
Oversight, House Comm. on Ways and Means, 108th Cong., 1st Sess. (May 
13, 2003) (statement of Mark W. Everson, Commissioner of Internal 
Revenue).
---------------------------------------------------------------------------
    In fact, the IRS acknowledges that it will run out of inventory 
sometime in February 2008 unless it expands the criteria for cases. 
Thus, the IRS plans to accelerate a test on certain extremely low-
dollar cases because if it waits too long to assign these low-dollar 
cases to the PCAs, ``[p]rojections would not be met due to low average 
balance due.'' \43\ Moreover, the IRS notes that `[n]ot expanding 
inventory [beyond primary criteria] would lead to a large number of 
lower dollar deferred cases being placed with the PCAs, which would 
significantly reduce PCA collections. '' \44\ Thus, the IRS appears to 
be more concerned about ``smoothing revenue'' to make the program look 
like a success than it is with either acknowledging that its 
projections will not be met--namely, that IRS doesn't have the ``easy'' 
cases it originally believed it had--or considering the impact such 
referrals may have on taxpayers.
---------------------------------------------------------------------------
    \43\ Internal Revenue Service, Filing & Payment Compliance Advisory 
Council (May 1, 2007) at 12. These are ``Status 23 Deferred'' cases 
where the amount of the liability is below tolerance--i.e., the dollar 
amount is so small that it is just not worth it for the IRS to collect. 
According to the IRS, there are 595,065 existing Status 23 Deferred 
cases, with an extremely low average balance due. Id. at 10.
    \44\ Internal Revenue Service, Filing & Payment Compliance Advisory 
Council (May 1, 2007) at 24.
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B.  Expanding Case Referral Criteria Poses Threats to the Integrity and 
        Fairness of Tax Collection.
    Expanding the inventory beyond the primary criteria--to ACS cases, 
to cases involving U.S. territories and possessions, to business taxes, 
to nonfilers, and to older cases--increases the likelihood that the 
PCAs will make mistakes and decreases the likelihood that the PCAs will 
actually be able to collect any payment from the taxpayer. As the Joint 
Committee on Taxation noted in its analysis of the proposal in 2003:
    Another issue is the extent to which taxpayers will voluntarily pay 
the amounts owed in response to the private debt collectors or will 
raise procedural or substantive issues that will require referral of 
their cases back to the IRS. It is possible that such referrals back to 
the IRS may consume considerable resources of the IRS.\45\
---------------------------------------------------------------------------
    \45\ Joint Committee on Taxation, Present Law and Background 
Relating to Permitting Private Sector Debt Collection Companies to 
Collect Tax Debts, JCX-49-03 (May 12, 2003) at 6 (citations omitted).
---------------------------------------------------------------------------
    In these complex cases, taxpayers are more likely to have questions 
that the PCA employees are unable to answer because their knowledge 
regarding tax issues is limited, at best, or because the PCAs cannot 
exercise discretion in either answering a question or working a case. 
First, as the expanded case selection increases the likelihood of IRS 
Referral Unit involvement, the underlying business case for the PCA 
initiative evaporates. Second, and more important from the taxpayer's 
perspective, faced with having to send the case back to the IRS 
Referral Unit, the PCAs may attempt to pressure the taxpayer into a 
payment plan. Here are a few case examples where the PCA continued 
pressuring the taxpayer into paying rather than answering the 
taxpayer's question or making a referral to the IRS Referral Unit.
    Case One: A taxpayer called a PCA to try to work out a payment 
arrangement. The taxpayer asked whether some of the interest charges 
could be abated. Interest abatement requires the exercise of discretion 
and can only be evaluated by an IRS employee, but the PCA did not offer 
to refer the case to the IRS on that basis. In addition, the taxpayer 
said she could not afford the $793 per month in payments the PCA was 
requesting over a four-month period. Initially, the taxpayer was not 
offered any payment plan longer than 120 days despite the fact that 
taxpayers are allowed to enter into installment agreements of up to 36 
months under the existing PCA guidelines. The taxpayer asked to speak 
with TAS. The PCA employee and a supervisor told the taxpayer that 
TAS's role is not to set up payment agreements but to assist with 
situations such as significant hardship. Eventually, the PCA supervisor 
offered to work out a payment arrangement of less than $793 per month. 
However, the taxpayer was frustrated by that point and insisted on 
working with TAS.\46\
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    \46\ Contractor Officer Technical Representative (COTR) case review 
write-up; Taxpayer Advocate Management Information System (TAMIS).
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    Case Two: During the initial phone call, the taxpayer indicated she 
did not owe the tax because the apparent liability resulted from a 
mistake by her tax preparer. The taxpayer was trying to get a portion 
of the funds submitted with a joint extension of time to file credited 
to her married filing separately account. The PCA placed several 
temporary holds on collection activity, but when the case was referred 
to TAS, almost four months after the taxpayer's initial conversation 
with the PCA, the PCA was still making outbound calls to attempt to 
collect the tax. These calls occurred notwithstanding that on several 
occasions during this timeframe, the taxpayer submitted a letter 
outlining her dispute.\47\
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    \47\ IRS Private Collection Agency Complaint Review Panel.
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    These two examples illustrate how difficult it is to identify 
``easy'' cases. These examples also demonstrate that complex cases 
increase the likelihood that when PCA employees don't know how to or 
can't respond to taxpayers' questions, they simply continue trying to 
collect the tax.
IV.   Whereas the IRS Attempts to Provide Service to Taxpayers, PCAs 
        Are Compensated Primarily Based on Revenue Collection and Have 
        Little Incentive or Ability to Assist Taxpayers Who Have 
        Special Needs, Who May Not Owe the Alleged Tax Liability, or 
        Who May Lack the Ability to Pay.
    PCAs are given very little training about tax law or procedure, are 
not permitted to enter into discussions with taxpayers about matters 
that require the exercise of discretion (e.g., to compromise a tax debt 
or abate interest or penalties), and have no economic incentive to do 
more than collect the maximum number of dollars as quickly as possible. 
While IRS employees are far from perfect, they receive broader 
instruction about tax law and procedure, have the authority to exercise 
discretion, and seek to foster maximize long-term compliance. The 
differences in how taxpayers are treated and assisted will predictably 
be significant.
A.  PCAs Are Unable to Meet the Diverse and Complex Needs of Taxpayers.
    Taxpayers have a variety of diverse and complex needs and deserve 
to interact with an organization that can meet those needs. However, 
providing quality customer service seems to be superseded by the PCAs' 
motivation to secure payment from the taxpayer and collect their 
commission. This motivation is made clear by the three contractors' 
operational plans for the first phase of the PCA initiative, which 
place a heavy emphasis on collection results rather than customer 
service. The IRS, on the other hand, devotes significant resources 
specifically toward meeting the needs of taxpayers.
    The IRS Multilingual Initiative (MLI) is one example of the IRS 
making an effort to address taxpayers' needs. IRS started this 
initiative to address the needs of taxpayers who have Limited English 
Proficiency (LEP).\48\ The PCAs, however, have made little to no effort 
to address LEP or other issues relating to taxpayer populations with 
special needs, and it is highly unlikely that PCAs can or will 
duplicate this type of initiative. In fact, only one PCA has a 
telephone number for Spanish speaking taxpayers, and the other PCAs 
provide virtually no LEP services. Further, when TAS representatives 
dialed the one PCA's Spanish-speaking number, there was only an 
English-speaking voice, which transferred the call to another line; the 
call was then automatically terminated. The PCA has apparently 
corrected the problem, but the fact that TAS discovered this failure 
demonstrates the low priority PCAs place on taxpayer service.
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    \48\ Internal Revenue Service, Multilingual Initiative Customer 
Base Report FY 2006 (Feb. 2006) at 12.
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    The IRS acknowledges these problems in PCA taxpayer service 
delivery and has asked TAS to handle multilingual taxpayer cases until 
the PCAs have developed the resources to work these cases. TAS has 
agreed to do so, but this situation raises several serious concerns. 
First, the IRS should have ensured that PCAs could meet the needs of 
all taxpayers prior to awarding contracts. Second, there is no 
determination on when or how the PCAs will develop these resources. 
Third, TAS picking up these cases and working them demonstrates that 
even apparently ``easy'' cases are not easy, results in IRS employees' 
working cases that they weren't planning to work, and increases the 
opportunity cost of the PDC initiative by pulling TAS employees off 
presumably more productive cases to work these cases.
B.  PCAs Utilize Psychological Techniques to Collect the Maximum Amount 
        from Taxpayers.
    Throughout the fall of 2006, TAS representatives reviewed the three 
PCAs' operational plans and made numerous requests for changes. One 
such objection involved a PCA collection script placed in one of the 
private collectors' operational plans which required representatives to 
advise taxpayers ``Your balance of $___ is due in full today.'' 
followed by the question ``How can we help you resolve this?'' The 
script then requires the collection representative to employ a 
``Psychological pause--let the Taxpayer speak first,'' (emphasis in 
original), in which the representative says nothing and waits for the 
taxpayer to commit to a payment amount. After the taxpayer provides a 
commitment or financial information, the collector responds ``GREAT . . 
. Before we continue, Federal law requires me to inform you that this 
is an attempt to collect a debt, any information obtained will be used 
for that purpose.'' \49\ (Emphasis in original.)
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    \49\ Pioneer Credit Recovery, Inc., ``The Initial Demand.'' A copy 
of this script is attached as Appendix A.
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    TAS objected to the entire script. TAS has not been permitted to 
interact directly with the PCAs and must communicate through the IRS 
representatives. In response to TAS's objection, the IRS asked the PCA 
to remove the word ``psychological'' from the phrase ``psychological 
pause.'' TAS representatives informed the IRS that this was an 
insufficient remedy because the Fair Debt Collection Practices Act 
(FDCPA) warning still came after the taxpayer volunteered information. 
Additionally, because private collectors had already been operating 
under the script for months, we asked that the employees be given some 
type of instruction clarifying the correct approach. The IRS did not 
respond to those additional TAS requests. In response to the discussion 
of this issue in the National Taxpayer Advocate's 2006 Annual Report to 
Congress, the PCA in question revised its script to provide its FDCPA 
warning at the beginning of the conversation; however, the PCA still 
uses the ``pause'' as a device.\50\
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    \50\ See National Taxpayer Advocate 2006 Annual Report to Congress 
at 60. While we were preparing the 2006 Annual Report to Congress, the 
IRS advised us that the operational plans and calling scripts of the 
PCAs were proprietary and therefore generally could not be released 
without the PCAs' consent. We found this disturbing because one of the 
principles on which the PDC initiative was predicated was the existence 
of a ``level playing field,'' meaning that rules and restrictions 
applicable to the IRS and its employees would apply equally to PCAs and 
their employees. The collection procedures followed by IRS personnel 
are published in the Internal Revenue Manual, so the ``proprietary'' 
designation of PCA operational plans and calling scripts violates the 
``level playing field'' principle. After we raised concerns, the IRS 
asked the PCAs for consent to disclose the scripts. The responses were 
mixed. After our report was issued, two PCAs provided consents. The 
third PCA, Pioneer, offered to give consent only if the IRS agreed not 
to require PCA employees to refer cases to TAS immediately if the 
taxpayer makes such a request. TAS opposed this condition, and the IRS 
made clear that callers who asked to be referred to TAS must be so 
referred. We were informed on February 27, 2007, that Pioneer finally 
gave an unconditional consent.
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    Since publishing the 2006 Annual Report to Congress, we have 
learned that the other two PCAs also employ this and other disturbing 
devices.
Training Materials for Linebarger Goggan: \51\
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    \51\ The referenced section of the Resource Guide is attached to 
this document as Appendix B.
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

Training Materials for CBE: \52\
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    \52\ The referenced section of the Resource Guide is attached to 
this document as Appendix C.
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    We have found the following references inPCA training materials and 
scripts.have not looked into the collection practices used by other 
Federal agencies. The IRS is subject to an entirely different set of 
laws, regulations, and procedures from other Federal agencies, 
reflecting its unique role as the Federal tax system's administrator 
and enforcer. Congress' concerns over past IRS practices, including 
collection practices, have led to enactment of three Taxpayer Bills of 
Rights, with numerous protections for taxpayers. While we have not 
expressed an opinion that these techniques violate any laws, we do 
believe that these techniques are inconsistent with the values built 
into IRS customer service initiatives since the IRS Restructuring and 
Reform Act of 1998. Were a taxpayer to complain to the National 
Taxpayer Advocate about such a script being used by IRS employees, I 
would immediately demand that the script be changed and that remedial 
training be offered to all collection employees, and I would refer the 
specific case to the Treasury Inspector General for Tax Administration 
(TIGTA) for investigation of potential intimidation. I would react the 
same way were I to see IRS training materials utilizing ``Glengarry 
Glen Ross'' type selling techniques (e.g., ``close the sale'').
    My concerns about these techniques arise in part from my 
experiences in my former practice, which are confirmed by reports from 
Low Income Taxpayer Clinics (LITCs). I represented low income taxpayers 
for many years in states that retained private debt collectors for the 
bulk of their tax collection activity. I found that taxpayers routinely 
agreed to installment agreements with monthly payment amounts greatly 
in excess of what they could afford and often at harm to their welfare 
and their ability to be compliant in the future. They offered up any 
amount in order to be free of the collection agency and did not ask 
about lower amounts for fear of what the collection agency might do. 
Needless to say, taxpayers frequently defaulted on these agreements and 
ended up in my clinic's office for assistance.
    Agreeing to an unreasonable installment agreement that will result 
in a default is not neutral to the IRS or the taxpayer. From the IRS 
perspective, this taxpayer has demonstrated additional noncompliance 
and will require additional (costly) contacts and efforts, including 
levies. The taxpayer no longer qualifies for a guaranteed installment 
agreement \53\ and will have to submit additional financial information 
(and pay an additional user fee) to reinstate the installment agreement 
or enter into a new one.\54\ If the taxpayer attempts to enter into an 
offer in compromise, his defaulted installment agreement may count 
against him.\55\ From the taxpayer's perspective, he now may be even 
more uneasy or afraid about communicating with the IRS, in addition to 
having fewer options, potentially reducing the taxpayer's future 
compliance. All of this could be avoided were taxes collected the right 
way--i.e., with an eye to future compliance and the particular 
circumstances of the taxpayer. The ``psychological pause'' instructions 
and attendant consequences demonstrate an important difference between 
the compliance-oriented IRS and the profit-oriented PCAs.
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    \53\ IRC Sec. 6159(c)(2)(C).
    \54\ IRM 5.14.11.7(2); IRM 5.19.1.5.4.3(1).
    \55\ For example, an offer-in-compromise based on effective tax 
administration can be rejected because of the taxpayer's compliance 
history. IRM 5.8.11.2.1(7).
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    I do not know whether the ``psychological pause'' practice violates 
the FDCPA. I do know that it harms taxpayers, does not contribute to 
future compliance, and may very well constitute intimidation in certain 
cases. In certain instances, this practice might violate Sec. 1203 of 
the IRS Restructuring and Reform Act of 1998. It is certainly an 
example of the kind of behavior Congress sought to change through three 
Taxpayer Bills of Rights. Such an approach is an example of the profit-
motivated approach of the PCAs, and does not constitute taxpayer 
service within enforcement. It is not the right way to collect tax, 
which should take into consideration not only the need to hold 
taxpayers accountable but also the specific facts of their cases, 
including their financial circumstances.\56\
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    \56\ TAS recently learned that IRS assigns accounts involving 
innocent spouse relief, the ten percent IRA early withdrawal penalty, 
and the trust fund recovery penalty to PCAs if the PCA already has a 
case involving that taxpayer. One can only imagine how an innocent 
spouse who is a victim of domestic violence or a struggling small 
business owner would respond to a ``psychological pause'' technique.
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C.  The PDC Procedure for Authenticating the Identity of a Taxpayer Is 
        Off-putting and Frightening to Some Taxpayers.
    When an IRS collection employee contacts a taxpayer, he is 
permitted to say that he is calling from the IRS. That information 
alone is generally sufficient to let the taxpayer know the nature of 
the call. When a PCA contacts a taxpayer, however, the PCA employee is 
not permitted to identify the nature of the debt about which he is 
calling until after he verifies the identity of the taxpayer, typically 
by asking the taxpayer to provide his Social Security Number (SSN). In 
theory, a letter precedes the phone call. But if the letter didn't 
reach the taxpayer or the taxpayer didn't focus on it, the taxpayer 
will be taken aback upon receiving a call about a debt and being asked 
to provide his SSN, and some taxpayers understandably refuse to provide 
their SSNs to an unknown caller.
    Indeed, one of the PCAs, CBE Group Inc. (CBE), when phoning 
taxpayers, simply states the call is in reference to a business matter, 
even though they are authorized to disclose the nature of their work, 
i.e., debt collection, prior to authentication. This practice has 
resulted in CBE having a significantly higher number of complaints than 
the other PCAs. Specifically, to date there are 21 complaints about 
CBE's authentication process.
D.  PCAs Have Violated Procedures for Informing Taxpayers About Their 
        Right to Opt Out of the Program and About TAS.
    Upon the request of a taxpayer, a PCA employee must allow that 
taxpayer to opt out of working with the PCA.\57\ The drafts of letters 
from PCAs to taxpayers that have been provided to TAS do not contain 
language designed to inform taxpayers that they have the right to ``opt 
out'' of the PCA initiative. To our knowledge, the only document that 
contains this information is the IRS pamphlet, What You Can Expect When 
the IRS Assigns Your Account to a PCA, which is sent to taxpayers when 
the accounts are initially assigned to PCAs.
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    \57\ The FDCPA, which is applicable to PCAs, requires debt 
collectors to cease communication efforts if the debtor makes this 
request in writing, 15 U.S.C.A. Sec. 1692c(c); see also Private Debt 
Collection Agencies Policy and Procedures Guide, Section 12.14 
(incorporating the FDCPA opt-out provision).
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    From the inception of this initiative, TAS has advocated for the 
right of taxpayers to come to TAS upon the request of the taxpayer as 
an additional protection for taxpayers. The PCA Policies and Procedures 
Guide includes instructions to the PCA employees that they must inform 
taxpayers about TAS and requires PCA employees to refer cases to TAS at 
the taxpayer's request. PCA employees are also required to inform 
taxpayers about the availability of LITCs. The Guide instructs PCA 
employees about how to identify potential TAS cases and make referrals 
to TAS without the taxpayer's request, just as IRS employees are 
required to do.\58\
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    \58\ TAS also produced video training, including a 20-minute 
presentation by the National Taxpayer Advocate and a two-hour 
discussion by TAS personnel, that is required to be taken by all PCA 
employees about TAS, taxpayer rights, LITCs, and procedures for 
referring TAS cases.
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    Months after the initiative began, TAS learned that one of the PCAs 
was not adhering to the Guide's requirement that taxpayers must be 
referred to TAS upon request and instead was coaching its employees to 
continue to attempt account resolution even after the taxpayer 
requested to come to TAS. More recently, when the IRS was negotiating 
with this PCA over whether it would agree to make its scripts public, 
the PCA attempted to condition the release of its script on the IRS 
validating its practice of not referring taxpayers to TAS upon request. 
TAS rejected this condition.
    Subsequently, we discovered that the practice was not isolated to 
one PCA. At least one other PCA was failing to refer taxpayers to TAS 
upon request and was not even providing the TAS phone number to 
taxpayers upon request unless the taxpayer stated he or she was 
experiencing a ``severe hardship.'' Such a precondition for referral is 
contrary to the PCA Policies and Procedures Guide. The IRS subsequently 
issued an alert to all PCAs that this practice is violation of 
procedures.
E.  PCA Employees Receive Limited Training and Experience High 
        Turnover.
    The number of PCA collectors who either were taken off the contract 
or are no longer employed at the PCA is disturbing. For example, over 
50 percent of CBE's collectors have either been taken off the contract 
or are no longer employed by CBE.\59\ In contrast, 77 percent of W&I 
and SB/SE customer service representatives have a year or more 
experience.\60\ When the PCA collector position is a revolving door, it 
is unlikely that these employees adequately understand IRS cases. More 
importantly, it is highly unlikely that these employees will have 
engrained in them the special protections that adhere to U.S. taxpayers 
under the Internal Revenue laws. In contrast to IRS employees, who 
receive taxpayer rights and confidentiality training every year over 
the course of their long careers at the IRS, PCA employees only receive 
several hours of IRS training, of which taxpayer rights is a small 
component.\61\
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    \59\ Pioneer had a 20.8 percent turnover rate for collectors, CBE 
had a 52.8 percent turnover rate for collectors, and LBGS had a 25 
percent turnover rate for collectors. (Calculation based on PCA list of 
``Collector'' and ``Collector/IRS Referral Unit'' Liaison employees 
provided by the IRS PDC project office).
    \60\ Internal Revenue Service, Human Capital Office Workforce Plan, 
IV-53 (March 2006).
    \61\ IRS employees receive substantial, in-depth training before 
handling collection matters. For example, ACS employees receive 
mandatory training on unauthorized access, ethnic awareness, computer 
security, and annual Continuing Professional Education. In FY 2005, 
this training was a total of 24 hours and eight hours of localized 
training. In contrast, PCA employees receive minimal training on 
complex topics before handling collections matters. For example, PCA 
employees receive 20 minutes of training on privacy awareness, 20 
minutes on disclosure and safeguard awareness, 20 minutes on the 
Taxpayer Bill of Rights and Taxpayer Advocate Service, 20 minutes on 
Sec. 1203 of the IRS Restructuring and Reform Act of 1998, and 20 
minutes on the role of the Treasury Inspector General for Tax 
Administration. PCA employees also view a two-hour video produced by 
the Taxpayer Advocate Service. National Taxpayer Advocate's 2005 Annual 
Report to Congress at 85-86.
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V.  TAS Cases Illustrate Some of the Problems Taxpayers Have 
        Experienced.
    As of May 21, 2007, TAS has received 318 cases relating to taxpayer 
concerns about the PCAs. These cases were received from the TAS Intake 
Line, as a referral from the PCA, or from IRS employees answering toll-
free lines. Once TAS receives a case, the TAS Case Advocate identifies 
the issue that needs to be resolved and works with the taxpayer to 
resolve that issue. During the time that TAS is working with the 
taxpayer, the PCA must cease all collection activity. TAS has closed 
242 of the 318 referred PCA cases. Appendix E provides an analysis of 
TAS cases received to date.
    TAS monitors these cases in an effort to identify any trends that 
may have a negative impact on taxpayers. For example, TAS identified a 
situation where taxpayers assigned to a PCA were being treated 
differently from taxpayers with a similar situation dealing directly 
with the IRS. In this situation, the taxpayer was requesting an 
installment agreement with a term of more than three years but less 
than five years. The PCA employee cannot unilaterally enter into an 
installment agreement for over three years' duration and is required to 
refer that case to the IRS. The PCA taxpayer was required to submit a 
financial statement in this situation. However, if the case were being 
worked directly by the IRS, the taxpayer would have received a 60-month 
agreement without submitting a financial statement. TAS is currently 
working this issue with the PDC Project staff; in the meantime, the PCA 
procedures continue to excessively burden taxpayers and allow the PCA 
access to taxpayer financial information that it has no reason to 
acquire.
    The following examples involve PCA cases where the taxpayer called 
TAS directly. They demonstrate the fallacy of the IRS's assertion that 
it is sending ``easy'' or ``clean'' cases to the PCAs and demonstrate 
why the IRS alone--with its full panoply of assessment, abatement, and 
collection authorities--should be working taxpayer-collection cases.

      The taxpayer called TAS after receiving a letter from a 
PCA. After sustaining injuries in a near-fatal automobile accident, the 
taxpayer is living off only Social Security benefits and food stamps 
and was unable to pay the balance due.
      The taxpayer incurred a balance due as a result of an 
early withdrawal from her retirement plan. The taxpayer is currently on 
Social Security disability income. She is also taking care of her ill 
mother and is unable to pay at this time.
      The taxpayer's debt arose from her 1998 tax return, on 
which the IRS disallowed the taxpayer's youngest child, born December 
1, 1998, for purposes of the dependency exemption and EITC. The 
taxpayer sent proof of her child's birthday to the IRS on three 
separate occasions. The IRS told the taxpayer that the period of 
limitations for making changes to her tax return has expired, and it 
has offset additional refunds in the amount of $2,000.
      The taxpayer's tax returns were examined for each of tax 
years 2001 through 2005, resulting in EITC disallowances. Each year, 
the taxpayer submitted all requested documents but did not receive a 
response. The taxpayer states that the claimed children are hers, and 
she does not understand why the claim on her return is continually 
being disallowed. She has called the IRS several times and cannot 
obtain assistance.
      The taxpayer stated that he has been receiving bills for 
taxes that he does not owe. The taxpayer has resided in Puerto Rico for 
his entire life. He has proof of filing with the Hacienda and says he 
has reported all his earned income.
      The taxpayer called TAS in response to a letter from a 
PCA. The taxpayer stated that he does not owe the tax debt. The 
taxpayer said he did not work for the tax year at issue and did not 
file a tax return for that year, nor did he receive a refund. He 
suspects his child's mother may have helped someone improperly use his 
information to file.
VI.  The PCA Initiative Raises Concerns about the Confidentiality and 
        Security of Taxpayer Information.
    The Internal Revenue Code places significant emphasis on the 
confidentiality and security of taxpayer information. When taxpayer 
information is shared with outside contractors, the risks of misuse and 
the steps required to secure information both increase.
A.  The IRS Recently Terminated a PCA for Failing to Perform at 
        Appropriate Standards, Yet the PCA Is Permitted to Retain 
        Taxpayer Information for an Additional Two Years.
    As Linebarger's contract came to an abrupt end, new security 
concerns have arisen. The IRS is permitting a PCA, which is no longer 
part of the initiative, to keep and maintain taxpayers' files for two 
years after the contract has ended. Allowing PCAs to hold onto taxpayer 
information after a PCA has left the initiative is a failure of the 
IRS's fiduciary duty to protect taxpayer information and significantly 
compromises taxpayer information.\62\ It is especially disturbing that 
Linebarger will keep taxpayer information for two years after the 
contract, since Linebarger's security breaches were a major focus of a 
recent TIGTA Report. Some of the concerns the report addresses include 
the following:
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    \62\ The IRS could store and maintain taxpayer files and allow the 
PCA access to the files in case of a civil suit.

     Two storage rooms were not wired with alarm systems;
     Perimeter doors did not have sufficient locking 
mechanisms; and
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    \\ Multiple PCA employees had keys to the IRS work area and one of 
these employees did not need access to Federal tax information.\63\
    \63\ Treasury Inspector General for Tax Administration, The Private 
Debt Collection Program Was Effectively Developed and Implemented, but 
Some Follow-up Actions Are Still Necessary (Mar. 27, 2007).

    It seems irresponsible and foolish to allow any PCA to keep 
taxpayer information for two years after contract expiration, but 
especially foolish to allow a PCA to keep taxpayer information where 
that PCA was significantly criticized for security breaches in a recent 
TIGTA report.
B.  PCAs Are Now Receiving Sufficient Information About Taxpayers to 
        Enable Identity Theft.
    As described above, PCAs are required to verify that they are 
talking to the correct taxpayer before they can disclose the specific 
purpose for the phone call or discuss details of the account. Now, in 
addition to PCAs' having the taxpayer's name, last known address, and 
SSN, they also want the taxpayer's date of birth to make the 
authentication process easier. One wonders how comfortable taxpayers 
would feel knowing that the IRS is handing over more and more of their 
information to private collectors.
    The rate at which collectors either are taken off the IRS contract 
or are no longer employed at the PCA is alarmingly high. For instance, 
Pioneer had a 20.8 percent turnover rate for collectors, CBE had a 52.8 
percent turnover rate for collectors, and LBGS had a 25 percent 
turnover rate for collectors. In contrast, 77 percent of ACS employees 
have a year or more of experience.\64\
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    \64\ Internal Revenue Service, Human Capital Office Workforce Plan, 
IV-53 (March 2006).
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VII.  The IRS Can Do It Better
    As stated previously, a central tenet of the PDC initiative is that 
the IRS has a significant number of accounts in which taxpayers could 
be induced into paying what they owe by a simple phone call.\65\ The 
mere fact that there is a substantial pool of cases that effectively 
result in revenue if only someone contacts the taxpayer does not mean 
that PCAs are the best qualified to handle these cases.
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    \65\ See Department of the Treasury, General Explanation of the 
Administration's FY 2004 Revenue Proposals (Feb. 2003) at 99, stating:

      Indeed, the IRS is clearly the superior collection agent 
for these cases:The IRS currently possesses a large collection 
infrastructure with thousands of trained employees and an annual budget 
of nearly two billion dollars.\66\ The IRS has 14 ACS sites that 
interact with millions of taxpayers annually, in contrast to the 
private collectors who operate out of single locations with 81 
employees in the aggregate.
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    \66\ IRS FY Budget in Brief, available at: http://www.irs.gov/pub/
irs-utl/bib-irs.pdf. Excluding operations support costs, the IRS's 
total budget for tax law enforcement in fiscal year 2006 was 
approximately $4.7 billion dollars and its proposed enforcement budget 
for FY 2007 is approximately $4.8 billion dollars. IRS Budget in Brief 
FY 2007, available at: http://www.irs.gov./pub/irs-news/
fy07budgetinbrief.pdf. For fiscal year 2006, the Small Business/Self-
Employed Division allocated approximately 11,270 FTEs toward collection 
efforts. IRS Small Business/Self-Employed Division, FY 2006--FY 2007 
Plan. The IRS Wage & Investment Division allocated approximately 3,332 
FTEs to collection. Wage & Investment Division, FY 2006 Plan.
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      The IRS employs and continues to spend significant 
resources on the same technology used by private collectors, such as 
predictive dialer systems.\67\
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    \67\ In 2004, the IRS acquired an additional ``predictive dialer'' 
system used to automatically contact taxpayers. National Taxpayer 
Advocate 2004 Annual Report to Congress at 234.
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      The IRS maintains and utilizes various internal and 
external databases for research purposes, including but not limited to 
Integrated Data Retrieval System, Choice Point, and the United States 
Postal Service. Many of these are the same sources currently being 
utilized by the PCAs to attempt to locate and contact PDC-assigned 
taxpayers.

    Furthermore, timely and personal interventions on collection 
accounts are powerful motivations for taxpayers to resolve tax problems 
and cannot be discounted. These interventions represent the appropriate 
point in the collection process to identify and resolve issues that 
have caused the taxpayers to become delinquent, thereby preventing 
future noncompliance, and to explore meaningful payment options. Many 
of the accounts currently being assigned to PCAs are less than $25,000 
and thus would qualify for guaranteed or streamlined installment 
agreements (IAs).\68\ The IRS already has the means and proven track 
record to effectively handle these types of accounts.\69\
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    \68\ IRM 5.14.5.2 (Jul. 12, 2005). The IRS may approve streamlined 
installment agreements where the aggregate unpaid balance of tax 
liabilities is $25,000 or less and can be fully paid within 60 months 
or prior to the Collection Statute Expiration Date, whichever comes 
first. These agreements do not require detailed financial statements or 
approval by IRS managers and may be granted even though the taxpayer 
may be able to fully pay the tax balance sooner.
    \69\ Streamlined IAs accounted for 96.7 percent of all IAs approved 
in FY 2006 and 96.2 percent of the open IA inventory at the close of 
the fiscal year. Internal Revenue Service, Collection Activity Report, 
Taxpayer Delinquent Account Cumulative Report, NO-5000-6 (October 2, 
2006).
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    The IRS could collect taxes even more effectively if it were to 
enhance and refine its existing automation and technology. The 
predictive dialer system and the online research tools that the IRS 
maintains are both effective means of contacting and locating 
taxpayers, but neither is being utilized to its fullest capacity. For 
example, the predictive dialer system is predominantly used after all 
required notices are sent, a notice of levy issued, and there is no 
response from the taxpayer. If outbound contact were moved up in the 
notice stream and ACS process, the IRS could make even more timely and 
effective contacts and be more likely to reach resolution, without the 
need for enforcement action.
    Similarly, the IRS also has a vast array of internal and external 
research sources at its disposal, including a sophisticated ``skip 
tracer-like'' mechanism--the Address Research System (ADR). While ADR 
has the potential to validate or update potential addresses for a given 
taxpayer, the IRS currently uses this resource selectively, usually 
late in the collection process. If the IRS were to expand its search 
tool to include such sources as the Internet, Department of Motor 
Vehicles records, and voting registries, and employ the search tool 
earlier in the collection process, it could improve the collection 
productivity of its existing personnel.
VIII.  Ultimately, Tax Collection Is the IRS's Responsibility.
    IRS collection activities are compliance-based, and the training of 
its employees reflects that fact.[70] In other words, the collection 
policy followed by IRS collection representatives is to first cure the 
taxpayer's current noncompliance, whether through increased withholding 
or taking other actions, rather than seeking repayment of past amounts 
due. In contrast, the PCAs who are paid by commissions have the reverse 
incentive. There is no commission given to PCAs when they work with a 
taxpayer to increase his or her withholding. If a taxpayer increases 
withholdings, he or she may not be able to afford to pay a delinquency 
from a prior tax year. Moreover, since PCAs are paid as a percentage of 
the taxes actually collected, there is an incentive to close accounts 
through full-pays or high-dollar monthly installments. There is less 
incentive to take into consideration the taxpayer's specific 
circumstances. Unreasonable installment agreements result in defaults, 
and can harm taxpayers' ability to become compliant. It is inevitable 
that the effect of these incentives will be adverse to taxpayer 
compliance in some cases.
    Some proponents of the PDC initiative have touted the outsourcing 
of collection by the states and the Department of Education in support 
of the IRS's use of PCAs. We find these arguments unpersuasive. The 
Department of Education and most State Departments of Revenue do not 
have large collection functions. The IRS, on the other hand, has 
allocated over 14,000 FTEs to its collection initiatives and, as noted, 
has an annual collection budget of over $2 billion. Moreover, IRS 
employees are subject to many taxpayer protections, above and beyond 
the requirements of the FDPCA, that do not apply to either state PCA 
arrangements or the Department of Education.
    These taxpayer protections exist for several reasons. First, taxes 
are the lifeblood of the Federal Government--without taxes, the 
government is unable to conduct the business of the people. Second, 
taxpayers pay their taxes willingly (if not joyfully) because they have 
a social contract with their government--and the government's end of 
that contract is that it will treat its taxpayers courteously, fairly, 
efficiently, and helpfully. For the reasons discussed in the foregoing 
testimony, the PDC initiative breaches that social contract on all 
counts.
IX  .Conclusion
    I believe the PDC program risks too much for too little. In 1998, 
Congress enacted significant taxpayer rights protections to guard 
against overzealous IRS collection tactics. Now, less than ten years 
later, the IRS is outsourcing tax collection to private companies with 
a profit motive to extract every dollar possible from taxpayers. 
Calling scripts that emphasize the use of psychological techniques 
(e.g., ``The next person to speak loses''; a well timed pause will 
pressure a taxpayer to ``tell you everything you need to know to `close 
the sale' '') make this point clear. In addition, private collectors 
are constitutionally barred from discussing collection alternatives 
with taxpayers who cannot afford to make full payment, and this 
restriction further highlights a significant limitation of the program.
    But even leaving aside the taxpayer rights concerns the program 
raises, the business case for the program does not justify its 
existence. Originally, the program was billed as a way for the IRS to 
collect essentially ``free money.'' The IRS would outsource tax debts 
it otherwise would not get around to collecting due to resource 
constraints, and even after commissions of up to 25 percent were paid 
to the PCAs, the government would receive at least 75 percent of 
whatever was collected.
    The reality has turned out to be very different. The IRS has to 
spend significant sums of money to administer the program, and if these 
sums were instead spent to fund additional IRS enforcement personnel, 
the IRS may well be collecting significantly more tax debts than the 
PCAs will collect--even without accounting for PCA commissions. 
Moreover, as the inventory of PDC-eligible ``easy cases'' dwindles, the 
IRS will be outsourcing more complex cases, which will result in a 
lower rate of collection, higher administrative costs for the IRS, and 
a greater risk of taxpayer rights violations.
    For the reasons I have described, I urge the Congress to terminate 
the PDC program now.
Appendix A: Training Materials for Pioneer
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

Appendix B: Training Materials for Linebarger Goggan
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

Appendix C: Training Materials for CBE
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

Appendix D: Proposed Expansion of Cases to Be Sent to PCAs

----------------------------------------------------------------------------------------------------------------
                               Inventory available without additional programming:
-----------------------------------------------------------------------------------------------------------------
             Type of Case                Description of Case             Volume                TAS Concerns
----------------------------------------------------------------------------------------------------------------
Shelved Taxpayer Delinquent            Delinquent returns but            60,822          Will create the need
 Investigation (TDI).                   policy decision made                              for PCA employees to
                                        to shelve the TDI.                                secure returns.                                                                                         PCA employees cannot
                                                                                          determine which
                                                                                          taxpayers are required
                                                                                          to file tax returns,
                                                                                          resulting in increased
                                                                                          case referrals back to
                                                                                          IRS to work.
----------------------------------------------------------------------------------------------------------------
Deferred (Status 23).................  Balance due is below             595,065          Low dollar inventory
                                        tolerance level..                                 may have higher
                                                                                          percentage of low
                                                                                          income taxpayers who
                                                                                          do not have
                                                                                          representation.                                                                                         Low dollar accounts may
                                                                                          cause PCAs to be more
                                                                                          aggressive in order to
                                                                                          make up for low
                                                                                          dollars per case by
                                                                                          volume closed.
----------------------------------------------------------------------------------------------------------------
Status 22                              Balance due case                  34,458          IRS has not completed
                                        assigned to ACS.                                  ACS processing on
                                                                                          these cases. Cases
                                                                                          never intended to be
                                                                                          sent to the PCAs are
                                                                                          now being considered
                                                                                          to meet the inventory
                                                                                          and revenue
                                                                                          projections of the PCA
                                                                                          program.
----------------------------------------------------------------------------------------------------------------
U.S. Territories/Possessions.........  Tax accounts for                  15,000          Complex issues, with
                                        taxpayers residing in                             increased likelihood
                                        U.S. Territories/                                 of cases referred back
                                        Possessions. These                                to IRS for resolution.
                                        accounts were
                                        originally excluded
                                        from primary inventory
                                        assignment criteria..
----------------------------------------------------------------------------------------------------------------
Collection Statute Expiration Date     Current criteria is              150,000          Complex issues, with
 (CSED) expansion > 2 years.         CSED>3 years. The                              increased likelihood
                                        change to 2 years will                            of cases referred back
                                        result in older cases                             to IRS for resolution.
                                        being sent to PCAs..
----------------------------------------------------------------------------------------------------------------
Taxpayer Delinquent Account (TDA)/     Balance due account              154,612          Complex issues and the
 Taxpayer Delinquent Investigation      with an associated TDI                            need for the PCA
 (TDI) Combination.                     indicating there are                              employee to secure
                                        also years where there                            delinquent returns.
                                        is no record of a
                                        return..
----------------------------------------------------------------------------------------------------------------
Master File Tax Code (MFT) 29........  10% IRS early            Total number of MFT 29   Both MFT 29 and MFT 31
                                        withdrawal penalty on    and MFT 31 cases is      involve complex
                                        an Individual            42,368..                 issues, with increased
                                        Retirement Plan..                                 likelihood of cases
                                                                                          referred back to IRS
                                                                                          for resolution.
---------------------------------------------------------------                                                                                         Issues likely to
                                                                                          involve hardship,
                                                                                          financial difficulty,
                                                                                          spousal abuse.
Master File Tax Code (MFT) 31........  This MFT is used when
                                        IRS splits a 1040
                                        joint tax liability
                                        and substitutes a
                                        single liability for
                                        each person and is
                                        used for such cases as
                                        innocent spouse,
                                        bankruptcy, offer-in-
                                        compromise, and Tax
                                        Court cases..
----------------------------------------------------------------------------------------------------------------
Master File Tax Code (MFT) 55........  Miscellaneous civil               36,062          Complex issues. On
                                        penalty cases (Trust                              trust fund recovery
                                        Fund Recovery penalty                             penalty, underlying
                                        is most common).                                  liability is the
                                                                                          result of unpaid
                                                                                          corporate trust fund
                                                                                          taxes. These cases
                                                                                          usually involve
                                                                                          disputed facts and are
                                                                                          hotly contested.
----------------------------------------------------------------------------------------------------------------

Appendix E: Analysis of PCA Cases Received in TAS to Date
    Summary of PDC Activity in TAS through 5/21/2007:
    Number of PDC calls received on the TAS intake telephone line (1-
877-ASK-TAS1) from 9/11/2006--5/14/2007--220 calls.
    Number of PDC cases received in TAS from 9/11/2006--05/21/2007--318 
cases (76 are open and 242 closed).
    Information on TAS PDC cases:
    157 cases were a result of the PCA preparing a form (Form 911) for 
a TAS referral and forwarding the form to the IRS contact (the COTR) to 
input the TAS referral.
    113 cases were added by a TAS employee answering the 1-877-ASK-TAS1 
telephone line.
    18 cases were the result of the Form 911 being received directly in 
a local TAS office.
    21 cases were referred by an employee in the Wage and Investment 
Operating Division.
    4 cases were referred by a National Taxpayer Advocate toll-free 
assistor.
    5 cases were a result of other sources.
    PCA Assignment:
    #1--Pioneer Credit Recovery, Inc--69 cases
    #2--LGBS, LLP--102 cases
    #3--CBE Group--147 cases
    TAS Cases by TAS Criteria Code:
    Criteria 1--(Economic Harm)--70 cases
    Criteria 2--(Adverse Action)--10 cases
    Criteria 4--(Irreparable Injury)--5 cases
    Criteria 5--(Delay of More than 30 Days)--50 cases
    Criteria 6--(No Response/Resolution by Date Promised)--7 cases
    Criteria 7--(Systemic or Procedural Failure)--154 cases
    Criteria 9--(Public Policy)--19 cases
    Criteria 3 and 8--(Significant Cost/Equitable Treatment or Taxpayer 
Rights Issues)--3 cases combined
    Summary of Issues:
    (The issues listed below were determined upon case receipt in TAS)
    Potential unable to pay cases--101 cases; Potential installment 
agreements--38 cases; Taxpayer disputes or requests an explanation of 
the balance due--75 cases; Amended return issues--18 cases; Penalty 
and/or interest abatement requests--18 cases; Earned Income Tax Credit 
issue--8 cases; Levy issue--11 cases; Offer in compromise issue--7 
cases; Request for assistance in filing returns--9 cases; Innocent 
spouse issue--3 cases; Potential identity theft cases--7 cases; Lien 
issue--7 cases; Appeals issue--3 cases; Bankruptcy issue--5 cases; 
Refund issue--5 cases; Other--3 cases.
    In 58 cases, the taxpayer indicated that he or she previously 
contacted IRS to resolve the tax issue.
    In 20 cases, the taxpayer indicated that he or she wanted to work 
with the IRS, not the PCA.
    In 44 cases, the taxpayer requested TAS assistance when contacted 
by the PCA.
    In 7 cases, the taxpayer had a complaint about the PCA.
    Summary of closing actions:
    Out of the 242 TAS cases that have been closed:
    In 101 cases, the case was closed after TAS had completed all 
possible actions and the taxpayer did not respond to the Case Advocate.
    In 34 cases, TAS provided the taxpayer with an explanation of the 
balance due, an IRS or PCA procedure, or a copy of an IRS transcript.
    In 79 cases, the case was resolved with an installment agreement, a 
determination that the account is currently not collectible, an 
adjustment, an offer in compromise, a penalty abatement, an appeals 
request, or full payment.
    In the remaining 28 cases, the case was either recalled from the 
PCA or the taxpayer he or she would work directly with the PCA.

                                 

    Chairman RANGEL. Thank you. Our next witness is Colleen 
Kelley, President of the National Treasury Employees Union, and 
she is with Elizabeth Paray. You may proceed.

 STATEMENT OF COLLEEN M. KELLEY, PRESIDENT, NATIONAL TREASURY 
        EMPLOYEES UNION, ACCOMPANIED BY ELIZABETH PARAY

    Ms. KELLEY. Thank you very much. Chairman Rangel, Ranking 
Member McCrery, and Members of the Committee. Thank you for 
allowing me to provide comments on the IRS' private collection 
on behalf of the National Treasury Employees Union. Joining me 
today is Elizabeth Paray, an NTEU member and an IRS collection 
representative in the IRS Appletree call center in Buffalo, New 
York. Liz has been with the IRS since 1999, has been a 
certified instructor since 2002 and was named her site's 2006 
instructor of the year. NTEU strongly opposes the 
administration's private tax collection program. It is a waste 
of taxpayer dollars and invites overly aggressive techniques, 
jeopardizes the financial privacy of American taxpayers and may 
ultimately serve to undermine IRS enforcement and compliance 
efforts. With regard to cost, former IRS Commissioner Mark 
Everson has repeatedly acknowledged that using private 
collection companies to collect Federal taxes is more expensive 
than having IRS do the work itself.
    IRS estimates the return on investment for pursuing known 
tax debts through phone calls by IRS employees at 13 to 1 while 
the return on investment for private collection companies is 
expected to be less than 4 to 1. A 2002 report by former IRS 
commissioner Charles Rossotti found that assigning more IRS 
employees to collection work could bring in roughly $30 for 
every $1 spent. Under current contracts, private collection 
firms are eligible to retain 21 to 24 percent of what they 
collect depending on the size of the case. These rates were 
never put up for competition, denying bidders an opportunity to 
make offers on terms that could have resulted in the Treasury 
getting a greater share of the collected revenue.
    In addition to being fiscally unsound, allowing private 
collection agencies to collect tax debt on a commission basis 
flies in the face of the IRS Restructuring and Reform Act 1998 
which specifically prevents employees or supervisors at the IRS 
from being evaluated on dollars of collections that they bring 
in. The idea of allowing private collection companies to 
collect taxes on a commission basis has been opposed by members 
of both parties, including President Reagan's Treasury 
Department, which said about such a proposal, and I quote, 
``the Department strongly opposes contracting out the 
collection of taxes. The public must be assured at all times 
that the person collecting taxes derives no personal benefits 
from that activity and that the integrity of the tax system 
will not be compromised.''
    IRS employees are trained to, quote, ``assist taxpayers in 
resolving their balance due accounts.'' The IRS employees' 
interest is in helping the taxpayer to become compliant and 
they have access to the information as well as the enforcement 
tools both carrots and sticks to do that. In contrast, private 
collectors' interests is to collect from the taxpayer the 
balance due.
    They have no interest in whether the taxpayer owes other 
taxes or may not have filed required returns, nor do they have 
access to any other taxpayer records, so they are unable to 
answer any questions provide any advice or use any enforcement 
tools, such as extensions offers, in compromise or liens ot 
levies. Their only goal is to collect the money, and their only 
tool is a telephone.
    As you know, this is not the first time that the IRS has 
tried to outsource the collection of Federal taxes. Obviously 
Chairman Lewis refers back to 1874. But even more recently, 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 it was canceled after 12 months, despite the 
fact that it was authorized and scheduled to operate for 2 
years. A subsequent internal review by the IRS found that 
contractors participating in the pilot programs regularly 
violated the Fair Debt Collection Practices Act, did not 
adequately protect the security of personal taxpayer 
information, and did not bring in revenue. In fact, the pilot 
resulted in a $17 million net loss. The IRS has the authority 
and the expertise to improve taxpayer compliance. But staffing 
has been slashed in recent years, resulting in an overall 36 
percent decline in combined collection and examination 
enforcement staff between 1996 and 2003.
    These staffing cuts have come at a time when the IRS 
workload has dramatically increased. While not proposing or 
fighting for adequate resources, the IRS has at the same time 
cited a lack of manpower as the justification for outsourcing 
cases to private collection companies. It makes no sense to 
allow private collection companies to keep a quarter of what 
they collect on the easiest cases, when IRS employees could be 
doing it at less cost. Clearly a better option would be to 
provide the IRS with the resources and the staffing it needs. 
NTEU supports a 2 percent annual increase in staffing, roughly 
1,800 position as year over a 5-year period to gradually 
rebuild the depleted IRS workforce.
    Thank you for your leadership on this issue, Mr. Chairman. 
I would also like to thank Congressman Van Hollen for 
sponsoring bipartisan legislation to end the use of private 
collection agencies by the IRS. Ending the use of these PCAs is 
supported by every national consumer organization, the NAACP, 
as we heard the National Taxpayer Advocate and many others. 
Thank you, again, for allowing me to provide these comments, 
and I would be happy to answer any questions.
    [The prepared statement of Ms. Kelley follows:]
 Prepared Statement of Colleen M. Kelley, President, National Treasury 
            Employees Union, accompanied by Elizabeth Paray
    Chairman Rangel, Ranking Member McCrery, and distinguished members 
of the Committee, I would like to thank you for allowing me to provide 
comments on IRS' private tax collection program. As President of the 
National Treasury Employees Union (NTEU), I have the honor of 
representing over 150,000 Federal workers in 31 agencies, including the 
men and women at the IRS.
    Mr. Chairman, NTEU strongly opposes the Administration's private 
tax collection program, as authorized by Congress in 2004 in the 
``American Jobs Creation Act of 2004.'' NTEU believes this misguided 
proposal is a waste of taxpayer dollars, invites overly aggressive 
collection techniques, jeopardizes the financial privacy of American 
taxpayers and may ultimately serve to undermine IRS enforcement and 
compliance efforts. NTEU believes the collection of taxes is an 
inherently governmental function that should be restricted to properly 
trained and proficient IRS personnel. 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.
COST
    There has been much debate over whether using contract employees is 
more costly than using trained and professional IRS employees. But in 
testimony before Congress, former IRS Commissioner Mark Everson 
repeatedly acknowledged that using private collection companies to 
collect Federal taxes is more expensive than having IRS do the work 
itself.
    ``. . . we could do this work as cheaply or more that the private 
sector. As you know, we do the President's Competitive Sourcing 
Initiative and we look at different things all the time, different 
projects, and more often than not, the Government wins because it 
doesn't have to make a profit. So, I believe you could do this more 
cheaply internally.'' (House Ways and Means Subcommittee on Oversight 
hearing on April 6, 2006)
    ``The nation's chief tax collector said Wednesday that using 
private agencies to collect debts under a new program will cost more 
than hiring additional agents to do the job . . . ``I admit it. I 
freely admit it,'' Everson said. (Associated Press, March 29, 2006. 
Quoting Everson at a House Appropriations Subcommittee).
    ``I have freely acknowledge it is more costly (to use private 
collection agencies) than it would be were the IRS to do it.'' Senate 
Homeland Security and Governmental Affairs Subcommittee Hearing, 
September 26, 2006).
    Supporters of the private tax collection program have frequently 
mentioned the importance of return on investment in the collections 
arena. I agree and a look at the numbers confirms once again that IRS 
employees can collect unpaid tax debts much more efficiently than 
private collectors. This fact was made clear by the Government 
Accountability Office (GAO) in testimony last year on the tax gap when 
it noted that as part of the IRS' effort to make the best use of its 
enforcement resources, it had developed rough measures of return on 
investment (ROI) in terms of tax revenue that it assesses from 
uncovering non-compliance. GAO noted that IRS estimated the ratio of 
estimated tax revenue gains to additional spending for pursuing known 
individual tax debts through phone calls is 13 to 1. (Senate Finance 
Subcommittee on Taxation and IRS Oversight hearing on July 26, 2006). 
But according to recent IRS figures, under even the most optimistic 
scenario, the ROI for the private collection companies is expected to 
reach just 4 to 1 in FY '08.
    The high commission payments to the private contractors for work on 
the easiest to collect cases is unjustified and unnecessary. As you may 
know, under current contracts, private collection firms are eligible to 
retain 21% to 24% of what they collect, depending on the size of the 
case. Regrettably, the commission rates that contractors are being paid 
for their services were never put up for competition. Before the 
initial bid solicitations first went out, the IRS set commission rates 
at 21 to 24 percent of the revenue collected by contractors, denying 
bidders an opportunity to make offers on terms that would have resulted 
in the IRS getting a greater share of the collected revenue. 
Consequently, one of the companies that lost its bid for the contract 
filed a protest with GAO and noted in its bid protest that ``offerors 
were given no credit for proposing lower fees than the 'target' 
percentages and fee recommended by the IRS.''
TAXPAYER FAIRNESS
    In addition to being fiscally unsound, the idea of allowing private 
collection agencies to collect tax debt on a commission basis also 
flies in the face of the tenets of the IRS Restructuring and Reform Act 
of 1998 (RRA 98). Section 1204 of the law specifically prevents 
employees or supervisors at the IRS from being evaluated on the amount 
of collections they bring in. But now, the IRS has agreed to pay 
private collection agencies out of their tax collection proceeds, which 
will clearly encourage overly aggressive tax collection techniques, the 
exact dynamic the 1998 law sought to avoid. Furthermore, the IRS is 
turning over tax collection responsibilities to an industry that has a 
long record of abuse. For example, in 2006, the Federal Trade 
Commission (FTC) received 69,204 consumer complaints about debt 
collection agencies--giving debt collectors the impressive title of the 
FTC's most complained-about industry (FTC Annual Report 2007: Fair Debt 
Collection Practices Act).  Despite this track record, or maybe because 
of it, Congress waived all Federal Government liability for actions of 
these contractors when it authorized their use in the 2004 Jobs Act.
    Mr. Chairman, the fear that allowing private collectors to collect 
tax debt on a commission basis would lead to contractor abuse was 
realized when the IRS recently confirmed that the agency had received 
more than five dozen taxpayer complaints against the three private 
collection companies, including an instance where a collector attempted 
to collect in a state in which it was not licensed to operate even 
though being licensed in all 50 States was a requirement of the bid 
request. A private collector also repeatedly called a taxpayer's 
previous address of record between 1 and 7 times a day for 27 days 
after establishing the taxpayer no longer resided at that location, a 
clear violation of the Fair Debt Collection Practices Act. It is hard 
to understand how these kinds of violations were allowed to occur when 
the IRS repeatedly told Congress and the public that it would maintain 
extremely close oversight of this controversial program.
TRAINING & PROFESSIONALISM
    Another important area which we believe separates IRS employees 
from private collectors is the rigorous and comprehensive mandatory 
training that IRS employees receive. For example, new hires in the 
Automated Collection System (ACS), which the IRS itself has analogized 
to the use of private collectors, generally must complete an eight-week 
training course in a classroom setting which is complimented by three 
weeks of on the job training. In addition, these employees undergo 
mandatory annual training on topics such as confidentiality and privacy 
of taxpayer information, ethics awareness, taxpayer rights and computer 
security (ACS Basic Modules A-1Training Course 6719-102).
    In contrast, it has been reported that some private collection 
personnel receive as little as two weeks of training before being 
allowed to handle taxpayer accounts. That National Taxpayer Advocate 
has previously cited concerns over the lack of training given to 
private collection employees in her recent annual report to congress 
noting that IRS plans to start assigning cases to the private 
collectors with the types of complexities that they were never intended 
to work on (pg. 51--National Taxpayer Advocate Annual Report to 
Congress). Olson went on to say that some of these cases will require 
the exercise of judgment and discretion and that such authority cannot 
be delegated to a non-governmental employee. IRS employees on the other 
hand have a wide range of tools at their discretion. They are able 
analyze financial statement information, research assets, enter into 
installment agreements, make currently not collectible determinations, 
and can take lien and/or levy enforcement actions.
    In addition, while IRS policies, procedures and training guidelines 
are geared towards providing quality customer service and are open to 
the public, the operational plans of the private collectors emphasize 
the importance of collection results rather than customer service and 
have been designated proprietary information, and thus have not been 
made public. This fact was highlighted recently by the National 
Taxpayer Advocate in her annual report to Congress in which she noted 
that while the IRS requires its telephone representatives to seek full 
payment, they cannot employ trickery or any device to manipulate 
taxpayers. And while ``the training given to IRS ACS collection 
representatives includes an emphasis on fairness, accuracy, and 
taxpayer rights, we are concerned that the private collectors are using 
trickery, device, and belated Fair Debt Collection Practices Act 
warnings to take advantage of taxpayers.'' (pg. 50)
    Olson's report also cited concerns about the ability of the private 
collection companies to meet the needs of a diverse American taxpaying 
public saying that `` . . .  the three private collection agencies have 
taken next to no steps to address taxpayers with limited English 
proficiency.'' (pg. 48). In contrast, the IRS is able to ensure that 
persons with limited English proficiency are able to understand and 
meet their tax responsibilities through its Multilingual Initiative 
(MLI). This service wide initiative provides written and oral 
assistance to Limited English Proficient (LEP) taxpayers in Spanish, 
Chinese, Vietnamese, Korean and Russian.
    As noted previously, while the operational plans and calling 
scripts of the private collectors are not open to public scrutiny, the 
procedures and guidelines telling IRS employees how to serve taxpayers 
in administering the nation's tax laws, as contained in the Internal 
Revenue Manual (IRM), are open to public examination and review and in 
fact, are available on the IRS website.
    IRS employees are trained to ``assist taxpayers in resolving their 
balance due accounts.'' (IRS Manual 5.19.1.1) When an IRS employee 
calls a taxpayer, the employee has access to all of the taxpayer's 
information and can answer questions and offer advice. For example, 
they can see whether a taxpayer has not filed a return and explain that 
the sooner the taxpayer makes arrangements to address filing and 
balance due issues the less penalty and interest they will owe. They 
can look at the taxpayer's records and answer questions about why they 
owe a balance and what they can do about it. They can also tell the 
taxpayer that they are not having enough taxes withheld by their 
employer and need to address that or that if an ex-spouse is claiming a 
child as a dependent they will not also be able to receive an 
exemption. If a simple mistake, like a math error, has occurred, they 
can fix it. They can provide an extension of the time period for 
payment. They can make a determination that the taxpayer meets the 
currently not collectible requirements. They can determine whether the 
taxpayer may be eligible for an Offer in Compromise in which part of 
the balance due is foregone, or they can send the case on where a lien 
or levy can be imposed. The IRS employee's interest is in helping the 
taxpayer become compliant and they have access to the information as 
well as the enforcement tools, both carrots and sticks, to do that.
    In contrast, private collectors' interest is to collect from a 
taxpayer the balance due amount they have been provided. They have no 
interest in whether the taxpayer owes other taxes or may not have filed 
required returns, nor do they have access to any other taxpayer 
records, so they are unable to answer any questions, provide any advice 
or use any enforcement tools, such as extensions, offers in compromise 
or liens or levies. Their only goal is collect the money and their only 
tool is the telephone. That may explain why concerns have been raised 
about the use of deceptive tactics when dealing with taxpayers 
``including use of the 'psychological pause' (the next person who 
speaks loses)'' and ``instructions to 'close the sale' which seem 
closer to boiler room techniques than efforts to bring taxpayers into 
compliance.'' (Nina Olson, House Appropriations Subcommittee on 
Financial Services and General Government hearing March 5, 2007)
    With the proliferation of tax scams and identity theft in recent 
years, the simple issue of providing the taxpayer with adequate 
identification has apparently been a problem for the private collection 
companies. IRS employees are assigned identification numbers, which 
they must provide to the taxpayer at the beginning of the call before 
they can confirm any of the taxpayer's personal information. This is 
critical to ensure that scam artists trying to impersonate IRS 
employees are unable to obtain personal or financial information for 
purposes of stealing confidential information or taxpayer assets.
    In order to give you an idea of the extent of taxpayer protections 
and variety of services that IRS employees provide to a taxpayer when 
discussing their delinquent account, I have attached a sample calling 
script at the end of my testimony.
History of Failure
    Mr. Chairman, as you know this is not the first time the IRS has 
tried to outsource the collection of Federal taxes. Two pilot projects 
were authorized by Congress to test private collection of tax debt for 
1996 and 1997. The 1996 pilot was so unsuccessful it was cancelled 
after 12 months, despite the fact it was authorized and scheduled to 
operate for two years. A subsequent review by the IRS Office of 
Inspector General found that contractors participating in the pilot 
programs regularly violated the Fair Debt Collection Practices Act, did 
not adequately protect the security of personal taxpayer information, 
and even failed to bring in a net increase in revenue. In fact, a 1997 
GAO report found that private companies did not bring in anywhere near 
the dollars projected, and the pilot caused a $17 million net loss.
     Despite IRS assurances that it has learned from its past mistakes, 
two recent reports indicate otherwise. A March 2007 report by the 
Treasury Inspector General for Tax Administration on IRS' 
implementation of the private tax collection program raises a number of 
questions about the security of taxpayer information being stored on 
contractors' computer systems. The report is rife with alarming 
examples of data security lapses, including transmitting data over an 
unsecured channel, storing taxpayer data on a server used for four 
other contractor clients and failing to load antivirus and encryption 
software. The report notes that ``these factors, as well as other 
computer and physical security issues, increase the risk that Federal 
tax information may be inadvertently disclosed, lost, stolen, or 
corrupted'' (TIGTA Audit # 2007-30-066). These security breaches 
illustrate not only the risks associated with collecting and 
disseminating large amounts of electronic personal information, but the 
risk of harm or injury to consumers from identity theft crimes.
    In addition, a September 2006 examination of the IRS private 
collection program by the Government Accountability Office (GAO) 
reveals that like the 1996 pilot, the program may actually lose money 
by the scheduled conclusion of the program's initial phase in December 
2007. The report cited preliminary IRS data showing that the agency 
expects to collect as little as $56 million through the end of 2007, 
while initial program costs are expected to surpass $61 million. What's 
more, these projected costs do not even include the 21-24 percent 
commission fees paid to the collection agencies directly from the taxes 
they collect.
Negative Effect on Tax Administration
    Mr. Chairman, while the direct cost of the private tax collection 
program is clear, I am also worried about the potential negative effect 
that the private tax collection program will have on our tax 
administration system and taxpayer compliance. In her recent report to 
Congress, the National Taxpayer Advocate voiced similar concern about 
the unintended consequences of privatizing tax collection. Ms. Olson 
cited a number of ``hidden costs'' that private tax collection has on 
the tax system including reduced transparency of IRS tax collection 
operations, inconsistent treatment for similarly situated taxpayers, 
and reduced tax compliance. In addition, this concern has been voiced 
by members of both parties including President Reagan's Administration 
which said this about such a proposal:
    ``The Department strongly opposes contracting out the collection of 
taxes because it is likely to result in considerable adverse public 
reaction. The public must be asured at all times that the person 
collecting taxes derives no personal benifits from that activitly and 
that the integrity of the tax system will not be compromised.''

                (Treasury Dept. Statement to House Judiciary Comm. 8/8/
86)

    Clearly the negative effects of contracting out tax collection to 
private collectors hampers the agency's ability to improve taxpayer 
compliance and will only serve to undermine future efforts to close the 
tax gap.
Opposition Widespread and Growing
    NTEU is not alone in its opposition to the IRS' private collection 
program. Opposition to the program has been voiced by a growing number 
of members of Congress, major public interest groups, tax experts, as 
well as the Taxpayer Advocacy Panel, a volunteer Federal advisory 
group--whose members are appointed by the IRS and the Treasury 
Department. In addition, the National Taxpayer Advocate, an independent 
official within the IRS recently identified the IRS private tax 
collection initiative as one of the most serious problems facing 
taxpayers and called on Congress to immediately repeal the IRS' 
authority to outsource tax collection work to private debt collectors 
(National Taxpayer Advocate 2006 Report to Congress). In addition, 
dozens of newspapers across the country, including the San Francisco 
Chronicle, Providence Journal, Tennessean, Indianapolis Star, and 
Arizona Republic have editorialized against the use of private 
collection agencies.
    We are also supported by Representatives Chris Van Hollen, Steve 
Rothman and Russ Carnahan who have introduced H.R. 695, the ``Taxpayer 
Abuse and Harassment Prevention Act of 2007.'' This critical bipartisan 
legislation would repeal the IRS's authority to enter into contracts 
with private sector debt collectors and ensure that tax collection is 
kept in the professional and accountable hands of Federal employees. 
This bill currently has 126 bipartisan cosponsors.
    Instead of rushing to privatize tax collection functions which 
jeopardizes taxpayer information, reduces potential revenue for the 
Federal Government and undermines efforts to close the tax gap, NTEU 
strongly believes the IRS should increase compliance staffing levels to 
ensure that the collection of taxes is restricted to properly trained 
and proficient IRS personnel.
NTEU Staffing Proposal
    Mr. Chairman, history has shown that the IRS has the expertise to 
improve taxpayer compliance but lacks the necessary personnel and 
resources. The President's fiscal 2008 budget proposal trumpets the 
increased tax collections produced by IRS's own employees and cites the 
increased collections of delinquent tax debt from $34 billion in 2002 
to $49 billion in 2006, an increase of 44 percent. Unfortunately, 
instead of providing additional resources to hire more enforcement 
staff, IRS personnel resources have been slashed in recent years 
resulting in an overall 36% decline in combined collection and 
examination function enforcement staff between 1996 and 2003. In 
addition, these staffing cuts have come at a time when the IRS workload 
has dramatically increased.
    According to IRS's own annual reports and data, taxpayers filed 
114.6 million returns in 1995. After a steady annual climb, eleven 
years later, the Service saw more than 132 million returns filed. Yet, 
between 1995 and 2005, total numbers of IRS employees shrunk from 
114,000 to 94,000. Even more alarming is that during that period, 
revenue officers and revenue agents--two groups critical to IRS 
enforcement and compliance efforts--shrunk by 32 and 23 percent 
respectively. Revenue officers who collect large delinquent accounts 
went from 8,139 to 5,462 and revenue agents who do audits fell from 
16,078 to 12,355. Unfortunately, instead of reversing this trend, the 
IRS has continued efforts to reduce its workforce and has moved forward 
with downsizing in several different areas which have targeted some of 
the service's most productive employees.
    While moving forward with drastic reductions to its enforcement and 
compliance staff, the IRS has at the same time cited a lack of manpower 
as one of the primary justifications for outsourcing cases to private 
collection companies. But a recent GAO report noted that as of March 1, 
there were only 75 total employees among the three collection companies 
actually working the cases. At the same time, the report notes that the 
IRS had allocated 65 of its own employees to monitor the program, thus 
the IRS is using almost as many employees to monitor the program than 
are actually working the cases. (GAO-06-1065 September 2006)
    NTEU believes instead of expending significant resources on 
monitoring outside collectors that are allowed to keep up to a quarter 
of what they collect, the IRS should strongly consider retraining IRS 
employees scheduled to be laid off to do the work that is being 
outsourced to private collection companies. The Taxpayer Advocate has 
noted that there currently ongoing reductions in force of low-graded 
IRS employees that are capable of being trained to do the work that is 
being given to private collectors. One possibility might be to look at 
the thousands of IRS employees that are scheduled to be laid off at a 
number of paper processing sites over the next several years. A number 
of these sites already have the infrastructure and technological 
capabilities to work the type of cases being turned over to the private 
companies. In addition, these employees have already undergone 
extensive background checks and have been trained on the importance of 
protecting the privacy of all taxpayers. Retraining these employees 
would allow the IRS to collect outstanding taxes more efficiently 
without putting taxpayers' financial privacy at risk.
    While we believe retraining IRS employees soon to lose their jobs 
is a sensible and fiscally sound approach to the private tax collection 
issue, we strongly believe the IRS must also look to address the 
overall staffing crisis at the service. In order to reverse this 
downward trend in staffing, NTEU supports a two percent annual net 
increase in staffing (roughly 1,885 positions per year) over a five-
year period to gradually rebuild the depleted IRS workforce to pre-1998 
levels. A similar idea was proposed by former IRS Commissioner Charles 
Rossotti in a 2002 report to the IRS Oversight Board. In the report, 
Rossotti quantified the workload gap in non-compliance, that is, the 
number of cases that should have been, but could not be acted upon 
because of resource limitations. Rossotti pointed out that in the area 
of known tax debts, assigning additional employees to collection work 
could bring in roughly $30 for every $1 spent. The Rossotti report 
recognized the importance of increased IRS staffing noting that due to 
the continued growth in IRS' workload (averaging about 1.5 to 2.0 
percent per year) and the large accumulated increase in work that 
should be done but could not be, even aggressive productivity growth 
could not possibly close the compliance gap. Rossotti also recognized 
that for this approach to work, the budget must provide for a net 
increase in staffing on a sustained yearly basis and not take a ``one 
time approach.''
    Although this would require a substantial financial commitment, the 
potential for increasing revenues, enhancing compliance and shrinking 
the tax gap makes it very sound budget policy. One option for funding a 
new staffing initiative would be to allow the IRS to hire personnel 
off-budget, or outside of the ordinary budget process. This is not 
unprecedented. In fact, Congress took exactly the same approach to 
funding in 1994 when Congress provided funding for the Administration's 
IRS Tax Compliance Initiative which sought the addition of 5,000 
compliance positions for the IRS. The initiative was expected to 
generate in excess of $9 billion in new revenue over five years while 
spending only about $2 billion during the same period. Because of the 
initiative's potential to dramatically increase Federal revenue, 
spending for the positions was not considered in calculating 
appropriations that must come within annual caps.
    A second option for providing funding to hire additional IRS 
personnel outside the ordinary budget process could be to allow IRS to 
retain a small portion of the revenue it collects. The statute that 
gives the IRS the authority to use private collection companies to 
collect taxes allows 25 percent of collected revenue to be returned to 
the companies as payment, thereby circumventing the appropriations 
process altogether. Clearly, there is nothing magical about revenues 
collected by private collection companies. If those revenues can be 
dedicated directly to contract payments, there is no reason some small 
portion of other revenues collected by the IRS could not be dedicated 
to funding additional staff positions to strengthen enforcement.
    Mr. Chairman, in order to continue to make improvements in taxpayer 
services while simultaneously processing a growing number of tax 
returns and stabilizing collections and examinations of cases, it is 
imperative to reverse the severe cuts in IRS staffing levels and begin 
providing adequate resources to meet these challenges. With the future 
workload expected to continue to rise, the IRS will be under a great 
deal of pressure to improve customer service standards while 
simultaneously enforcing the nation's tax laws. NTEU believes that 
frontline IRS employees are the best defense against an increasing U.S. 
tax gap. Unfortunately, the Administration has not requested the 
funding necessary to close the tax gap. Congress must, therefore, act 
to provide IRS with the necessary staffing and a dedicated funding 
stream to support those additional workers.
IRS Budget
    Mr. Chairman, the final issue that I would like to discuss is the 
Administration's FY '08 budget request for the IRS. As you know, the 
IRS budget forms the foundation for what the IRS can provide to 
taxpayers in terms of customer service and how the agency can best 
fulfill its tax enforcement mission. Without an adequate budget, the 
IRS cannot expect continued improvement in customer service performance 
ratings and will be hampered in its effort to enhance taxpayer 
compliance. I would like to applaud the Administration for 
acknowledging in its FY ?08 Budget in Brief (page 65) that ``assisting 
the public to understand their tax reporting and payment obligations is 
the cornerstone of taxpayer compliance and is vital for maintaining 
public confidence in the tax system.'' However, I was disappointed in 
the Administration for failing to request a budget for FY '08 that 
meets the needs of the Agency to fulfill its customer service and 
enforcement challenges. In fact, the President's budget anticipates a 
``savings'' equal to nearly 1,200 full-time equivalent positions, 
including 1,147 in enforcement and taxpayer service programs.
    Although it's widely recognized that additional funding for 
enforcement provides a great return on the investment, the 
Administration seems reluctant to request an adequate budget for the 
IRS. In addition, as noted previously, despite citing a lack of 
resources as the primary rationale for contracting out a number of 
inherently governmental activities, such as the collection of taxes, 
the former Commissioner of the IRS told Congress that the IRS does not 
need any additional funding above the President' budget request.
    NTEU believes that Congress must provide the IRS with a budget that 
will allow the Service to replenish the depleted workforce, 
particularly with respect to enforcement personnel.
    Thank you again for allowing me to provide these comments on this 
important issue. I would be happy to answer any questions you might 
have.
SAMPLE IRS EMPLOYEE CALL SCRIPT
    Hello, may I speak with Jack Smith?
    Hi Mr. Smith, My name is Ms. Jones, I am calling from the Internal 
Revenue Service, my ID # is xx-xxxxx
    In order to proceed with this conversation, I need to verify some 
information to ensure that I am speaking with the correct taxpayer and 
not disclosing your information to the wrong party.
    May I have your Social Security Number?
    May I have your complete name as it appears on your last tax 
return?
    What is your current mailing address?
    I have reached you at your home number, can you please give me your 
work number?
    Do you have a cell phone number?
    Where are you currently employed?
    And finally, where do you do your banking?
    I am calling to discuss your outstanding balance (or overdue tax 
return). Then I proceed with the conversation--asking if they know why 
they owe. Are they able to full pay or borrow--if they say no, I ask 
why.
    During the remainder of the call, I will use the ACS Quick 
Reference Guide to resolve all aspects of a taxpayer's account and 
ensure that the taxpayer receives the best possible service.
    For example, I may ask:
    What can I do to help you not owe again?
    This is done to ensure that the taxpayer understands why he/she 
owes.
    I also may state certain things to taxpayer as well, such as

      Explaining that an additional balance would default their 
Installment Agreement, and the consequences of default on the 
Agreement.
      If a taxpayer has not filed taxes for a certain year, I 
advise them that, under the law the IRS can file for them. This could 
result in the taxpayer incurring additional liability. I explain this 
to them to help the taxpayer avoid such a circumstance.
      In order to assist the taxpayer in filing returns, I can 
also send them their income information. In some instances the returns 
must be filed before an Installment Agreement can be set up.

                                 

    Chairman RANGEL. Thank you, Ms. Kelley. Now we will hear 
from Kevin Brown, who is the Acting Commissioner of the 
Internal Revenue Service. Thank you. Welcome to the Committee 
as Acting Commissioner.

STATEMENT OF KEVIN BROWN, ACTING COMMISSIONER, INTERNAL REVENUE 
                            SERVICE

    Mr. BROWN. Thank you. Good morning Chairman Rangel, Ranking 
Member McCrery, and Members of the Committee. I appreciate the 
opportunity to discuss these private collection agencies for 
the collection of the Federal individual income taxes owed.
    As you know, Mr. Chairman, the private debt collection 
program was authorized by the American Jobs Creation Act of 
2004. The Act permitted the IRS to use collection agencies as a 
means for collecting delinquent taxes. It is estimated that the 
agencies will collect from $1.5 billion to over $2.2 billion 
over 10 years. This provides us with another tool in the effort 
to close the tax gap. Although there have been some growing 
pains in the new program, we want to do it right. We are making 
every effort to protect taxpayer rights. Private collection 
agencies and their employees are subject to extensive quality 
control monitoring. The employees must be in full compliance 
with the Federal tax laws. They also are subject to initial 
background checks, FBI fingerprint screening annually and a 
reinvestigation every 5 years. Taxpayers receive the same 
treatment from collection agencies that they would receive from 
the IRS, including access to the taxpayer advocate service.
    So, far there have been no reported instances of the misuse 
of taxpayer information or intentional disclosure of protected 
information. The private collection agencies only work on cases 
where the taxpayer does not dispute the liability. The 
collection agencies cannot knock on the doors of taxpayers. 
They do not meet taxpayers face to face. The private companies 
contact taxpayers only by phone or mail. The agencies only work 
on cases up to $100,000 in tax liability. The debt collection 
program has been examined by several government bodies. The 
Inspector General for tax administration reported that the IRS 
had effectively developed and implemented the collection 
program with careful attention to taxpayer rights.
    The Chairman of the IRS oversight board said--and I am now 
quoting--overall this program seems to be working well although 
the board intends to continue to monitor it closely. Through 
this program the IRS has found a way to reach a specific 
segment of taxpayers who have outstanding debts. The Government 
Accountability Office reported that the IRS has made major 
progress in addressing critical success factors for the private 
debt collection program. The GAO also made several 
recommendations about how to improve the collection program and 
we are implementing those recommendations.
    As of April 28, 2007, the private debt collection agencies 
have been assigned cases involving almost 38,000 taxpayers. 
They have collected $19.5 million in gross revenue. Of the more 
than 37,000 cases placed with collection agencies we have 
received 25 concerns related to taxpayer treatment. That is .7 
of 1 percent of all the cases assigned. Of the 25 concerns 
raised, only one was validated as a contract violation, two are 
pending the completion of an investigation, and in 22 cases 
there were no contract violations found. The IRS conducts 
customer satisfaction surveys of taxpayers contacted by private 
collection agencies. We have just received the survey for the 
month of April. Ninety-seven percent of the taxpayers who 
responded were satisfied with the service received from the 
collection agencies.
    I believe that the agencies and IRS overall are taking all 
possible steps to treat taxpayers with fairness and respect. 
Mr. Chairman, the private debt collection program has made good 
strides. Without the collection agencies, $19.5 million would 
have gone uncollected. As I noted at the start, this amount is 
projected to grow to the range of $1.5 to $2.2 billion over the 
next 10 years. The IRS could not collect this money otherwise. 
We simply do not have the manpower to make a phone call to 
every delinquent taxpayer in the country. Our employees are 
assigned to higher priority cases, requiring a deeper knowledge 
of the tax laws and IRS procedures. I recognize that the 
private debt collection program is controversial. Some Members 
of Congress believe the Federal tax collection is an inherently 
governmental function that should not be contracted out. I 
understand and respect those views. Nevertheless, Congress 
created the debt collection program and we are doing our best 
to carefully carry it out. Thank you, and I would be happy to 
take any questions you may have.
    Chairman RANGEL. Thank you.
    [The prepared statement of Mr. Brown follows:]
  Statement of Kevin M. Brown, Acting Commissioner, Internal Revenue 
                                Service
    Good morning Chairman Rangel, Ranking Member McCrery and Members of 
the Committee. I appreciate the opportunity to appear this morning to 
discuss the limited use of private collection agencies (PCAs) for the 
collection of Federal individual income tax.
    As you know Mr. Chairman, the Private Debt Collection (PDC) program 
was authorized by the American Jobs Creation Act (AJCA) of 2004. It 
authorized the Internal Revenue Service (IRS) to use PCAs as an 
additional resource to help collect delinquent Federal taxes, 
addressing one aspect of the tax gap. We have proceeded based on the 
specific provisions of the legislation that PCAs can successfully 
perform some ministerial and nondiscretionary tasks in connection with 
the collection of taxes.
Previous Experience
    The AJCA was not the first was not the first Act to authorize the 
IRS to use PCAs. In 1996 there was an initiative allowing us to create 
a pilot program to determine the feasibility of using PCAs. That 
program failed, but provided some important lessons for us in setting 
up the current PDC program.
    First, in 1996 the assigned cases were aged and had little 
probability of collection (e.g., very low dollar, statute issues, 
etc.). This time we provided cases that have various statuses and 
dollar amounts. The cases also have a higher probability of collection.
    Second, the pilot program did not provide systems that were 
specific to management of PCA activities, preventing the successful 
exchange of information between PCAs and the IRS. Now, we have systems 
in place that are more sophisticated and efficient in tracking work and 
addressing problems encountered with segregating the private debt-
collection inventory.
    Third, most of our processes and controls were manual in nature in 
1996. With the current PDC program, we now have oversight and 
monitoring processes that are structured and efficient with increased 
automation for data processing and exchange.
    Fourth, the pilot program allowed PCAs only to call and locate 
taxpayers. They had no authority to set up and monitor payment 
arrangements. Under our new program, maximum effort has been made to 
provide PCAs with the latitude required to implement best business 
practices in the debt-collection industry. PCAs are now authorized to 
request payment and set up installment agreements (with IRS approval) 
of up to five years in length. They also monitor case progress.
    Finally, and perhaps most importantly, under the pilot program, 
PCAs were compensated based on a flat fee arrangement, and they were 
compensated even if they generated no additional collections. Under our 
current program, PCA payments are tied to performance.
    In addition to learning from the implementation of the previous 
program, the tax collection climate has changed substantially since 
1996. Changes in the tax law have provided greater protection for 
taxpayers. The landmark change was the enactment of the IRS 
Restructuring and Reform Act (RRA) of 1998. That act, among other 
things, provided for collection due process hearings for taxpayers and 
restrictions on productivity based evaluations of IRS employees. It 
also prohibited specific conduct by IRS employees and established the 
position of National Taxpayer Advocate.
Taxpayer Protection
    When it authorized the program, Congress was rightly concerned that 
PCAs be prevented from engaging in an activity that is a violation of a 
taxpayer right or protection.
    As such, the enabling legislative language ensures taxpayers 
receive the same treatment from PCAs as they would if the IRS handled 
their collection matters, including access to the Taxpayer Advocate 
Service (TAS).
    Specifically, PCAs are allowed to work cases where the taxpayer 
does not dispute the liability. They can contact taxpayers by phone to 
attempt to resolve delinquent tax issue and initially were allowed to 
work cases from $100 up to $25,000. We increased the upper end of that 
range to $100,000 in February. PCAs are also authorized to gather 
pertinent information from taxpayers and provide it to the IRS to 
resolve cases outside of their authority. Finally, they can use skip-
tracing technology to locate taxpayers.
    PCAs and their employees are subject to extensive quality control 
monitoring internally and by the IRS to ensure compliance with taxpayer 
protections and applicable policies and procedures. This oversight 
includes ``live'' monitoring of telephone communications between 
collection agency employees and taxpayers, review of recorded 
conversations, taxpayer satisfaction surveys, audits of collection 
agency records, and periodic reviews of agency performance.
    In addition, the IRS specifically monitors collection agency 
compliance with taxpayer confidentiality requirements and the 
restrictions on certain conduct contained in section 1203 of the IRS 
Restructuring and Reform Act of 1998 (RRA 1998). To date, there have 
been no reported instances of the misuse of taxpayer information or 
intentional disclosure of protected information.
    In addition, private collection agencies are required to comply 
fully with the provisions of laws and regulations that pertain to 
taxpayer information, including, to the extent permissible under 
applicable law, the removal from the IRS contract activities of 
employees who violate the requirements of these provisions.
    PCA employees must be in full compliance with Federal tax laws and 
are subject to FBI fingerprint screening annually and a reinvestigation 
every five years. The IRS monitors PCA compliance with all applicable 
Federal and State laws. Failure to comply with these laws and 
regulations will be considered a breach of contract.
    Section 1204 of the RRA, which prohibits IRS employees from being 
compensated based on the number of audits they conduct or the amount of 
dollars they collect, does not specifically apply to the PCAs since the 
PCAs are not allowed to take enforcement actions. However, the intent 
of section 1204 was taken into account when the measurements of the 
PCAs were developed. For example, the IRS reviews PCAs and certifies 
that dollars collected are not a measure for their employee performance 
or their bonus structure. Also, the IRS PDC Project Director certifies 
1204 compliance on a quarterly basis.
    In addition, contractors are prohibited from soliciting direct 
receipt of funds from taxpayers. Although payments have been received 
at PCA sites, PCAs have fully complied with the IRS' misdirected 
payment requirements. Of the 114 misdirected payments sent to PCAs 
erroneously by taxpayers, all have been re-directed to the IRS and 
posted to the proper accounts.
    While PCAs are held to the same guidelines of the Fair Debt 
Collection Practices Act (FDCPA) as IRS employees, there are many 
procedural differentiations and restrictions for PCAs that are in place 
as safeguards to minimize risks to taxpayer rights and privacy. Some of 
these restrictions include:

      PCAs cannot contact the taxpayer at any unusual time or 
place, or at a time or place an employee knows, or should know, is 
inconvenient to the taxpayer. (PCAs can generally contact the taxpayer 
after 8:00 AM and before 9:00 PM local time at the taxpayer's location, 
unless there is reason to know otherwise).
      PCAs cannot contact the taxpayer at work if the taxpayer 
has instructed them not to do so or if there is reason to believe the 
employer does not allow this contact. (PCAs can call at the place of 
work only if permitted by a taxpayer. The IRS has not authorized any 
third-party contacts to date.)
      PCAs cannot contact a taxpayer directly when the IRS or 
the taxpayer has informed the PCA that the taxpayer has an authorized 
representative and the PCA is able to determine the representative's 
name, address, telephone number, and authority with respect to the 
taxpayer.
      PCAs cannot engage in conduct that is harassing, 
oppressive, or abusive.
      PCAs cannot visit Taxpayers.

Implementing the Program
    In implementing the authority granted under the AJCA to utilize 
private debt collectors, the IRS has been very careful both in 
selecting the PCAs and in ensuring that taxpayer rights were protected. 
We used a competitive procurement process to identify PCAs using the 
General Services Administration (GSA) Schedule to solicit Requests for 
Quotations (RFQ) for GSA debt-collection vendors.
    The initial RFQ was cancelled in August 2005 as a result of a 
protest and reissued in October 2005. A total of 33 firms took part in 
the competitive bidding process that resulted in contracts with the 
three PCAs selected for the limited implementation phase of the PDC 
program in March 2006. Prior to the contract award, the IRS researched 
the complaint records of the three firms with the Federal Trade 
Commission.
    A post award protest in March 2006 delayed work until June 2006. 
Selected PCAs, as well as more than 350 PCA employees, passed 
background investigations, including tax-compliance checks. Only 
following the successful completion of testing and certification 
(including physical and information security) did the initial roll out 
begin.
    On September 7, 2006, 11,564 cases were placed with three PCAs. 
This limited implementation phase was designed as a controlled 
environment to gather critical information on debt collection for 
future releases of the program. The Taxpayer Advocate, the Governmental 
Accountability Office (GAO), the Treasury Inspector General for Tax 
Administration (TIGTA), and other vital stakeholders were included to 
ensure safeguards and accountability was integrated in the processes.
    The following were key activities performed for project stand up:

      Usability testing of the initial contact letters with 
taxpayer focus groups and the capture of input from numerous 
stakeholders such as TAS, Counsel, Ways & Means Committee, etc.
      PCA Policy and Procedures Guide was developed and 
reviewed with TAS Counsel, Disclosure, and Practitioners and all PCAs 
who bid on the contract.
      The Quality and Reports Handbook were developed and 
reviewed with TAS, Counsel, and Disclosure.
      The PCA Operational Plan, PCA Training Plan, PCA Letters, 
and Scripts were reviewed and changes were made based on feedback from 
the project team, TAS, Counsel, and Disclosure.
      On-Site Management Issues Meetings were conducted with 
each PCA.
      Performed Business Acceptability Testing at each PCA.

    During the initial months of start up, IRS representatives, the 
TIGTA and Disclosure were on site at the PCAs to oversee operations, 
answer questions about processing and ensure training was properly 
delivered to PCA employees.
IRS Monitoring of PCA Activities
    The IRS has put in place an aggressive oversight and management 
process to ensure PCAs adhere to contract requirements and the 
protection of taxpayer rights. PDC is projected to use approximately 45 
FTEs (delivered by 64 employees) in FY 2007 to provide support to the 
PCAs handling of taxpayers and to perform project management. 
Approximately 24 of these FTEs are for direct support and the remaining 
21 FTEs are for project management. Since not all of the direct support 
employees work full-time on the project, the 24 FTEs are delivered by 
43 employees. This number can vary, of course, based on workload 
requirements.
    The employees are divided between two units--the Oversight and the 
Referral. The Oversight Unit (OU) has 11 full time staff--1 Manager, 1 
Management Assistant, 3 Contracting Officer Technical Representatives 
(COTRs), 3 Management Information System (MIS) Analysts and 3 Quality 
Analysts.
    The OU is responsible for a number of things including:

      Inventory Management: This involves the determination of 
the types and number of cases that should be placed with the PCAs to 
meet placement plans.
      Invoice Reconciliation: This includes the review of 
payments and administrative resolutions received and determine the 
amount for which the PCAs should be commissioned.
      PCA Contractual Oversight: This involves the monitoring 
of PCAs and issues that arise including researching reported concerns 
to ensure adherence to the Contract. The COTR's primary role is the 
administration of all aspects of the contract, including invoice 
validation, complaint investigation, ensuring compliance with contract 
requirements such as background investigation review and validation, 
invoice computation and certification, and ensuring adherence to 
security requirements.
      Quality Review: This includes the monitoring of PCA phone 
calls and the performance of case reviews to ensure that PCAs adhere to 
the Policies and Procedures outlined by the IRS.
      Report Management: This involves analyzing reports and 
providing updates.

    The Referral Unit (RU) consists of 32 employees with 2 Managers, 2 
Lead Contact Representatives (CR), 2 Inventory Control Specialists, and 
26 CRs.
    The activities of the RU include:

      PCA Support: This includes regularly communicating with 
the PCA to respond or approve requests for determination on different 
case issues.
      Taxpayer Contact: The RU responds to request from 
taxpayers assigned to the PCAs. This assistance is provided to 
taxpayers as indicated in the letter taxpayers receive from the IRS on 
assignment of their case to the PCA as well as in the event the PCA may 
not be able to address an issue.
      Case Recall: Cases are recalled from the PCAs for a 
variety of reasons. This is part of the normal operating environment 
and provides the IRS with the ability to retrieve a case from the PCA 
if the case status changes where it no longer meets assignment criteria 
(e.g, disaster recovery).

    The IRS uses processes including live-call monitoring, review of 
recorded telephone calls, taxpayer-satisfaction surveys, audits of PCA 
records and periodic review of PCA performance to assure proper 
safeguards are in place. Until recently, the PCAs had more than 350 
employees cleared to work on this contract, with 120 to 166 front-line 
employees working directly on accounts.
Private Debt Collection Workflow
    Once the IRS determines that a particular taxpayer module will be 
delivered to a PCA for collection, the IRS sends a letter advising the 
taxpayer that its account has been placed with the PCA. The letter 
identifies the PCA with whom the account has been placed as well as IRS 
contact information should the taxpayer have any questions. A brochure 
answering pertinent questions on the program is also included.
    Taxpayer cases are delivered to the respective PCA electronically 
through a secured data exchange method. The PCA updates the files to 
their collection system and validates the data. PCAs perform a review 
of bankruptcy records or records to determine if the taxpayer is 
deceased.
    PCAs then attempt to contact the taxpayer if they are not bankrupt 
or deceased. The initial contact is via letter. The PCA prepares and 
mails an approved initial contact letter no sooner than three business 
days after the IRS contact letter is mailed and no later than 10 days 
of receipt of inventory. The letter advises the taxpayer again that the 
account has been placed and provides payment and contact information 
for both the PCA and IRS.
    The PCA will initiate phone contact with the taxpayer beginning 
three days after the PCA initial contact letter is mailed in an attempt 
to resolve outstanding debt. The taxpayer can resolve the outstanding 
debt either by payment of the debt in full or through an installment 
agreement. If the taxpayer is unwilling or unable to full pay the 
account or establish an installment agreement, the PCA will attempt to 
secure information sufficient to resolve the case and forward that 
information to the IRS for a case decision.
    The PCA initiates electronic skip-tracing efforts to attempt to 
locate the taxpayer address and/or phone number. However, PCAs cannot 
initiate third-party contacts without prior IRS approval, and to date, 
that approval has not been given to any PCA. If contact with taxpayer 
fails to resolve the case or if electronic skip-tracing efforts fail to 
locate the taxpayer then the PCA may pursue additional information to 
resolve the case.
    Collections are a difficult business whether conducted by an IRS 
employee or a PCA. The fact that collections are necessary at all 
indicates that the people are unwilling or unable to pay the debt in 
question. In the event a taxpayer, whose case has been assigned to a 
PCA, disputes the liability then the collection activity is immediately 
suspended by the PCA, and the case is referred to the IRS for dispute 
resolution.
    In fact, collection activities are immediately suspended on all 
cases where a concern has been received by the IRS or the PCA. PCA 
management enters the reported concern into a log and compiles case 
information, which is forwarded to IRS.
Handling of Concerns and Complaints
    The reported concerns process built into the PCA contracts serves 
as an accountability tool to identify areas where the taxpayer could be 
better served. Anyone may report a concern, but from our limited 
experience the primary source is from the PCAs directly (79%). Each PCA 
self-identifies cases where they believe the taxpayer may not be 
satisfied with the interaction they had with the PCA. This interaction 
is reported directly to the COTR.
    All reported concerns received on PCA assigned cases are thoroughly 
reviewed by the PCA, the COTR and IRS review panel. Each PCA 
investigates every concern they identify or receive. The panel reviews 
documentation gathered on each case by the COTR, who also must 
investigate every concern. Documentation may include a case history 
review, discussions with the taxpayer, IRS personnel, and PCA 
employees, and when available, call recordings.
    Depending on the severity, complaints can result in immediate 
contract suspension or termination. The contract includes a clause for 
validated penalty cases. To date, penalties totaling $10,000 have been 
imposed by the IRS on the PCAs.
Program Goals
    Prior to beginning implementation of the program, specific, 
measurable program goals and objectives were established. Specific 
goals include annual percent of dollars collected, case resolutions, 
taxpayer satisfaction, employee satisfaction, quality, and validated-
penalty cases. Some of these goals cannot be measured until a full year 
of performance is gained, but from what we see thus far, we are meeting 
or exceeding all of the goals.
    There were also specific revenue projections established for the 
program. We projected that there would be 2.9 million cases placed for 
a total of $13.9 billion through the year 2017. Original projections 
for gross revenue by the Office of Tax Analysis in 2004 called for the 
collection of $1.5 billion to $2.2 billion over 10 years. Based on the 
numbers cited below, the program is tracking toward the higher end of 
those projections.
PCA Performance
    As of April 28, 2007, we had placed cases involving 37,689 
taxpayers. Some of these taxpayers had additional tax liabilities for 
more than one year so there were a total of 51,414 modules assigned. 
The total value of the cases was $255 million.
    From these cases placed, as of April 28, 2007, 3,973 have resulted 
in full payment and 1,467 installment agreements have been approved. 
PCAs have collected $19.49 million in gross revenue with $15.53 million 
considered commissionable revenue, which resulted in $3.38 million in 
payments to the PCAs. Our projections for this period of time had been 
to collect between $15.05 and $20.69 million.
    Of 37,689 cases placed with PCAs through April 28, 2007, we 
received 25 concerns (0.07% of cases placed) related to taxpayer 
treatment. Of the 25 concerns raised, one was validated as a contract 
violation by the panel, two are pending the completion of an 
investigation, and in 22 cases there were no contract violations found.
    Treatment concerns include 11 for PCA interaction and 14 for PCA 
calling practices.
    Of the 11 PCA interaction concerns, six are for collector behavior 
(i.e., rudeness). For three of the cases, call recordings confirm 
professional PCA behavior. In the three other behavior cases the IRS 
was unable to identify a contract violation. Two of the eleven involve 
the taxpayer being placed on hold, and one involved the PCA not 
returning a call. Three are procedural issues and call recordings do 
not substantiate a contract violation. Two items remain open and under 
investigation.
    Of the 14 PCA calling practices concerns, eight involve the 
taxpayer requesting the PCA not call them, and two involved the 
taxpayer being upset at receiving a call. Recordings were reviewed in 
five cases and PCA professional behavior was confirmed. Nine items are 
not representative of contract violations. Four are multiple or 
frequent calls to taxpayers, and one of the concerns was validated as a 
contract violation for which a penalty was imposed. One item remains 
open under investigation.
    The majority of concerns are contract administration, constituting 
difficulties with taxpayer identity authentication or inadvertent 
disclosure of information. Through March 2007, 44 contract 
administration concerns (0.12% of cases placed) have been reported, 
with two validated-penalty cases (0.01% of cases placed). Of all the 
concerns received to date, 46% or 32 concerns were reported within 60 
days of the program start up.
    The PCAs have reported ten 10 disclosure concerns, all inadvertent, 
with only one validated contract violation penalty case by the IRS PCA 
Reported Concerns Review Panel. The remaining nine inadvertent 
disclosure cases did not rise to the level of contract violation.
Costs and Benefits of the PDC Program
    In evaluating the success of this program it is important to 
remember the purpose for which it was created. Specifically, this 
program was never designed to compete with the collections that the IRS 
performs. Rather, it was designed to maximize the effectiveness of the 
PCA resources given their limited authority level. Accordingly, we 
select cases for PCA assignment that are not being worked by IRS 
employees but are still potentially collectible.
    In other words, the issue is not whether the IRS or PCAs can do a 
better job in collecting this revenue. The issue is whether the revenue 
is collected by PCAs or goes uncollected. If the program ceased today, 
the money we are currently investing in the PDC program would not be 
reassigned to IRS employees who would then pursue these cases. It would 
be reassigned to employees who would go after higher priority cases, 
leaving the current PCA cases untouched.
    Our current estimated costs for startup and ongoing maintenance of 
the PDC program includes all Project Office, Oversight, administration 
and IT costs from FY 2004 through FY 2010. To date, PDC has incurred 
less cost than originally budgeted in FY 2004 and, we expect it to 
remain cumulatively under original budget costs through FY 2010, though 
there likely will be some variation in total costs as the first year of 
operations progresses and we gain experience in complete operations. 
The chart below shows the estimated budget costs between FY 2004 and FY 
2010 as opposed to the actual costs

----------------------------------------------------------------------------------------------------------------
                                     FY 2004/2005           FY 2006             FY 2007             FY 2008
----------------------------------------------------------------------------------------------------------------
2004 E300 Budget Costs                  $50.07M             $11.5M              $11.38M             $8.99M
----------------------------------------------------------------------------------------------------------------
2007 PDC Actual Costs and               $38.87M             $16.84M             $14.93M             $7.35M
Updated Budget Costs*
----------------------------------------------------------------------------------------------------------------
Net                                    ($11.2M)             $5.34M              $3.55M             ($1.64M)
----------------------------------------------------------------------------------------------------------------
Cumulative Net                         ($11.2M)            ($5.86M)            ($2.31M)            ($3.95M)
----------------------------------------------------------------------------------------------------------------

          *Excludes Infrastructure Assessments               Updated 
April 30, 2007

    Based on conservative projections for revenue, the PDC program is 
projected to recoup all costs, including sunk costs, in April 2008. For 
funds allocated in FY 2007, all costs were recouped by April 2007.
    Overall, the IRS Return on Investment (ROI) is about 4 to 1. ROI 
resulting from IRS enforcement programs ranges from $3 to $14 for every 
additional $1 invested, depending on the type of enforcement activity. 
For example, labor-intensive activities such as the Collection Field 
Function have lower ROIs, and automated activities such as Automated 
Underreporter have high ROIs.
    For the PDC program specifically, the potential return is between 
3.2 to 1 and 3.6 to 1 for FY 2007, the first full year of 
implementation. This estimate is based on FY 2007 gross revenue of 
$45.7 million to $65 million, divided by the operating costs of the 
program, which include payments to PCAs averaging 18.5% of gross 
program revenues and fully loaded projected FTE costs of $5.99 million.
    In FY 2008, the IRS expects the PCA ROI will increase to between 
4.0 to 1 and 4.3 to 1, once the program is in steady state. The IRS 
bases this estimate on FY 2008 gross revenue projections of $86 million 
to $127 million compared to operating costs of approximately $5.84 
million in IRS costs and the average 18.5% payments to the PCAs.
    In a May 2004 assessment of the IRS PDC program, the GAO 
recommended that ``the IRS Commissioner should ensure that a study is 
completed that compares the use of PCAs to a collection strategy that 
officials determine to be the most effective and efficient overall way 
of achieving collection goals.'' In response to the GAO report, the IRS 
has undertaken a Cost Effectiveness Study, with input on study design 
from the GAO and TAS.
    The study intends to analyze the cost effectiveness of the PDC 
program versus the use of IRS resources in working the ``next best 
case'' and compare performance between IRS and PCAs using the same 
types of cases currently placed with PCAs. Data will be available in 
June 2007 and early results will be available in September 2007, with a 
final report in April 2008. Data resulting from the PCA cost-
effectiveness study will be used to support IRS' response to the GAO's 
recommendations, as well as the Biennial Report to Congress in late 
2007.
GAO and TIGTA Oversight
    In addition to the high level of scrutiny by the IRS, the PDC 
program has also been reviewed by both the GAO and TIGTA. The GAO audit 
focused on whether we had addressed all the critical factors for 
implementing a successful PDC program. The five critical factors 
addressed include: (1) results orientation, (2) agency resources, (3) 
workload, (4) taxpayer issues, and (5) evaluation.
    The GAO found that the IRS made significant progress in addressing 
the five critical success factors and 17 related sub-factors before 
sending cases to PCAs for the limited implementation. The GAO 
identified additional steps needed on three sub-factors: setting goals 
and measures, determining all program costs, and evaluating the 
program. In response to the GAO's findings, the IRS has developed a 
corrective action plan to address these sub-factors. The IRS will:

    1.  Establish goals and targets for all appropriate measures for FY 
2008.
    2.  Perform a Cost Effectiveness Study; and
    3.  Develop reports to gather information regarding the delinquent 
accounts inventory, PCA resolutions based on inventory type, and IRS 
resource capacity.

    The TIGTA has conducted two audits focusing on the development and 
implementation of the PDC program. The TIGTA found that the IRS 
effectively developed and implemented the program and recommended 
actions that would enhance security and accountability.
    The IRS agrees with all recommendations and will incorporate the 
recommendations in future contract negotiations and policy and 
procedural guides. These include:

      Security enhancements: During their computer and physical 
security review, the TIGTA identified a PCA with a shared server. The 
TIGTA also found other security issues that needed to be resolved but 
determined that these issues were not sufficiently significant to 
prevent the assignment of cases to the PCA. Many of the security issues 
identified by the TIGTA were found at the location of the PCA for whom 
the IRS did not extend the contract.
        In future Requests for Quotation (RFQ) we will require 
PCAs to maintain Federal Tax Information (FTI) on a separate dedicated 
server.
        We will develop procedures to ensure timely follow-up 
with PCAs on security issues.
      Accountability: During their review of PCA policy and 
procedures, the TIGTA identified areas where we could strengthen our 
oversight of the PCAs and our performance, including:
        Update the procedures for handling taxpayer concerns to 
ensure consistent and timely processing.
        In future RFQs, PCAs will be required to have scripts 
to direct employees through telephone conversations and must be 
submitted for review and approval.
        As data becomes available, update/modify the revenue 
model used to calculate projected revenue based on the inventory placed 
with the PCAs.

    The program has also gotten a favorable review from the IRS 
Oversight Board. Following its recent meeting at which the program 
results thus far were presented, the Board Chairman commented, 
``Overall, this program seems to be working well although the board 
intends to continue to monitor it closely. Through this program, the 
IRS has found a way to reach a specific segment of taxpayers who have 
outstanding tax debts.''
Evaluating the PCAs
    The initial PCA Task Orders for each of the chosen firms were 
issued for a 12-month period to give the IRS an opportunity to hold the 
PCAs accountable and to make an informed decision about moving forward 
with another 12-month option on a firm-by-firm basis. As we approached 
the time to make the decision on the contract extensions, we considered 
overall performance and concluded that two of the three firms met our 
needs and held the most accountability going forward.
    In February 2007, the IRS chose to extend the contracts of two PCAs 
through March 2008, but declined extending the contract of Linebarger 
Goggan Blair Sampson, LLP (LGBS), which expired March 7, 2007. This 
decision demonstrates the PCA initiative is working successfully as 
intended, with the IRS following through on oversight responsibility 
and holding the PCAs accountable throughout the process.
    Preparations are now underway for the June 2007 issuance of a RFQ 
for the next implementation phase of the PDC program. Future 
contractors will be selected based upon lessons learned from the 
limited implementation phase. The new contract award is planned for 
October 2007. The next implementation phase will ``go-live'' in March 
2008.
    To assist in evaluating the PCAs performance, we have developed the 
PCA Scorecard. This tool will be used to evaluate PCA performance by 
ranking PCAs on a quarterly basis
    The Scorecard evaluates cases placed with the PCA for a minimum of 
three months, so cases placed with the PCA during the first quarter FY 
2006 (October--December) could not be evaluated until April 1, 2007. 
The Scorecard will enable us to build incentives into the process to 
ensure that the companies are constantly working to improve their 
performance across the balanced measures. During this initial period of 
implementation, the scorecard process is being perfected as we 
establish a baseline for future use
Summary
    Mr. Chairman, the PDC program has garnered controversy since its 
inception. A number of Members of Congress believe that Federal tax 
collection is an inherently governmental function that should not be 
contracted out. I understand and respect those opinions. Nevertheless, 
Congress has provided a statutory direction for the PDC program, and 
the IRS has carefully developed and implemented an effective program 
that collects unpaid tax debts while ensuring that taxpayer rights are 
protected.
    As the first year of this program nears completion, we believe the 
PDC program is operating as Congress envisioned. And, it has proved to 
be an effective tool in our efforts to address the tax gap, bringing in 
$19.49 million in gross tax revenues to the Treasury that would have 
otherwise gone uncollected. Based on conservative projections for 
revenue, we will recoup all costs, including sunk costs, in April 2008; 
and we are exercising strong oversight over the program and carefully 
monitoring the behavior of the PCAs.
    As I said earlier, collection is a tough business. Complaints are 
inevitable, whether we do the collections or they are done by a PCA, 
but in light of the over 30,000 cases that have been assigned to the 
PCAs, the level of complaints have been minimal, and each of those 
complaints have been investigated and the appropriate response 
undertaken.
    I appreciate the opportunity to appear this morning, and I will be 
happy to respond to any questions.

                                 

    Chairman RANGEL. Our next witness is Thomas R. Penaluna, 
President and Chief Executive Officer of the CBE Group from 
Waterloo, Iowa.

  STATEMENT OF THOMAS PENALUNA, PRESIDENT AND CHIEF EXECUTIVE 
                  OFFICER, THE CBE GROUP, INC.

    Mr. PENALUNA. Good morning, Mr. Chairman and Members of the 
Committee. I thank you for providing me the opportunity to 
testify today. My name is Tom Penaluna. I am president and CEO 
of the CBE Group founded almost 75 years ago and family owned. 
CBE is headquartered in Waterloo, Iowa with offices in Des 
Moines, Iowa and Atlanta, Georgia. We currently employ over 900 
people and approximately 50 of those people on the IRS private 
debt collection program that we are discussing here today. CBE 
is proud to serve a variety of organizations throughout the 
United States, including the Department of Education, the 
Financial Management Service, a bureau of the Department of 
Treasury, and, of course, the IRS. Serving these three agencies 
is an honor shared only by one other company, our colleagues, 
Pioneer Credit Recovery. CBE's corporate culture is based on 
core values of integrity respect innovation and continuous 
improvement. A strong work ethic is embedded in the fiber of 
our employees which promotes a commitment to doing things right 
a focus on details and a drive to deliver superior results with 
the highest levels of integrity which has contributed to our 
success in this program.
    This morning I would like to describe for you our 
experience so far with the program, our overall views of the 
importance of the program and why we think it should be 
continued toward full implementation.
    CBE continues to invest substantial resources in personnel 
technology and infrastructure, focused on ensuring our 
compliance with the strict statutory and administrative 
requirements in oversight that are in place to protect taxpayer 
rights and privacy. CBE is uses state-of-the-art systems that 
have been certified and accredited by the IRS. It is important 
to emphasize that CBE be, by statute, subject to the exact same 
and even greater requirements restrictions and prohibitions and 
legal consequences as those that are imposed upon IRS 
employees. In addition, we must also comply with the Fair Debt 
Collection Practices Act and all other laws and regulations 
that govern the collection industry. Like IRS collection 
agents, our employees are not paid on commission basis, and 
must adhere closely to the call scripts that have been approved 
by the IRS. The program is now almost 10 months old, and it has 
exceeded expectations, as confirmed by independent reviews 
recently conducted by TIGTA, GAO and the IRS oversight board.
    As with any program, there have been minor wrinkles to iron 
out and a few glitches along the way. However, the numbers 
don't lie. CBE's results are as follows: The IRS established a 
collection goal of 6 percent of placements recovered at the 
onset of the program. Today CBE has collected 8.2 percent of 
the dollars placed with us. The IRS established a taxpayer 
satisfaction goal of 67.5 percent at the onset of the program. 
CBE scored 97 percent taxpayer satisfaction ratings on the most 
recent survey taken for the month of April. The IRS established 
a quality goal of 90 percent. CBE's quality goal is 99.4 
percent. The IRS established a goal of zero type two and type 
three complaints. CBE has had no type two or type three 
complaints, not one.
    I can tell you that in the course of working over 20,000 
cases through the end of last month, CBE has received only 55 
alleged type one complaints for a complaint rate of less than a 
quarter of 1 percent, which were almost entirely self-reported 
and none of which have been validated by either the IRS or the 
taxpayer advocate service.
    This is a remarkable record considering the nature of our 
business. CBE is extremely proud and honored to be taking part 
in assisting the Federal Government's efforts to reduce the 
national tax gap. There is no greater threat to the integrity 
of our tax system than the perception that tax obligation, 
regardless of how small the amount, can be neglected with 
impunity. We need to use all the tools at our disposal to 
collect these taxes while always respecting the privacy and 
rights of the American citizens.
    I thank the Committee for its time and attention and would 
welcome your questions.
    Chairman RANGEL. Thank you so much.
    [The prepared statement of Mr. Penaluna follows:]
 Prepared Statement of Thomas R. Penaluna, President & Chief Executive 
              Officer, The CBE Group, Inc., Waterloo, Iowa
    Good morning, Mr. Chairman and Members of this Committee, and thank 
you for providing me the opportunity to testify today. My name is Tom 
Penaluna, and I am the President and Chief Executive Officer of The CBE 
Group, Inc. Founded almost 75 years ago and family-owned, CBE is 
headquartered in Waterloo, Iowa. In addition to Waterloo, we have 
offices in Des Moines, Iowa and Atlanta, Georgia, and we currently 
employ over 900 people. Approximately 50 of these people work in our 
Waterloo offices on the IRS private debt collection program that we are 
discussing here today.
    CBE serves a variety of organizations throughout the United States, 
including student loan guaranty agencies, colleges and universities, 
healthcare organizations, financial institutions, satellite and 
telecommunications companies, utilities and State and Federal 
Government agencies. We are proud to serve the Department of Education, 
the Financial Management Service--a bureau of the Department of 
Treasury--and, of course, the IRS. Serving all 3 of these Federal 
agencies is an honor shared by only one other company--Pioneer Credit 
Recovery, Inc.
    CBE's corporate culture is based on our core values of integrity, 
respect, innovation, and continuous improvement. A strong work ethic 
also is embedded in the fiber of our employees, which promotes a strong 
commitment to doing things right, a focus on details, and a drive to 
deliver superior results. We look to the unifying force of our core 
values as a source of energy and the foundation of a new paradigm to 
ensure a bright future for our industry, our company, those with whom 
we interact, and all who depend upon us. We believe that our commitment 
to these core values--combined with the exhaustive training that we 
provide to our employees--has contributed to our successful 
participation in the pilot phase of the IRS private debt collection 
program.
    This morning, I would like to describe for you in some detail the 
process through which we entered the IRS program, our experience so far 
with the pilot phase of the program and, finally, our overall views on 
the importance of the program and why we think it should be continued 
towards full implementation.
    In October of 2005, CBE responded to a Request for Quotes from the 
General Services Administration to participate in a limited 
implementation--or ``pilot''--phase of a program to be administered by 
the Internal Revenue Service (``IRS'') to collect outstanding 
delinquent and undisputed Federal income tax obligations owed by 
individuals. Following an extended and very rigorous competitive 
bidding process, we and 2 other firms were selected from among 33 firms 
to participate in the pilot phase of the program.
    In preparation for the start of the program's pilot phase, CBE 
invested substantial resources in personnel, technology and 
infrastructure, with a sharp focus on ensuring that we comply in every 
way with the stringent statutory and administrative requirements that 
were designed to protect the rights and privacy of those individuals 
with whom the program would come into contact. The National Taxpayer 
Advocate, Government Accountability Office (``GAO''), Treasury 
Inspector General for Tax Administration (``TIGTA'') and several other 
government agencies were intimately involved in nearly every aspect of 
our extensive preparations--including the development of the training 
program and materials, policy and procedures guides, operational plans, 
form letters and other written materials, and call scripts--in order to 
ensure that all facets of the program were infused with appropriate 
safeguards and accountability.
    With regard to program personnel, it is important to highlight that 
we are subject--by statute--to the exact same requirements, 
restrictions and prohibitions as those that are imposed upon IRS 
employees, including the provisions of the Fair Debt Collection 
Practices Act and the IRS Restructuring and Reform Act of 1998. The 
program does not confer upon our employees any IRS enforcement powers--
we are only empowered to contact individuals with delinquent and 
undisputed tax obligations and request that they make payment to the 
IRS--so, of course, provisions relating to the misuse of enforcement 
powers such as property seizure and wage garnishment are not applicable 
to us. We also are subject to the same civil monetary damages as IRS 
employees for any unauthorized collection actions. To meet the high 
standard conduct outlined for this program, the only employees that we 
place into the IRS program are existing employees--not new hires--who 
already have significant experience with making outbound debt 
collection calls and who have never received any complaints.
    Before being placed into the program, these employees must 
successfully complete an FBI background investigation and undergo 
several weeks of intensive and specialized multimedia training for this 
program. In addition, they must undergo a new background investigation 
every 5 years and must be fingerprinted by the FBI every year.
    Like IRS collection personnel following enactment of the 1998 IRS 
reform legislation, our employees are not paid on a commission basis, 
which is prohibited by the terms of the program contract. In making 
their phone calls, these employees must adhere closely to call scripts 
that were approved by the IRS after having been reviewed and revised 
based upon comments received from the National Taxpayer Advocate. CBE 
has instituted and will enforce a zero tolerance policy with regard to 
employees that take part in this program, and the employees recognize 
this--as demonstrated by the fact that CBE has received no validated 
complaints to date in connection with this program.
    The technology and physical infrastructure that we have put into 
place for the IRS program is standard-setting, surpassing that of even 
our largest corporate accounts and other government agencies, including 
the Department of Education and Financial Management Service. Our 
employees in the IRS program work in a tightly controlled and secured 
facility that is physically and visually isolated from the rest of our 
operations. Entry into this facility requires electronic access and is 
restricted to the employees working in the program, program managers 
and IRS personnel. Those who do have access to the facility are 
continuously monitored, are permitted to enter and leave with only 
limited personal belongings, and are subject to search at any time.
    Working closely with IRS personnel and outside experts, we have 
designed and built an information technology structure for this program 
that features every possible security measure to protect the privacy of 
the information that we receive from the IRS and ensure that 
unauthorized persons--within or outside of CBE--cannot get access to 
the information. The system hardware is encrypted and relies upon a 
dedicated network and server that is completely segregated from the 
systems that we use for the rest of our operations. Of course, we do 
not use laptops or any other ``walk away'' hardware for this program.
    At the same time, our technology for this program is designed to 
permit IRS personnel to monitor onsite or remotely live phone calls 
made by our employees. We also tape every phone call and retain the 
tapes so that they can be later reviewed by us, the IRS or the National 
Taxpayer Advocate for quality control purposes or in the event that an 
individual contacted by us lodges a complaint.
    The pilot phase of the IRS program began on September 7, 2006, with 
the assignment of 11,654 cases to the participating firms. The program 
is now almost 10 months old, and we believe that the program has 
exceeded everyone's expectations. Independent reviews and audits 
recently conducted by TIGTA, GAO and the IRS Oversight Board have given 
the pilot phase of the program high marks overall, while noting 
specific areas in which the program can be further improved. In part, 
the success of the program so far can be attributed to the example set 
by other Federal Government agencies that use private collection 
agencies to collect delinquent debt obligations, as well as the 41 
States that currently use private collection agencies to recover 
delinquent taxes. In particular, we have seen how the IRS program has 
benefited tremendously by integrating best practices and lessons 
learned from the Department of Education, which for well over 20 years 
has used private collection agencies (including CBE and Pioneer) to 
recover delinquent student loan obligations and has saved the Federal 
Government tens of billions of dollars as the guarantor on these loans.
    As with any new program, there have been wrinkles to iron out and a 
few glitches along the way. However, the numbers don't lie. Through the 
end of last month, CBE has received over 20,000 cases from the IRS 
involving over $125 million of delinquent taxes. We have returned to 
the American people over $10 million of these delinquent taxes, while 
continuing to work on the remaining amount. It is important to remember 
that these are merely the results of the program's pilot phase, in 
which the caseload is only a fraction of the anticipated caseload once 
the program is fully implemented. From these collections, CBE was paid 
just over $1 million, which means that we retained approximately 11 
percent of the amount collected--not the 25 percent that is permitted 
by statute or asserted by critics of the program and some in the media.
    Overall, the program has recovered nearly $20 million through the 
end of last month, and the participating firms were paid just over $3 
million for their efforts in recovering these delinquent taxes. The 
legislation creating this program also permits the IRS itself to retain 
up to 25 percent of these recoveries--with the rest going to the 
general fund of the Federal Government--which means that the IRS 
received for its own use over $3.5 million of the amounts recovered 
through the end of last month. Under the legislation, the IRS can--and 
we think should--use these funds to hire additional collection agents. 
Along with the existing IRS collections workforce, these new agents 
could pursue cases that are more complex and involve larger dollar 
amounts than the cases that are assigned to us. As these early results 
demonstrate, the more this program succeeds, the more everyone 
benefits--the participating firms, the IRS workforce and, most 
importantly, the American people.
    It is also important to point out that we have accomplished these 
results using very limited information from the case files of the 
individuals who we contact. These files contain no tax returns or 
detailed tax return information whatsoever. They contain no wage or 
employer information. They contain no non-tax financial information. 
The only information that they provide is the individual's Social 
Security number, last known address, amount of taxes owed (as well as 
interest and penalties), and the tax year for which the taxes are owed. 
The case files do not even contain the individual's phone number, which 
we must locate ourselves.
    Moreover, many of the traditional tools commonly used by the IRS to 
collect delinquent taxes are not available to us. We do not have the 
authority to garnish wages, seize property or enter into agreements to 
reduce the amount of taxes owed. We only have the authority to request 
the individual to pay his or her outstanding tax obligations in full or 
over a period of up to 5 years. These payments are made directly to the 
IRS--not us--so we handle no funds. In fact, we have no authority to 
compel an individual even to talk to us. We inform every individual who 
we contact that they are not required to talk to us and can request to 
have his or her case referred back to the IRS or to speak with the 
Taxpayer Advocate Service. These restraints under which we operate are 
justified by the sensitivity to privacy and taxpayer rights, but they 
also amplify the early success of the program.
    Another key indicator of the program's success to this point is the 
customer service ratings that we have received from the individuals 
themselves who have been contacted by us to resolve their outstanding 
tax obligations. From a customer service standpoint, the program is 
monitored using taxpayer satisfaction surveys of individuals taken 
after they have been contacted by us. These surveys are very similar to 
those conducted by the IRS to evaluate its own employees who perform 
collection functions. The program goal for the taxpayer satisfaction 
survey was 67.5 percent at the onset of the pilot phase, with an 
ultimate goal of 90 percent. Through the end of March, the firms 
participating in the program have received a 94 percent taxpayer 
satisfaction rating.
    The overall performance of the firms participating in the IRS 
program is measured by a quality rating, which takes into account: the 
results of the taxpayer satisfaction surveys; the number of reported 
contract complaints; the number of contract fines assessed; the number 
of cases referred to the Taxpayer Advocate Service; a regulatory and 
procedural accuracy rating; a timeliness rating; and a professionalism 
rating. The program goal for the quality rating is 90 percent. Through 
the end of March, the firms participating in the program achieved a 99 
percent quality rating.
    With regard to complaints that we have received during the course 
of the program's pilot phase, let me be clear. I am never happy to 
receive complaints from individuals who are contacted by our employees 
regarding their delinquent debts--and validated complaints are simply 
unacceptable. Having said this, I can tell you that in the course of 
working over 20,000 IRS program cases through the end of last month, 
CBE has received only 55 complaints--none of which have been validated 
by either the IRS or the Taxpayer Advocate Service and most of which 
have involved administrative issues not related to taxpayer rights or 
privacy. In fact, there have been no validated complaints received to 
date by either of the firms currently participating in the program. 
This is a remarkable record, considering the nature of our business.
    The privacy of the individuals contacted by us and the protection 
of their information is paramount. I can report to you that there have 
been no instances to date of the misuse or intentional disclosure of 
taxpayer information.
    Finally, I cannot conclude my remarks without addressing the 
question of program efficiency, because the critics of this program 
have continued to spread misinformation about the cost efficiency of 
using private collection agencies to recover delinquent tax 
obligations. As I described earlier, CBE and Pioneer are being paid 
less--as a percentage of collections--than authorized by statute, and 
it is my hope and expectation that this hearing will bring some clarity 
to the true costs that would be incurred by the IRS if it actually had 
the resources to pursue these delinquent tax obligations itself. Once 
these costs are better understood and then compared to our commissions, 
I am confident that the cost effectiveness of this program will become 
evident even to critics of the program.
    CBE--and I'm sure Pioneer as well--is extremely proud and honored 
to be taking part in assisting the Federal Government's efforts to 
address a serious national problem. We are not bounty hunters or 
gangsters. We are professionals, working in partnership with the IRS to 
help shrink our unacceptably large tax gap.
    While this program is only a small step forward in closing the tax 
gap, there is no greater threat to the integrity of our tax system than 
the perception that tax obligations--regardless of how small the 
amount--can be neglected with impunity. We need to use all the tools at 
our disposal to collect these taxes, while always respecting the 
privacy and rights of American citizens.
    I thank the Committee for its time and attention, and I would 
welcome all of you to visit our offices in Waterloo to see firsthand 
the fine work being done by our employees who are actively engaged in 
this program on behalf of the American people.
    At this point, I would be happy to take your questions.

                                 

    Chairman RANGEL. The last witness is Gregory Kutz, managing 
director, Forensic Audits and Special Investigation, U.S. 
Government Accountability Office. He is here with John Ryan.

 STATEMENT OF GREGORY KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS 
   AND SPECIAL INVESTIGATION, U.S. GOVERNMENT ACCOUNTABILITY 
      OFFICE, ACCOMPANIED BY JOHN RYAN, ASSISTANT DIRECTOR

    Mr. KUTZ. Mr. Chairman and Members of the Committee, thank 
you for the opportunity to discuss tax debt collection. In 
2006, IRS awarded three contracts to private collection 
agencies as part of a pilot program. My testimony today will 
present key facts related to taxpayer opinions about this 
program. Our investigation included interviewing and obtaining 
data from the IRS the three private collection agencies and a 
consulting company that administered a taxpayer survey. I will 
walk you through the key facts we identified using two poster 
boards which are on my right and for members, on your left.
    I show on the first poster board from September of 2006 
until February of 2007 the IRS referred over 37,000 cases to 
private collection agencies. According to the IRS, these cases 
referred were agreed to taxes that were not being worked due 
primarily to resource limitations. The average case was about 3 
years old and $5,000. During this period, the three collection 
agencies made over 250,000 outbound calls to contact taxpayers 
associated with these 37,000 cases. Examples of a connected 
call include someone answering the telephone or the collection 
agencies leaving a message on an answering machine. These 
250,000 calls resulted in 13,000 right-party contacts. A right-
party contact means that the collection agency determined that 
the individual that they were speaking to was one of these 
37,000 cases. One reason the 250,000 calls were made to contact 
13,000 taxpayers was that the IRS did not provide telephone 
numbers to the collection agencies.
    According to IRS representatives, this was a policy 
decision, not a legal matter. Providing a telephone number to 
collection agencies we believe would significantly reduce the 
number of telephone calls necessary in the future. The 
consulting company began an automated telephone survey of 
right-party contacts in late November of 2006. Note the 
collection agency calls began in September of 2006. As a result 
and show on the poster board, 6,837 or 50 percent of the over 
13,000 contacts were made before the survey began. The 
remaining 50 percent were made after the survey. A key 
underlying assumption for the survey was that all right-party 
contacts would have a chance to complete the survey. However, 
we could not determine how many were offered this survey 
because two of the three collection agencies did not keep 
records.
    Further, two of the three collection agencies did not offer 
the survey to all right-party contacts. Also note that 
individuals whose identity could not be validated, which are 
referred to as incorrect contacts, were not part of the survey. 
The second poster board shows that for the first 3 months, 
1,572 agreed to take the survey. Of these, 1,011 completed the 
survey. The consulting company that prepared the survey was not 
aware until recently that all right-party contacts had not been 
offered a chance to take the survey. According to IRS, 
beginning in April of 2007, the two remaining collection 
agencies began offering the survey to all right-party contacts. 
With respect to the survey, the overall satisfaction rate 
reported by the IRS of 94 to 96 percent represents the answer 
to 1 of 20 questions. 15 of these questions related to taxpayer 
satisfaction. Satisfaction ratings for these 15 questions 
ranged from 81 percent to 98 percent.
    Also, we found that some taxpayers may have completed the 
survey more than once. In conclusion, I appreciate the 
importance of the policy matters related to the use of private 
collection agencies. My objective today was to provide you with 
facts so that you could make informed policy decisions. I also 
believe that something needs to be done about the type of 
telephone call that was played earlier in this hearing. None of 
us want taxpayers to somehow believe that a legitimate call 
made on behalf of the Federal Government is an attempt to steal 
their identity. Mr. Chairman, this ends my statement. I look 
forward to your questions.
    [The prepared statement of Mr. Kutz follows:]
    
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

    Chairman RANGEL. Thank you so much. Mr. Brown, whose idea 
was this in the first place to farm out IRS collection to 
private organizations? How did this get started?
    Mr. BROWN. Well, Congress actually enacted a law back in 
2004 that allowed----
    Chairman RANGEL. I know. But did they do it at the request 
of IRS, or did they just enact the law and tell you to do it?
    Mr. BROWN. I am really not familiar with the history.
    Chairman RANGEL. Are you familiar with how these firms were 
selected? Were there bids put out?
    Mr. BROWN. Yes. There was a competitive bidding process, 
and three were selected at the end of that process.
    Chairman RANGEL. Do you know how many people applied?
    Mr. BROWN. Thirty-three.
    Chairman RANGEL. Do you believe there is a special 
relationship between U.S. taxpayers and the IRS that is not the 
ordinary debtor/creditor relationship, which we all are 
familiar with?
    Mr. BROWN. I would like to think there is a special 
relationship between IRS and taxpayers.
    Chairman RANGEL. Do you believe, that normally the taxpayer 
has a certain reverence as it relates to the Internal Revenue 
Service rather than a tax collector?
    Mr. BROWN. I would not describe my interactions with 
taxpayers with reverential. I am not attempting to be humorous, 
but it is a business.
    Chairman RANGEL. You don't believe that when the IRS calls, 
there is a different response from the taxpayer than if just 
another creditor calls? When someone says an IRS agent calls, 
you don't think that is any different?
    Mr. BROWN. I am quite frightened when an IRS agent calls 
me. But I would like to place in context those phone calls if I 
could.
    Chairman RANGEL. No, no, no. We don't have that much time. 
Let's try to figure this out. When the IRS is collecting taxes 
and one of the collectors is typically good, is that person 
rewarded by the Internal Revenue Service for being effective? 
Do they get any reward for the more money they collect from the 
taxpayers? Is that considered?
    Mr. BROWN. No. Dollars collected is not considered.
    Chairman RANGEL. Do you think that it makes a difference 
just in everyday experience that when a person's income is 
dependent on the amount of money extracted and the way they 
handle the creditor, generally speaking?
    Mr. BROWN. Well, private debt collection employees also are 
not compensated based on how much money they collect.
    Chairman RANGEL. Then do they get a commission for the 
amount of money that they collect?
    Mr. BROWN. No. For individual employees who make the phone 
calls, it is prohibited under the terms of the contract from 
basing their compensation, bonuses, evaluations on the amount 
of dollars they collect.
    Chairman RANGEL. Well, in order for a firm to be 
successful, would it not be dependent on the amount of money 
they collect?
    Mr. BROWN. At the firm level, that is correct.
    Chairman RANGEL. So, you would call that profits. Would it 
be profits? The profits are dependent on the amount of money 
they collect?
    Mr. BROWN. Yes.
    Chairman RANGEL. So would it not appear as though that the 
more aggressive you were in collecting--strike that.
    An IRS collector, do they have the taxpayer's tax files in 
front of them when they are collecting?
    Mr. BROWN. Generally, yes.
    Chairman RANGEL. Would a private collector have the tax 
information in front of them?
    Mr. BROWN. They would have very limited information, the 
amount of money owed for that tax year that has been assigned 
to the private debt collection outfit.
    Chairman RANGEL. Could the IRS person representing the 
government enter into settlements? Could the IRS look at the 
files and see if they can work out something that could be of 
agreement between the taxpayer and the government? Would they 
be authorized to do that?
    Mr. BROWN. Yes. Private debt collection outfits can only -
    Chairman RANGEL. No, no. I am talking about the IRS.
    Mr. BROWN. I understand. The private debt collection 
outfits do not have authority----
    Chairman RANGEL. No, no, no. I am talking about the IRS. Do 
they have the authority to do it?
    Mr. BROWN. The IRS has authority, yes.
    Chairman RANGEL. If they bring in a settlement agreement, 
they are not penalized because they did not collect the money?
    Mr. BROWN. No.
    Chairman RANGEL. The private collector, of course, on the 
other hand cannot reach a settlement. If they don't collect the 
money, they don't make the profit.
    Mr. BROWN. But the private debt collection workers are also 
not penalized. What they do then is move to the next case.
    Chairman RANGEL. But they don't make any money.
    Mr. BROWN. That is correct. They wouldn't make any money on 
that case.
    Chairman RANGEL. So, if you want to make money for the 
firm, you can't settle. You aggressively pursue the collection 
of the money owed to the government.
    Mr. BROWN--full payments of the liability or an installment 
agreement, a full payment over time.
    Chairman RANGEL. Based on your experience, if you had to 
negotiate a debt, would you prefer to be working with a private 
collector whose profits were dependent on his collection or 
would you want to work with an IRS collector that you are 
familiar with the work they do?
    Mr. BROWN. Personally, I would prefer obviously not to be 
in debt and getting a phone call like this at all. But I would 
hope I could just wrap it up as quickly as possible with as 
little interaction with whomever was on the phone.
    Chairman RANGEL. Okay. Now, your predecessor, did he have 
different feelings about this type of private collecting do you 
know? Did he support this program?
    Mr. BROWN. Commissioner Everson supported this program, 
yes.
    Chairman RANGEL. He testified before the Congress that 
using private collection companies to collect Federal taxes is 
more expensive than having the IRS to do the work itself. Do 
you agree?
    Mr. BROWN. I agree. We have tools, our collectors----
    Chairman RANGEL. Do you agree with what your predecessor 
said?
    Mr. BROWN. I do. Our collectors----
    Chairman RANGEL. --Okay. Now he also said, we could do this 
work as cheaply or more cheaply as the private sector. As you 
know, the President's Competitive Sourcing Initiative looked at 
different things all the time, different projects. More often 
than not, the government is better because it doesn't have to 
make a profit. So, I believe you could do this work more 
cheaply internally. Do you agree with that statement?
    Mr. BROWN. Again,--under the law, we----
    Chairman RANGEL. You have got to help me with my time. 
Would you say that you disagree or you agree.
    Mr. BROWN. A yes or no answer doesn't fully explain----
    Chairman RANGEL. That is okay. You can't answer whether you 
agree or disagree with that?
    Mr. BROWN. We can do it more efficiently. We have tools 
under the law that lead's to us being more efficient.
    Chairman RANGEL. If Congress provided you with the 
resources, could you do it more effectively?
    Mr. BROWN. We would apply those resources to higher 
priority cases.
    Chairman RANGEL. Okay. Thank you so much. He also said, I 
freely acknowledge it is more costly to use private collection 
agencies than it would be if the IRS was to do it. He said that 
in the Senate last year. Do you agree with that?
    Mr. BROWN. Yes. We can do this more cost effectively 
because of the tools under the law.
    Chairman RANGEL. So the Congress told you to try this 
method. It wasn't the commissioners who said that I could do a 
better job for the IRS or the government with this program. It 
was the Congress that told you that they wanted you to start 
this privatization, wasn't it?
    Mr. BROWN. There was a statute enacted, yes.
    Chairman RANGEL. You have been a very, very good witness. I 
want to thank you. I would like to yield to Mr. McCrery.
    Mr. MCCRERY. Thank you, Mr. Chairman. I thought all the 
witnesses were very good.
    Chairman RANGEL. I don't know that yet.
    Mr. MCCRERY. I commend their testimony. I haven't practiced 
law in many years, but when I was practicing law, lawyers 
extract anywhere from 25 percent to 40 percent for collecting 
debts. What is the average, Mr. Brown, percentage take from 
these private debt collectors?
    Mr. BROWN. 18.5 percent.
    Mr. MCCRERY. 18.5. Not 25 percent?
    Mr. BROWN. 18.5.
    Mr. MCCRERY. 18.5 percent. I believe in response to the 
Chairman--one of the Chairman's questions, you were about to 
illustrate why this is not an apples-to-apples comparison. 
While yes, if we gave the IRS more resources, more money to 
hire more workers to collect more debts, you wouldn't put those 
resources toward collecting these particular debts, would you?
    Mr. BROWN. No. The comparison is difficult to make.
    Mr. MCCRERY. It is an apples-to-oranges comparison.
    Mr. BROWN. Yes. IRS employees have the power of filing a 
Federal tax lien to levy on wages and bank accounts and that 
sort of things. The private debt collection employees do not 
have those powers.
    Mr. MCCRERY. Thank you for explaining that, Mr. Brown. The 
fact is if we want to give more resources to the IRS, we can do 
that, or at least we can suggest that to the appropriators. 
That is not in our jurisdiction. But if the Appropriations 
Committee sees fit to give the IRS more resources that may, in 
fact, result in higher collections but not from the debtors 
that are identified for use in this particular program. Now, 
the TIGTA is the Treasury Inspector General For Tax 
Administration. What has the Treasury Inspector General found 
about the development and implementation of this program?
    Mr. BROWN. They have said that we have effectively 
implemented the program. There were things we could improve but 
overall, we have implemented the program effectively.
    Mr. MCCRERY. How about the IRS oversight board? What have 
been their findings?
    Mr. BROWN. They think the program to date has been well 
run, and they want to keep an eye on it.
    Mr. MCCRERY. The GAO has made some recommendations, haven't 
they, to the IRS for improvements? Has the IRS agreed to 
implement the GAO recommendations?
    Mr. BROWN. We have.
    Mr. MCCRERY. Mr. Kutz, is that your understanding as well, 
that the IRS has agreed to implement the recommendations of the 
GAO?
    Mr. KUTZ. Yes.
    Mr. MCCRERY. Are you satisfied that they are going to do 
that?
    Mr. KUTZ. Yeah. I think the one key one is to do an apples 
and apples cost comparison of using private collection agencies 
with the other options here.
    Mr. MCCRERY. That would be a good idea. Is that underway 
Mr. Brown?
    Mr. BROWN. No. Not completely apples to apples. What we 
would be doing then is taking IRS employees and telling them 
not to use their powers, their full array of powers under the 
Internal Revenue Code which would then lead to less money being 
collected. So, what we are doing is assigning the same work to 
both sets of employees, both the private ones and the 
government employees and comparing the results there.
    Mr. MCCRERY. Generally speaking, what is the potential rate 
of return, the IRS return on investment for collections?
    Mr. BROWN. For this type of work, it would be about 13 to 
1, but again I caution that the numbers are not an apples-to-
apples comparison because of the tools that IRS employees have 
to work.
    Mr. MCCRERY. Again, if you had more tools, you wouldn't 
utilize them for these debtors, you would go after higher 
targets?
    Mr. BROWN. We have higher dollar cases, more recent 
liabilities and more complex cases that we would work on.
    Mr. MCCRERY. So, essentially, Mr. Brown, it seems to me 
that what taxpayers are getting, what the IRS is getting is 
help in collecting debts that would otherwise go almost 
unattended to. The IRS, as I understand it, for these debtors 
sends four notices. Is that correct?
    Mr. BROWN. Yes. I would like to place the phone calls in 
context. The taxpayer files a return and he admits that he owes 
the tax, but there is not a check that accompanies the return. 
We then send the taxpayers four notices over the course of 
about 6 months. They are increasingly severe in language. Many 
of them then get a phone call from the IRS. Then we send them a 
letter, saying that your account is now going to be assigned to 
a private debt collector. A few days go by, the private debt 
collector then sends him a letter saying your account has now 
been assigned to us and we will be phoning you soon. What you 
have heard there are phone calls where the taxpayer says they 
did not get the letter. We are cognizant of the fact that some 
people may actually not have gotten the letter for whatever 
reason. We are going to now send letters where we hear a 
conversation like that. We will send these letters by certified 
mail and then have private debt collectors call once again.
    Mr. MCCRERY. One of the reasons the collectors are somewhat 
vague in identifying themselves and the subject of the call is 
for privacy reasons, isn't it?
    Mr. BROWN. That is exactly right. Under Federal law you 
cannot disclose tax return information to anyone other than the 
taxpayer. So, the collector are quite cautious about making 
sure that the taxpayer is the phone and what you are hearing 
there is an authentication process before they want to talk 
about the bill.
    Mr. MCCRERY. Thank you, Mr. Brown. Mr. Chairman, I have an 
estimate from the Joint Tax Committee of the cost to the 
Treasury if we were to repeal this law, which estimates that we 
would lose--the Treasury would lose about a little over $1 
billion over the next 10 years if we were to repeal this 
program. I would like to submit this estimate for the record, 
Mr. Chairman.
    Mr. LEVIN. [Presiding.] So, ordered. I guess I am next. I 
will call on myself.
    I don't quite understand the apples-to-apples and apples-
to-oranges discussion. Let's say the tougher cases are apples 
and the less difficult cases are oranges. Okay? Does IRS have 
enough personnel to effectively enforce the law against the 
apples, the more difficult cases?
    Mr. BROWN. No.
    Mr. LEVIN. So, essentially what the minority is saying, 
having underfunded IRS in terms of going after the apples, that 
they have provided money for somebody to go after the oranges. 
In terms of the tax gap, what percentage of the tax gap do you 
think is going to be addressed by going after what we have 
called the oranges through these private collection agencies?
    Mr. BROWN. It would be relatively small. About $33 billion 
of the tax gaps, what we call underpayments, which is a 
collection activity and this is going to garner--let's say it 
garners over $2 billion over the course of 10 years, relatively 
small. I would note, though, that it is real money, $2 billion.
    Mr. LEVIN. I know. I didn't say it wasn't real money. You 
are a careerist, right?
    Mr. BROWN. I am.
    Mr. LEVIN. So, you don't have to defend either what we do 
or what the Republicans do, right?
    Mr. BROWN. I am here just to explain how the program works.
    Mr. LEVIN. Okay. No one was saying a billion isn't real 
money. What we are saying is, we have this tax gap, even if it 
isn't as large as some think, for years we have underfunded the 
IRS to go after what we have called the apples and 
significantly. So what they are saying is, apparently--I hope 
not all--that here we have provided private collectors moneys 
to go after what is a very small part of the tax gap, while 
they have failed to provide adequate moneys to go after those 
who represent the largest portion of the tax gap. Now, it is 
possible, is it not, for IRS employees to go after also those 
whom we have called the oranges? It is possible for them to do 
the easier work, right?
    Mr. BROWN. It would be possible. We have a relative 
prioritization of our work, and we tend to work the harder more 
complex cases that are likely the more lucrative cases first.
    Mr. LEVIN. Exactly. So, what has happened is, this 
Congress, under past leadership, has failed to fund IRS to go 
after the harder cases that provide--that present most of the 
money that has been unpaid while providing private tax 
companies, collectors to go after the easier cases that 
represent a very small portion of the tax gap.
    Mr. BROWN. Well, this is to say supplement to what we do.
    Mr. LEVIN. Well, you can call it a supplement. It is a 
replacement in the sense that if adequate moneys were provided 
IRS, you could go after everybody, right?
    Mr. BROWN. I would----
    Mr. LEVIN. You prioritize only because of inadequate 
funding, isn't that correct?
    Mr. BROWN. Well, we prioritize because the cases tend to be 
better cases to work. There is a higher degree of success when 
you work those sorts of cases.
    Mr. LEVIN. Higher degree of success and higher degree of 
moneys that are received. Okay. So, I think that should be made 
very, very, very clear.
    Ms. Paray, I have just a short time. When you handle these 
cases, what do you do? Quickly. What is the relationship 
between the IRS and the taxpayer?
    Ms. PARAY. Well, when we call a taxpayer, we identify 
ourselves as Ms. Paray, my ID number from the Internal Revenue 
Service, and then we go through a disclosure, getting their 
name, their Social Security number, their address, daytime 
phone number, work phone number. We tell them that we are 
calling regarding a Federal tax matter.
    Mr. LEVIN. Do you think--is this the same procedure 
followed by the private collector?
    Ms. PARAY. Based on the telephone call that we heard, they 
are not identifying themselves. If we leave a message on a 
taxpayer's identified answering machine, we tell them that this 
is Ms. Paray from the Internal Revenue Service. Please contact 
us back. We give the telephone number and a case reference 
number. We tell them by which day they need to call back.
    Mr. LEVIN. Thank you. Mr. Herger?
    Mr. HERGER. Thank you, Mr. Chairman. Very interesting 
testimony. I want to thank each of you for appearing before us 
today. As I think about my experience and why it is I am in 
public office from the private sector, one of my big concerns 
was that as individuals, as small businesspeople, we pay--our 
tax rates are too high. However, I do feel that we should be 
paying taxes. Certainly a big concern of mine, while on one 
hand we are trying to have our taxes as low as we can, those 
who owe taxes should be paying them. I think really the bottom 
line of why we are here today, excuse me, and what we hear so 
much in this Committee here in the last month or so has been 
the tax gap or that amount that people are not paying their 
taxes who should be paying their taxes.
    Now, we hear some interesting things--Mr. Kutz, now you are 
with the Federal Government, aren't you? It is your job at GAO 
is to look and see whether we are doing it effectively, and you 
will give us an honest appraisal of the job we are doing, is 
that correct?
    Mr. KUTZ. We provide you independent objective information 
to help you make policy decisions, yes.
    Mr. HERGER. I appreciate that. So, if we look at this, and 
we have some $290 billion that people are not paying their 
taxes, which puts a greater burden on people like I used to be 
who have a greater pressure to pay more taxes. So, the idea 
that at least to have everyone pay their fair taxes. So, we 
hear about the $200 billion that is not being paid. Of this, we 
heard in testimony of Mr. Kutz, I think you mentioned that some 
$132 billion is money that you feel perhaps could be collected 
of this, I believe, and you showed a very interesting chart 
over here. It was interesting--in just 6 months, we were able 
to collect $19.5 million of this delinquent debts that were not 
being paid before, that we have basically--I don't know if you 
say we had given up on this $200 billion.
    We haven't given up on it, but certainly it is money that 
hadn't been being paid before. I would just like to--and you 
were outlining some of the initial success that we had, Mr. 
Kutz, on this pilot program. I would like to ask, are there 
ways that the programs can be improved and expanded to help 
collect on some of the other $132 billion that the IRS doesn't 
collect? I might just also interject this. Now, I have been 
around the Federal Government, I have been here in this office 
for 20 years, and there isn't any doubt in my mind that our 
Federal employees on the whole do the very best job they can. 
But we have this huge government that is very difficult to make 
it work.
    So, often we hear the way you make it work better is just 
hire more employees, just hire more Federal employees. That 
seems to be the answer to make it work right. Well, we know 
that that is not always the answer. Mr. Kutz, we are trying to 
go with some of this money and allow the private sector in a--
on money that we haven't been able to collect, be able to 
collect it. With what you have seen, do you see other ways of 
programs that we can improve or that can be expanded to help 
collect some of the rest of this $132 billion?
    Mr. KUTZ. Well, let me just say with respect to the limited 
look we did at this with the use of private collection 
agencies. One thing that we did see that could help the 
efficiency and effectiveness of this program has to do with 
giving telephone numbers to the private collection agencies. We 
believe that that is something that regardless of the policy 
debate going on here, if you use private collection agencies, 
they are going to collect tax debt by telephone. We believe IRS 
should give them a telephone number. They give them a Social 
Security number, they give them an address.
    Mr. HERGER. It is like tying one hand behind their back. We 
talk about apples and oranges. We are really not giving them a 
chance.
    Mr. KUTZ. That is why we get 250,000 phone calls for 37,000 
people.
    Mr. HERGER. Is there some reason we didn't give them phone 
the numbers?
    Mr. BROWN. Yes. We didn't think the phone numbers would be 
good. As he explained, the accounts tend to be about 3 years 
old. We didn't think the numbers were good. We are going to 
study this recommendation. This sounds quite sensible to me.
    Mr. HERGER. Okay. Well, thank you. I think we need to let 
this pilot program work a little further. It sounds like we are 
having success. We certainly need to improve on it. But I 
certainly would not like to see you throw this out on having 
everybody pay their fair share. Anyway, thank you very much.
    Mr. LEVIN. Mr. McDermott has agreed Mr. Lewis will go next, 
the Chairman of the Subcommittee.
    Mr. LEWIS. Well, thank you very much, Mr. Chairman. Thank 
you, Mr. McDermott. Mr. Chairman, without objection, I would 
like to complete the tape of where we left off.
    Mr. LEVIN. Okay. Let's proceed. We will see if technology 
is working. It is.
    [Tape is played.]
    Mr. LEWIS. Mr. Chairman.
    Mr. LEVIN. Yes, Mr. Lewis.
    Mr. LEWIS. May I just ask Ms. Paray a question? Thank you 
so much for being here.
    Ms. PARAY. You are welcome.
    Mr. LEWIS. Would an IRS call a taxpayer's elderly parents 
150 times, in some cases, up to five times a day, asking for 
the taxpayer when they know that the taxpayer does not live 
there? Would you or one of your coworkers ever do anything like 
that?
    Ms. PARAY. No, sir. When we make the phone call, if we are 
told that that person is no longer there, if we have reached an 
incorrect telephone number, if we have reached someone where 
the spouse has deceased, we first apologize for reaching the 
wrong number if that is the case. If someone is deceased, we 
apologize for that, for attempting to contact them. We ask for 
some information regarding the deceased person.
    However, when we make a phone call, we identify ourselves, 
that this is Ms. Paray from the Internal Revenue Service, and 
my ID number is--if a taxpayer chooses not to give us their 
Social Security number, we will tell them we understand their 
concern, we will offer to give them the last four of their 
social if we will give the first five. If they choose not to do 
that--and again, understandably because of Social Security 
theft and privacy information, we will tell them that they 
could call back at the 800-number we are to give them with 
their case reference number. When someone answers, they will 
know that it is the Internal Revenue Service that is calling 
them. We would not call them five times a day. That would not--
that is not even in our guidelines to do something like that.
    Mr. LEWIS. Is there anything else you would like to say or 
add? You heard the tape.
    Ms. PARAY. As an ACS employee for the Internal Revenue 
Service, I am insulted that anyone would represent the 
government in that manner. If I received a phone call like 
that, I wouldn't be returning it either. There is no 
identification whatsoever other than a first name and a 
telephone number.
    Mr. LEWIS. Thank you so much again for being here, coming 
all the way from Buffalo----
    Ms. PARAY. Yes.
    Mr. LEWIS. --to be here. Thank you so much.
    Ms. PARAY. You are welcome.
    Mr. LEWIS. Mr. Chairman if I just may ask Ms. Kelley. Ms. 
Kelley, thank you so much for being here, being such a good 
witness, and all of the witnesses for being here and for all of 
your help on this matter.
    Do you believe there have been many, many more complaints 
than those reported by the private debt collectors?
    Ms. KELLEY. You know, I really don't know. My understanding 
is these have all been self-reported, the ones that have been 
made available. I don't have any firsthand information 
otherwise about it. But I would just think that with the 
examples that we have heard today on the phone that there have 
to be--I would bet there are others that are not satisfied. I 
just think it puts the IRS in a terrible light. I think the 
credibility of the IRS is put at risk when things like that 
happen.
    Mr. LEWIS. Ms. Olson, thank you also for being here. I know 
you believe there should be trust and confidence in our tax 
system. There must be a relationship between the taxpayer and 
the IRS. What do you believe?
    Ms. OLSON. Well, listening to that tape, you can see that 
if that taxpayer finds out ultimately that it was someone hired 
by the IRS to call that put him through that and caused him 
those concerns about his identity theft, he is going to really 
to be concerned about how this tax system is being run. I also 
thought that in the course of time, that that call had took, we 
could have probably--if an ACS employee had been on the phone--
have resolved that tax debt in that time. The PCAs do not have 
the tools, nor should they have the tools because they are 
inherently governmental to deal with taxpayers' specific 
circumstances and their concerns.
    It is the Federal Government and the IRS employees who 
should be dealing with that. Although there is plenty of room 
for improvement, and I identify 20 most serious problems every 
year, pointing out that room for improvement, I believe the IRS 
does it better than any other tax administration system in the 
world.
    Mr. KUTZ. Can I make one point on that? Just one 
clarification. There is no guarantee that that was one of the 
37,000 cases in the first place. So, that is just something to 
consider here. That may not have been one of the taxpayers that 
had tax debts. There is no way to know because they didn't 
authenticate their identity.
    Mr. CAMP. Okay. Thank you. Mr. Penaluna, is there any 
indication that that call is a common practice of CBE Group?
    Mr. PENALUNA. Well, Congressman, I think it is important to 
understand that we put taxpayer privacy at the utmost in every 
call. The limited tools we--excuse me--the limited tools we 
actually have to authenticate accounts is very limited. I might 
also make the statement that when we leave messages on 
answering machines, because we are also complying with the Fair 
Debt Collection Practices Act, that we cannot leave the name of 
our company. If that third party----
    Mr. CAMP. Right. But we heard comments of hundreds, 100 
calls or 5 calls in a day. Are those common practices for your 
company?
    Mr. PENALUNA. Only from the point of view that you may call 
somebody four or five times, not if they answered. But if they 
did not answer, people go to the store or are at work. So, we 
could call them four or five times a day until we actually 
reach them. Once we reach them, we will obviously do the talk 
off but at that point, the remaining calls would stop.
    Mr. CAMP. All right. Thank you. Mr. Brown, I understood you 
to say the IRS sends four delinquent notices before an account 
is considered for referral. Then there is a letter saying your 
account will be referred and then another letter saying the 
account has been referred.
    Mr. BROWN. That is correct.
    Mr. CAMP. So, that is six letters then from the IRS?
    Mr. BROWN. Five. Five from the IRS. One--from the PCA
    Mr. CAMP. Five from the IRS, one from the private. So, six 
letters to the taxpayer about the delinquency.
    Mr. BROWN. I should add in this situation, we just heard if 
the taxpayer has not received a letter, the private debt 
collection companies are now being instructed to send another 
letter by certified mail to make sure that the taxpayer do 
receive it. [11:30 a.m.]
    Mr. CAMP. Now, if the IRS receives a call from the 
taxpayer, which I understand some of these letters may 
generate, do they--is there authentication at the same level as 
compared to a private collection agency?
    Mr. BROWN. Yes.
    Mr. CAMP. So, they have similar standards, the IRS and the 
private collection agency in terms of authenticating a call?
    Mr. BROWN. That is correct.
    Mr. CAMP. The kinds of requests for address, and as we 
heard testimony, partial Social Security number that we heard 
in the call are also done by the IRS?
    Mr. BROWN. That is correct.
    Mr. CAMP. But IRS employees may identify in their call a 
source of levy or notify the taxpayer of the potential levy or 
potential of issuing liens or garnishment; is that correct?
    Mr. BROWN. Yes. Once we have authenticated that is actually 
the taxpayer, we would enter into that sort of discussion, yes.
    Mr. CAMP. But private collection agencies are not 
authorized to identify levy sources or to notify taxpayers 
about garnishing wages or even the threat of those steps; is 
that correct?
    Mr. BROWN. They have no such authority; that is correct.
    Mr. CAMP. Now, there has been an IRS study that shows a 94 
percent satisfaction rate for taxpayers contacted by third-
party collectors. We have had some discussion about that.
    Mr. BROWN. The April data indicated a 97 percent 
satisfaction rate.
    Mr. CAMP. Ninety-seven percent. Is there a like study about 
the contact between IRS agents and taxpayers as well?
    Mr. BROWN. The numbers are virtually identical for both our 
quality and what we call our customer satisfaction scores.
    Mr. CAMP. So, fairly high satisfaction scores for both IRS 
employees as well the private collection employees?
    Mr. BROWN. That is correct.
    Mr. CAMP. Now, is it also correct--do I understand 
correctly that there can be no face-to-face contact between an 
employee of a private collection agency and a taxpayer?
    Mr. BROWN. That is right. The contacts are either done by 
mail or by phone.
    Mr. CAMP. So, the only kinds of contacts we can have are 
either a letter in the mail or a phone call?
    Mr. BROWN. That is correct.
    Mr. CAMP. Now I presume that there are phone calls from 
private collection agencies where people verify that they are 
not that person. They have got the wrong number or--what 
happens then with the private collection company?
    Mr. BROWN. That should be the end of it.
    Mr. CAMP. Mr. Penaluna, do you want to comment?
    Mr. PENALUNA. That is correct. Once the consumer identifies 
to stop calling or--they would not necessarily know what the 
debt was about because once they could not authenticate--once 
they actually tell us to stop calling, we will stop that and 
actually refer that back to the IRS.
    Mr. CAMP. I presume phone numbers after 6 months get 
reassigned. A lot of your cases are 3 months old. So, I presume 
you are calling a lot of wrong numbers.
    Mr. PENALUNA. That is correct. We have identified that 
about 15 percent are wrong numbers.
    Mr. CAMP. At that point you stop contact when you discover 
that?
    Mr. PENALUNA. Yes, sir.
    Mr. CAMP. Thank you, Mr. Chairman.
    Mr. LEVIN. [Presiding.] Mr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. I remember we sat 
through hearings listening to taxpayers that thought they were 
harassed by the IRS and we changed the law under the 
Republicans. Now we have turned it all over to the private 
collectors, so now we have got to look at this.
    Ms. Olson, I, first of all, I want to enter into the record 
a couple of faxes or mimeographs--I guess they are faxes of 
envelopes that look like junk mail. This kind of stuff comes 
in. It has a Telepark address in Waterloo, Iowa, and does not 
say anything on it. No one would open that. Throw it away 
immediately it looks like to me.
    So, a part of the problem here is, that tax collector is 
not honest about what he is doing, I guess.
    Mr. LEVIN. Without objection, that will be entered into the 
record.
    [The information is being maintained in the Committee 
files.]
    Mr. MCDERMOTT. Mr. Penaluna reported a miracle here, and I 
want you to tell me how this happened. It says over 20,000 IRS 
cases were handled by them. They received 55 complaints and 
none of them have been validated--I don't know what that means, 
``validated''--by the IRS or the Taxpayer Advocate Service.
    Now, how could it be that there was not one single valid 
complaint on 20,000 contacts? Could you explain that process, 
what happens?
    Ms. OLSON. Well, first, I would disagree that none of them 
are validated by the Taxpayer Advocate Service because we have 
300 cases that came either from taxpayers calling----
    Mr. MCDERMOTT. Are you saying that his testimony is 
incorrect?
    Ms. OLSON. I am saying that we have seen many problems with 
this program through our cases. I don't know what ones are 
attributable to CBE and I can go back and find that out for 
you.
    Mr. MCDERMOTT. Would you, please.
    Ms. OLSON. Yes, sir. I can tell you that I have concerns 
about the complaint review process. I think the IRS takes a 
very narrow deposition of what complaints are and a even more 
narrow definition of what constitutes validation.
    Second----
    Mr. MCDERMOTT. Who is it that gets these complaints?
    Ms. OLSON. Well, the complaints are referred by the PCAs to 
the IRS Private Debt Collection Program office. With the 
exception of an employee from my office, everyone who serves on 
that review panel are actually people who work on the Private 
Debt Collection Program and who are being evaluated by their 
supervisors for the success of that program.
    Mr. MCDERMOTT. So, you are saying that the fox is handed 
the keys to the hen house, and they don't find any problems?
    Ms. OLSON. I have tried to think about this. If you had a 
review board that actually had an EEO representative or an 
external civil rights unit representative, representatives of 
collection employees, on the board, you might have a more 
balanced perspective of what were the actual practices that we 
should be holding these PCAs to, what are the standards that we 
should be holding them to.
    In fact, the review board views itself as a rubber stamp 
because it is the contract representatives, the COTRs, who are 
handling the contract that actually make the recommendations to 
the board, and in most instances, they are rubber-stamping what 
the COTRs say.
    There have been instances where my representative has been 
outvoted on the board. We have felt that there has been a 
violation and we have been outvoted.
    Mr. MCDERMOTT. Now, if somebody calls me up and says that 
they want my Social Security number, can you give me a valid 
reason why I shouldn't give it?
    Ms. OLSON. I would never give it. I cannot give you a 
reason.
    Mr. MCDERMOTT. Well, I mean, can they steal my identity if 
I give them my Social Security number?
    Ms. OLSON. Yes, sir. They can steal your identity; they can 
if they have your address.
    One thing that we have been talking about, that the IRS has 
been talking about is getting the private collection agency the 
birth dates of these taxpayers. So, if someone were to ask--a 
taxpayer gets a call and someone is asking them to verify their 
birth date, between your birth date and your Social Security 
and address you could create a whole identity and do a lot of 
damage to a person.
    Mr. MCDERMOTT. Those records that these debt collectors--
they are basically all secure in computers that can't be hacked 
and so forth?
    Ms. OLSON. This is what the IRS says. In one of the PCAs 
the Treasury inspector general, in his most recent report, 
identified several security breaches. This is of some concern 
to me; I cite this in my testimony.
    They found doors unlocked and file drawers unlocked. This 
is the PCA that the IRS terminated contract with, and that PCA 
is now able to keep our taxpayer files for 2 years and I have 
very many concerns about that.
    Mr. BROWN. I have to correct that. The PCA that is no 
longer working on this has no IRS files at this point. Sorry to 
interrupt.
    Mr. MCDERMOTT. So, is there any way to fix this law to give 
PCAs enough information so we don't have that kind of phone 
call that we just listened to?
    Ms. OLSON. If you fix the law, then you are changing the 
Fair Debt Collection Practices Act, and many of those rules 
under the Fair Debt Collection Practices Act were put in to 
protect taxpayers from getting phone calls at their homes and 
offices saying, Hi, I am the debt collector and I am out to get 
you. I am calling from so-and-so.
    So, you are in this double bind. The only solution is for 
the IRS to be collecting the taxes. That is where you have the 
protections.
    I do want to go back to the placement of the files, whether 
they are the actual files or they are the electronic files. We 
verified with the IRS program office that these files were 
kept.
    Mr. MCDERMOTT. I rest my case that the IRS are the only 
ones that can collect taxes without revealing--without invading 
people's privacy.
    Ms. OLSON. I agree.
    Chairman RANGEL. [Presiding.] Mr. Ramstad.
    Mr. RAMSTAD. Thank you, Mr. Chairman.
    Commissioner Brown, I want to get this straight. Did you 
say that in April, according to an IRS study, there was a 97 
percent approval rating for PCA's efforts to collect delinquent 
taxes?
    Mr. BROWN. It is not an IRS study; we contracted that out 
to a independent group.
    Mr. RAMSTAD. It was an independent study. A similar result 
for IRS?
    Mr. BROWN. The numbers are quite comparable.
    Mr. RAMSTAD. It would seem to me that with a 97 percent 
approval rating for PCAs' efforts to collect delinquent taxes 
and with Congress' approval rating at 36 percent, maybe we can 
learn something.
    Here we are bashing, based on a few anecdotal cases, a 
practice that promises to collect $1.5 billion and $2.2 billion 
for the taxpayers, money that would otherwise go uncollected; 
and we are taking a couple anecdotal cases--and perhaps there 
have been some abuses, certainly some alleged abuses--and 
people want to trash the law. It makes no sense whatsoever if 
you are pragmatic at all.
    Mr. Penaluna, I think you should make Ms. Benoit, based on 
what we heard here today, employee of the year. She personified 
patience and courtesy in responding to the gentleman.
    But more seriously, let me ask you this: It is because of 
taxpayer confidentiality laws, isn't it, that the caller we 
heard was not told that his call concerned a tax debt?
    Mr. PENALUNA. Yes, that is correct.
    Mr. RAMSTAD. The privacy laws preclude that?
    Mr. PENALUNA. The privacy laws and the fact that we only 
have the Social Security number for the authentication.
    Mr. RAMSTAD. Commissioner Brown, I would like to ask you a 
question. Is it true that the IRS does not provide the private 
collect agencies with the last known phone number of the 
taxpayer, even if the number is available?
    Mr. BROWN. Because the accounts are, on average, about 3 
years old, we just did not think the numbers would be current. 
Now that GAO has looked at this, we are going to study the 
recommendation quite closely here.
    Mr. RAMSTAD. Well, if, as implied by Ms. Kelley, it is so 
easy for the IRS to set up an outbound call system, why hasn't 
the IRS done so in the past?
    Mr. BROWN. Well, we do conduct some outbound calling, and 
actually we do some in the site.
    I will say that the vast majority of our calls are inbound; 
because of the tools we have when we talk about a lien or a 
levy, people tend to call us.
    Mr. RAMSTAD. I want to thank all the witnesses here today. 
It reinforces my view as everybody here thinks--agrees, close 
the tax gap. With a program, the PCA program, over the next 10 
years, it is projected to collect $2.2 billion in unpaid 
delinquent taxes, money that would otherwise go uncollected.
    That point needs to be reemphasized. I think it would be 
absolutely foolhardy to do away with this practice, and I 
commend the good work that you are doing. We are proving this 
is not an exclusive function of the government, as many, many 
other agencies have proven in the past.
    I yield back, Mr. Chairman.
    Chairman RANGEL. Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman.
    Ms. Olson, we have just heard that these phone calls 
typically start off with a request for a Social Security number 
and the taxpayer cannot find out anything more about these 
repeated phone calls until that number is divulged. I have a 
document from the Social Security government Web site that 
warns us that we should not divulge this number to private 
businesses unless we understand what law requires us to give it 
to them, because as the Social Security Administration states 
here, and I quote, ``Only the IRS can request this for the 
purpose of tax returns.''
    Ms. Olson, at the risk of being redundant, do you think 
these taxpayers should be divulging Social Security numbers 
over the phone?
    Ms. OLSON. No, I do not.
    Mr. NEAL. Mr. Brown, do you think they should be divulging 
their Social Security numbers?
    I want you to picture for a second perhaps a couple of 90-
year-old citizens. Do you think that they should be asked to 
give this information out over the phone? I wouldn't tell my 
children to give it out over the phone, let alone my 90-year-
old neighbors or parents.
    Mr. BROWN. I think when you place this in context, and they 
have received four notices from the IRS, a letter from the IRS 
explaining that the case is now going to be assigned to a 
private debt collector, a letter from a private debt collector 
saying we are going to be calling you soon, we have been 
assigned your case, it is not much of a surprise when a phone 
call occurs.
    Mr. NEAL. Ms. Olson.
    Ms. OLSON. Mr. Brown has said already that these cases are 
3 years old. The four letters come immediately very early in 
the collection stream. If somebody files a return with a 
balance due, the four letters come at that point. So, it could 
be 2 years ago that these letters were sent out to them, the 
letter that comes to the taxpayer telling the taxpayer that the 
PCS is going to be writing them.
    Of the $19.5 million that was collected under this 
initiative since September, 4 million of those dollars, 20 
percent, came from the IRS sending a letter. So, for the price 
of a postage stamp, people were sending us money without any 
contact whatsoever. We could continue to do that, not 
jeopardize identity, not jeopardize Social Security numbers.
    Mr. NEAL. Mr. Brown, how many letters are returned to you 
from the Postal Service?
    Mr. BROWN. I don't know, I will have to find an answer out 
for you.
    Mr. NEAL. Do you have somebody on the staff there that 
might be able to tell you that?
    Ms. OLSON. Congressman Neal, we did a----
    Mr. BROWN. Five thousand.
    Mr. NEAL. Five thousand. Thank you.
    Ms. OLSON. We did a study with the earned income credit 
population where we found that about 30 percent, 25 to 30 
percent of taxpayers within 6 months of filing their return had 
moved and most of them had left no forwarding address.
    So we have a population that moves around a lot. Many of 
these letters do not--are not received by taxpayers.
    Mr. NEAL. Mr. Brown, back to you. Perhaps that citizen 
served honorably in World War II, has paid their taxes all of 
their lives and maybe are suffering from a case of dementia, 
early stages, or suffering from Alzheimer's.
    Is it still your position that they should give out Social 
Security numbers to somebody on the phone who won't identify 
themselves?
    Mr. BROWN. I point out that they can opt out of this 
program at any time they want.
    Mr. NEAL. At 92 or 93 years old, what do they do?
    Mr. BROWN. If they are concerned at all about the 
interaction, there is a phone number. They can call the 
Internal Revenue Service. All they have to do is tell the 
private debt collector on the phone that they don't want to 
work with them. The case would be reassigned to the IRS.
    Mr. NEAL. Do you think that is easily accomplished for an 
individual at that age?
    Mr. BROWN. I can't speak to that, sir.
    Mr. NEAL. Let me give you a suggestion, because most of the 
Members of Congress, we spend a lot of time at senior centers. 
Maybe you ought to go out and try that. I think that is a piece 
of good advice.
    Mr. Kutz, let me understand your testimony regarding the 
survey. Did you say that only 1,000 taxpayers out of hundreds 
of thousands in conversations completed the survey, and if so, 
does that seem like a statistically valid sample?
    Mr. KUTZ. The sample was not statistically valid because 
not all people were offered the survey, so--you can have a 
small number respond and project it to a large population. But 
the reason that there was a problem here was because of the 
methodology that two of the three private collection agencies 
used. So, not everyone who actually agreed to take the survey 
took it.
    Mr. NEAL. Commissioner Brown, is it your position that this 
94 percent satisfaction rate, even based upon the testimony of 
Mr. Kutz, do you think this is at all valid?
    Mr. BROWN. In April, the survey was offered to all 
taxpayers.
    Mr. NEAL. Mr. Kutz, do you want----
    Mr. KUTZ. It wasn't all taxpayers; it was all right-party 
contact. The telephone call that you heard there, that person 
did not validate their identity. Anyone who was called that did 
not validate their identity was not part of this survey.
    I think the results need to be limited to the right-party 
contacts or people who authenticated they were part of the 
3,000 cases referred, so that would overstate the survey 
results. It needs to be limited to who authenticated they were 
the taxpayer involved here.
    Mr. NEAL. Mr. Brown, last, a piece of advice that we have 
had in my household for many years. I instructed my children, 
don't give out any personal information over the phone. I think 
you have to take that into consideration now.
    Mr. BROWN. Yes, sir.
    Mr. NEAL. Thank you.
    Chairman RANGEL. Mr. Brady.
    Mr. BRADY. Thank you, Mr. Chairman. I would like to yield 
to the Ranking Member, Mr. McCrery.
    Mr. MCCRERY. Thank you, Mr. Brady.
    I am concerned about this issue of the Social Security 
number. But as I understand it, the private debt collectors 
have to verify the identity of the person they are calling with 
the Social Security number, otherwise they violate the Privacy 
Act. So, it is a Catch-22 here.
    But the IRS, when the IRS calls, they can say to the 
person, This is the IRS and give us your Social Security 
number. Is this number 433-blah-blah-blah? The guy says, Yes.
    Why can't we authorize, through statute, the private debt 
collectors to say, This is CBE Company calling on behalf of the 
IRS, so that they then know what the subject is, and it is the 
same thing as if the IRS were calling? It seems to me that 
would solve--it would put the private debt collectors in the 
same standing as the IRS in terms of getting the information 
they need to verify the identity. Otherwise we are going to 
continue to have this problem.
    I agree, if somebody called me and said, What is your 
Social Security number, I would say, Buzz off; that is my 
business.
    So, maybe that is a problem. That is a problem, but it 
seems to me it is not a problem that can't be fixed. We ought 
to be able to fix that. But I think we have to do it by statute 
in order to assure private debt collectors they wouldn't be in 
violation of the Privacy Act.
    Thank you, Mr. Brady.
    Mr. BRADY. Thank you. I think when it comes to taxpayer 
rights, you can't be too careful.
    I think that this hearing is premature in evaluating the 
success of this program. We are told that there are many, many 
violations of this program, but I don't believe that is true. 
We have not seen complaints in our offices. Out of 37,000 
cases, there have been 69 with concerns and only a few, 25, 
about the taxpayer treatment. That is a pretty strong record.
    I want to point out, too, that of the firm whose contract 
IRS did not renew, two of the three violations were self-
reported by the company. They identified the problem and, by 
contract, told the IRS. That is exactly what they are supposed 
to do, and then correct it.
    We are told that these are easy collections, but that is 
not accurate either. Over 2 or 3 years with multiple contacts, 
they are still not collected. If these were easy collections, 
why didn't the IRS collect them themselves during that period?
    We are told that tax collection is a core function of the 
government. I don't believe it is. I think efficient and 
complete tax collection is the core goal of our government, and 
I think that the private companies can be helpful. They have a 
track record both at the local level--in our communities most 
of our property tax collections are done through private 
agencies at the State level; more than half have private 
agencies collecting their income taxes. I think the Federal 
Government, which is always slow and tends to trail the States 
when it comes to solving problems, has an opportunity to sort 
of learn from those successful programs and apply it to ours.
    I think--and I will wrap up with this. Mr. McCrery asked my 
question, but I think it is premature to kill this program. I 
think we need the balance of the IRS' strengths, and the IRS 
employees, who are very good at what they do, complemented with 
the expertise of the private agencies who can handle some of 
the areas that IRS perhaps could use some help with.
    I think that at this point we need to work on improving the 
program, always safeguard taxpayers' rights, but keep our eye 
on the goal of efficient and complete collection of as much of 
our taxes as we can.
    I yield back, Mr. Chairman.
    Chairman RANGEL. Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Let me ask one preliminary question, and perhaps, Mr. Brown 
or Ms. Olson, you could answer this. Is it accurate to say that 
most of this private debt collection occurring for the IRS 
involves taxpayers who are middle-to-lower income Americans? 
So,--less than $70,000 or so that you consider part of middle 
America?
    If I could get a quick ``yes'' or ``no'' or you will have 
to get back to me, I have a lot of other questions.
    Ms. OLSON. The IRS does not select cases based on income. 
They look at level of debt. Most of the cases involve very 
small debt, about $5,000 in debt. Our office pulled from IRS 
data and found that the population of cases going out to the 
PCAs were disproportionate--had a greater proportion of earned 
income credit cases, taxpayers who had claimed the earned 
income tax credit.
    Mr. BECERRA. Which are taxpayers below $40--or $45,000?
    Ms. OLSON. Yes. The adjusted gross income for those 
taxpayers was lower than the IRS population as a whole.
    Mr. BROWN. I would have to disagree with that assessment of 
the numbers. The numbers are identical for our automated 
collection program as they are for the private debt collection.
    Mr. BECERRA. We are still in the main looking at folks in 
this program that have incomes of, say, less than 100,000?
    Mr. BROWN. When we do collection work, we don't look to see 
how much money the taxpayer earns.
    Mr. BECERRA. Is it possible to find out?
    Mr. BROWN. Yes.
    Mr. BECERRA. Can you do that for us, Mr. Brown?
    Mr. BROWN. Yes.
    [The information is being maintained in the Committee 
files.]
    Mr. BECERRA. Appreciate that.
    Mr. Penaluna, let me ask you a question. You are the 
president of this company that does some of the debt 
collection. Do you give out your Social Security number to 
anyone over the phone who is a stranger to you?
    Mr. PENALUNA. No, sir.
    Mr. BECERRA. We have heard about identity theft cases where 
people will collect one bit of information or two bits of 
private information on an individual and then try to do 
something to confirm that those two bits of information 
correlate to the third bit of information. With that, bingo, 
they are now able to go ahead and do whatever they want to with 
your private information as they wish.
    Would you advise any American to disclose any kind of 
private identifying information to a stranger over the phone?
    Mr. PENALUNA. It depends under the circumstances. In the 
case of this program----
    Mr. BECERRA. So, it depends on the circumstances? Then I 
gather that the answer is ``yes.''
    Mr. BROWN. Under certain circumstances.
    Mr. BECERRA. I have 5 minutes. I am trying to figure out--
if there are circumstances, I will try to find out about them. 
But I am trying to figure out if under any circumstances you 
would advise Americans to provide their private information to 
a stranger over the phone.
    Mr. PENALUNA. There are some circumstances.
    Mr. BECERRA. Okay. Would you also under any circumstance 
advise any American to confirm private information over the 
phone where, as an example--as we saw in this case here that 
was played for us, where someone was saying, Will you at least 
tell me if this is your correct Social Security number or this 
is your correct address or this is your correct driver's 
license number--are there any circumstances under which you 
would advise an American to confirm that private information?
    Mr. PENALUNA. Under certain circumstances.
    Mr. BECERRA. Mr. Brown, on the survey, I am troubled that 
you--IRS continues to rely on this survey of 94 percent overall 
satisfaction. Let me make sure I understand this.
    There were 35,000 taxpayers who owed taxes that were 
targeted. We are given the information that over 300,000 
contacts were attempted by these private debt collectors to 
collect on the 35,000 people. Actually, over a million contacts 
were attempted and over 300,000 Americans were approached to 
try to find the 35,000 universe of taxpayers who owed money, 
correct?
    You are saying there is 94 percent overall satisfaction.
    As we heard Mr. Kutz say, that relied on a survey provided 
by the debt collectors to come up with that number. So, when 
you say 94 percent overall satisfaction, you are not saying 94 
percent of the 300,000 Americans who were contacted are 
satisfied, are you?
    Mr. BROWN. No.
    Mr. BECERRA. Because that would be over 280,000 Americans 
who would have said, Yes, we are satisfied with the work done 
by these private debt collectors.
    Mr. BROWN. No. As Mr. Kutz explained, we were talking about 
the people were verified as the taxpayer.
    Mr. BECERRA. I am looking at a chart, and I came up with a 
total of fewer than 2,500 people who were contacted.
    I believe, Mr. Kutz, you said it was something around 
1,000?
    Mr. KUTZ. It was 1,011 people.
    Mr. BECERRA. From that 1,011 people you extrapolate 300,000 
Americans, 94 percent of them were satisfied with the work that 
was done through the private debt collectors.
    Mr. BROWN. I am extrapolating that the people who were 
contacted were happy with the interaction.
    Mr. BECERRA. The contacts--and I will close with this 
because my time has expired--of the folks who were contacted 
and then the small universe that was used to come up with the 
survey, IRS did not choose who those people would be who would 
submit the survey results, were they?
    Mr. BROWN. That is correct. We did not.
    Mr. BECERRA. All the people who were contacted were asked, 
will you submit a survey?
    Mr. BROWN. Yes, they are offered it at the end of the phone 
call.
    Mr. BECERRA. Let me rephrase.
    All the people who submitted a survey, those that were 
forwarded to the IRS for purposes of determining the survey 
results, all of those people forwarded were forwarded by the 
tax collectors themselves?
    Mr. BROWN. No. By an independent consulting group.
    Mr. BECERRA. The independent consulting group got those 
results from whom?
    Mr. BROWN. The caller is referred at the end of the phone 
call to an independent consulting group.
    Mr. BECERRA. Who does the referral?
    Mr. BROWN. The private debt collector.
    Mr. BECERRA. Do you know that the private debt collector--
of the people that were contacted--gave that information to the 
American to make the call to that survey collector?
    Mr. BROWN. At the end of every call where you have talked 
to the taxpayer, they are required to send them along to the 
survey if they wish to take it.
    Mr. BECERRA. Thank you, Mr. Chairman. My point there is 
that, again, it is a very selective survey that is the result.
    Mr. Chairman, just for the record, I wanted to ask Ms. 
Olson some questions, because all of her testimony is based on 
our request to get back to us. So, I had some questions for Ms. 
Olson which I will probably put in writing.
    But I thank you for having responded to our requests with 
your testimony today, as the result of our request that you do 
so.
    Ms. OLSON. You are welcome.
    [The information is being maintained in the Committee 
files.]
    Chairman RANGEL. Mr. Reynolds.
    Mr. REYNOLDS. Thank you, Mr. Chairman. This hearing is kind 
of a big day for western New York. We are fortunate to have Ms. 
Paray from Cheektowaga in western New York; and we are 
privileged also to have the president and some representatives 
of Pioneer Credit Recovery, who have 1,200 to 1,400 employees 
in western New York; and of course, four members from New York 
on the Committee on Ways and Means chaired by a New Yorker in 
Chairman Rangel.
    As I see, first, how we got into the collection business, 
it was tax gap means, can we close it and can we use legitimate 
means to get there? One of those was to use PCAs, which ended 
up with an opportunity that GAO says is $1 billion minimum over 
10 years of revenue. Of course, in our world now with PAYGO, 
that is pretty serious in how we meet being able to close the 
tax gap but also not incur additional expense.
    As I kind of look at this, having western New Yorkers so 
integrally involved, some of this seems to me that we have got 
a view, can public employees that are also represented by their 
union, can they do a better job? Or can private collectors do a 
better job or can they do an equal job? How do we just plain 
get that $1 billion over 10 years?
    My first question, Ms. Olson, could you just again tell me 
the mission or the purpose of the National Taxpayers Advocate's 
office?
    Ms. OLSON. Sir, my mission is in 7803(c) of the Internal 
Revenue Code where Congress instructed me to help taxpayers 
solve their problems with the IRS, to identify administrative 
and legislative means to mitigate those problems.
    I make an annual report to Congress--actually twice a year, 
but in my December report, I identified private debt collection 
as a more serious problem for taxpayers. In doing that, I 
looked at the need to collect the tax gap and the best way to 
collect the tax gap.
    One of my concerns was that IRS employees, in collection 
their primary mission is sort of the three Cs: to do cause--
what caused the taxpayer to have this problem? How do we cure 
it? How do we bring the taxpayer into compliance?
    The private debt collectors, their mission is simply to 
collect the tax. They don't get into questions about, do you 
owe the tax, if the taxpayer does not believe they owe the tax; 
or being able to do a settlement for it rather than full pay, 
because that is what the taxpayer needs in order to continue to 
pay taxes and be in compliance.
    That is really a big difference, sir.
    Mr. REYNOLDS. Thank you. Could you tell me how many 
employees you have?
    Ms. OLSON. I have 1,900 employees around the country.
    Mr. REYNOLDS. Of the 1,900 employees, how many are covered 
by union contract?
    Ms. OLSON. Maybe about 1,600 are bargaining unit.
    Mr. REYNOLDS. Thank you.
    Could I get from Mr. Kutz: Do you believe that the study 
that was commissioned was a bona fide result as you got that 
data back that you cited in your testimony?
    Mr. KUTZ. The study being the survey? Are you talking about 
the taxpayer survey?
    Mr. REYNOLDS. Yes.
    Mr. KUTZ. No, not for the period we looked at. I believe 
there are some methodological issues that we understand have 
been corrected, starting early April, with respect to offering 
everyone the survey.
    I think everything that has been discussed here is that the 
survey should be qualified only to those people who 
authenticated their identity, and any of those who did not 
authenticate their identity were not included in any survey.
    Mr. REYNOLDS. Out of curiosity, is there any way that you 
might have known--we have, and I will submit for the record 
again the Inspector General's audit on the laptop computers 
that were lost and the press that accompanied that.
    Are you aware of any lost data by the PCAs that have come 
to your attention relative to taxpayers?
    Mr. KUTZ. That wasn't something that we looked at.
    Mr. REYNOLDS. Who would look at that?
    Mr. Brown?
    Mr. BROWN. Yes, we would.
    Mr. REYNOLDS. What you have found?
    Mr. BROWN. You are talking about losing hardware, specific 
laptops?
    Mr. REYNOLDS. As you know, the Inspector General did an 
audit on the IRS and there were lost laptops that were 
published in the national news. Are you aware of any lost data 
similar to what the Inspector General found in the possession 
of the PCAs?
    Mr. BROWN. No, we are not aware of any losses.
    Mr. REYNOLDS. Just if I might from the gentleman from Iowa, 
Mr. Penaluna, I have had occasion to visit the Pioneer Credit 
Recovery in my district and so I know a couple of things: one, 
the extensive training; two, the additional work that they 
require of their employees, and the fact that my own tax 
counsel who works on Ways and Means wasn't even admitted 
physically to see the site that was done for the IRS.
    Could you review some of the safeguards or the conditions 
the IRS set forth that you must meet in order to do your job 
and still meet an 18.5 percent revenue base?
    Mr. PENALUNA. Yes, sir, it basically falls into three 
areas. It is covered by staff, facilities and our systems.
    In the case of our staff, all of our staff are experienced 
employees who go through at least a 3-week training on IRS 
policies and procedures. They go through a full Federal 
security background check, fingerprinting. They actually sign 
all the forms and fall under all the same guidelines that any 
Federal IRS employee would.
    In regards to our facilities, our facilities have to be 
independent from the rest of our facility.
    In the case of our company--pardon me, sir?
    Chairman RANGEL. Could you describe the circumstances? He 
has run out of time.
    Mr. PENALUNA. The facilities is the second one, that they 
have to be secure.
    The third one are our systems; our systems have been 
authorized by the IRS and meet all of those requirements.
    All three have to be approved to be able to handle the 
contract.
    Chairman RANGEL. I thank the gentleman. The gentleman's 
time has expired.
    Mr. Blumenauer.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. I was interested, 
the 3 weeks' training in IRS procedures. I wonder, Ms. Kelley 
or Ms. Olson, if you could contrast the 3-week training on IRS 
procedures with the thousands of professionals that we have in 
the IRS now who do this in other regards.
    Ms. OLSON. I will certainly let our revenue officer, an ACS 
employee, talk about the training that she gets.
    But IRS employees every year get training on 
confidentiality, unauthorized disclosures. It is repetitive. 
Collection employees every single year get training in 
different modules that emphasize the importance of taxpayer 
rights, as opposed to 20 minutes that private collection 
agencies get on confidentiality, or 20 minutes on taxpayer 
rights and a 2-hour video that my office insisted on it being 
prepared, so that we had some assurance that the PCA employees 
understood the key nature and the unique nature of tax issues.
    Mr. BLUMENAUER. Ms. Kelley, part of what is in the back of 
my mind is what we now know to be sort of trumped up and 
overblown series of hearings that led to really eviscerating 
the IRS' capacity. A couple of isolated incidents trumped up 
and blown out of proportion as opposed to the day-in-day-out 
service that we receive.
    Could you help us get the context here of what the people 
you represent, the professionalism and how it relates to some 
of what we have heard here today?
    Ms. KELLEY. Sure. The employees that do this work on the 
telephone, the same kind of work turned over to the PCAs, I 
believe their training program is an 8-week classroom training 
and 3 weeks of on-the-job training. Liz could speak a little 
more to that.
    In addition to these annual trainings around taxpayer 
rights, which is, first and foremost, as important as 
collecting the taxes to IRS employees--and their job, also--the 
training also goes to what I mentioned in my testimony, that 
this is hopefully not about a taxpayer having a tax debt year 
after year. The employees who do this collection work in the 
IRS work with the taxpayer to help them be a compliant taxpayer 
in the future--to educate them, to give them information, to 
answer questions, to help put them on a track to get off of the 
list of delinquent taxpayers. That is part of what all of this 
training and the obligation of IRS employees is about.
    Mr. BLUMENAUER. Thank you.
    I am also interested in the notion of the return to the 
taxpayer. There is nothing inherent--I appreciate, Ms. Olson, 
in your testimony and also, Ms. Kelley, in what you very 
extensively put forth, there are alternatives to raise not just 
this money, but far more money if we are willing to make the 
investment; and that there are actually strategies that we 
could undertake that would be in compliance with our sometimes 
perverse budgetary rules that end up costing money to save 
money.
    But there are techniques that would end up having a much 
greater rate of return. Would either of you just comment on 
that?
    Ms. OLSON. Well, in my annual report this year I discussed 
IRS' collection strategy and critiqued it rather, I believe, 
thoroughly to point out that there are many things that the IRS 
could do with the resources that it has right now for us to be 
able to touch the taxpayers that the PCAs are working on, as 
well as doing other work.
    I think we need to make more outbound calls. We need to use 
greater resources to locate taxpayers. We don't do half of what 
we could do to find taxpayers and send letters to them.
    Mr. BLUMENAUER. My time is up. There are others who have 
waited patiently.
    Mr. Chairman, I am intrigued with the testimony that we 
have received here, that there are discrete, concrete steps 
that we can take to make sure that we are collecting all of the 
money that is talked about here and far more at far less cost 
to the taxpayer. I would look forward to working with you and 
the staff to find mechanisms that we could use, without falling 
prey to our budget rules, to be able to give these folks the 
tools they need to help our taxpayers and get the money that 
the Treasury is owed.
    Thank you very much.
    Chairman RANGEL. Mr. Brown, do you think we could have a 
moratorium on new contracts until the Committee and your staff 
have an opportunity to try to perfect some of the problems that 
we are having with these contracts?
    Mr. BROWN. The contract is set to expire next March, if we 
don't take steps very soon to put this out for bids. Our plan 
is to put it out for bids in June and to award contracts in 
October.
    Chairman RANGEL. How can we try to improve what is going on 
here, rather than have us legislate, which I think would be 
costly if we had to do that; can't we work out something?
    Mr. BROWN. I think the ranking member has made a suggestion 
which I find persuasive. One of the problems in the 
authentication process is that the debt collectors can't say 
that they are calling on behalf of the Internal Revenue 
Service.
    Chairman RANGEL. I am talking about the new bids out there. 
What happens if you delay them?
    Mr. BROWN. The program will terminate in March.
    Chairman RANGEL. We have to talk. Because we don't want to 
superimpose our judgment on you, but we have to find some way 
that we can work together rather than just legislate that you 
don't do it.
    So, let's see what we can do after the hearings and see if 
we can work out something.
    Mr. Doggett.
    Mr. DOGGETT. Thank you, Mr. Chairman. While the focus this 
morning is appropriately on debt collection, the overall theme 
is the privatization of primary functions of the Internal 
Revenue Service. Commissioner Brown, I would like to explore 
with you one of the other areas that, for the first time in 
history, appears to have been outsourced by the Service; and 
that is, IRS noticed 2007-17 concerning real estate mortgage 
investments and the decision of the Internal Revenue Service to 
turn over to those accountants and lawyers, whose job is to 
minimize taxes paid by their clients and avoid as many taxes as 
possible, the job of preparing the first draft of the 
regulations that the Internal Revenue Service would promulgate.
    Are you familiar with that?
    Mr. BROWN. I am.
    Mr. DOGGETT. You set an April 30th deadline.
    First--while IRS has, of course, hired technical experts to 
provide advice in the past, this is the first time in the 
history of the Service where you have actually said what some 
might characterize as asking, not the fox to guard the hen 
house, but the fox to design the hen house, and draw up the 
regulations for these complex real estate transactions.
    Mr. BROWN. Our chief counsel actually is here, and this 
resides in the chief counsel's organization.
    Mr. DOGGETT. I am glad for him to respond as well.
    Mr. BROWN. Let me start. I think the analogy is not apt. 
What we are talking about here is getting input from people who 
are affected by the guidance.
    Mr. DOGGETT. Well, you have had a mechanism to do that 
since the Service was first formed, the same mechanism that is 
available to every Federal agency to post its proposed 
regulations, proceed with rulemaking under the Administrative 
Procedure Act, and get comments from all affected, don't you?
    Mr. BROWN. That is correct.
    Mr. DOGGETT. So, it is highly unusual, indeed historic for 
the Commission to say, well, what we really need to do is just 
ask these tax lawyers and accountants to draw up the 
regulation.
    Mr. BROWN. They are not actually going to draw up the 
regulation.
    Mr. DOGGETT. They are going to make proposals and first 
drafts, aren't they?
    Mr. BROWN. As they do now.
    Mr. DOGGETT. They offer comments after the IRS has proposed 
a first draft?
    Mr. BROWN. No, the process works a little bit differently.
    When we announce in a published guidance plan that we are 
going to be taking a look at something, a lot of people start 
to write in right then.
    Mr. DOGGETT. Well, of course. Indeed, a tax practitioner at 
the local level, not someone here in Washington, can offer a 
suggestion at any point to the Service for a regulation that 
they are either contemplating or not contemplating. I suppose; 
isn't that right?
    Mr. BROWN. That is correct.
    Mr. DOGGETT. But it is unusual to announce you are working 
in a particular area without proposing the regulation and 
inviting those who are regulated, and their attorneys and 
accountants, to propose the regulation.
    Mr. BROWN. Well, I think we generally tend to hear from the 
people who are most interested in the subject.
    Mr. DOGGETT. Undoubtedly.
    Mr. BROWN. We typically hear from them very quickly.
    Mr. DOGGETT. In this case you asked them to start the 
process.
    Mr. BROWN. In a select number of instances.
    Mr. DOGGETT. In fact, it is called a pilot program; and my 
concern is, if this pilot works like most pilots in government, 
the idea is to turn over the job of preparing the first draft 
of regulations in other complex tax areas that have been the 
subject of tax shelters and tax avoidance in the past to the 
private sectors.
    Mr. BROWN. There are no such plans, but we would be happy 
to come up and give a full briefing and have the chief counsel 
come up and explain exactly what is contemplated here.
    Mr. DOGGETT. You mean, if you are not satisfied with this 
process, you don't plan to ever use it again, even though you 
are satisfied with it?
    Mr. BROWN. No. Generally, the whole point of a pilot is to 
see if it works.
    Mr. DOGGETT. That is my concern, that if IRS, with its move 
to privatization of primary functions, decides that this one 
works, that we will see it in other areas that have been the 
subject of tax avoidance.
    Do you agree with the comments that were made by the 
various experts that were quoted in the New York Times that 
there is an advantage to be had if you drew the regulation 
initially, if you offered the draft that the Service accepts?
    Mr. BROWN. No, I don't agree with that. If in the end, we 
get all kinds of submissions from the private sector and from 
government entities about things we are talking about issuing 
guidance in. Some of them are quite persuasive;others quite 
frankly, are not worth the paper they are printed on.
    Mr. DOGGETT. What has happened in the process since April 
30th, I believe when the proposals were to be submitted? What 
is the plan now for how you are going to proceed on this?
    Mr. BROWN. We have gotten three responses. We are 
evaluating them right now, and we are making sure this process 
is as transparent as possible.
    Chairman RANGEL. The time of the gentleman has expired.
    Mr. Linder.
    Mr. LINDER. Thank you, Mr. Chairman.
    Mr. Penaluna, Ms. Benoit, after 1 minute in the phone call, 
told the taxpayer that he understood and she would mark up his 
chart. He kept her on the phone for the next 4 or 5 minutes.
    If you were making a call, wouldn't you get suspicious 
about that call?
    Mr. PENALUNA. Yes, sir.
    Mr. LINDER. Don't you think she was suspicious she was 
being taped?
    Mr. PENALUNA. We tape all of our phone calls. None of our 
employees have a suspicion they are being taped; they know they 
are being taped.
    Mr. LINDER. That tape was coming from the taxpayer, wasn't 
it?
    Mr. PENALUNA. That tape came from us.
    Mr. LINDER. Ms. Olson, you said that you get 20 to 1 return 
on every dollar. Ms. Kelley said it was 13 to 1. Which is 
correct?
    Ms. OLSON. Mr. Brown actually said 13 to 1.
    Mr. LINDER. Ms. Kelley did, too.
    Ms. OLSON. Okay. Their number is based on startup costs 
that came from IRS research. Our data came from actual data 
from the IRS for the ACS program. A GS-8, step 5, ACS; that is, 
the midgrade of the step of the GS-8 level is about----
    Mr. LINDER. Thank you. You have been quite concerned about 
this sample script that inserted the phrase ``psychological 
pause.'' What if the script said ``wait for an answer?''
    Ms. OLSON. If it said ``wait for an answer'' and it did not 
say ``the next person who speaks loses,'' it might not raise 
concerns.
    Mr. LINDER. What is the difference?
    Ms. OLSON. When your message is saying the next person who 
speaks loses, you have turned debt collection into a game, and 
it is a power play.
    Mr. LINDER. Having been collected for debt myself and 
audited, it wasn't a game to me, but it was pretty brutal for a 
no-change audit. You are expressing your concerns about 
security breaches on behalf of the taxpayer that you advocate 
for. But you did not express any concerns about the 490 
computers that disappeared from the IRS, 44 percent of which 
had unencrypted sensitive data, including taxpayer data.
    Ms. OLSON. Sir, that is not correct. I do express concerns 
about that. I have sent messages out to my own employees, if 
they have a laptop, how they are to take care of their laptop.
    Mr. LINDER. Did any of those computers come from your 
employees?
    Ms. OLSON. I believe some of them may have.
    Mr. LINDER. Ms. Kelley, you represent the union; is that 
correct?
    Ms. KELLEY. Yes, I do.
    Mr. LINDER. During the past year, over 100 IRS employees 
have been removed, resigned, or retired because they either 
failed to file their tax returns or they understated their 
Federal tax liability.
    Do you have any comparable statistics for private 
collection employees?
    Ms. KELLEY. I don't, because that number is not available.
    That number is collected on Federal employees and on 
congressional staff as well, actually.
    Mr. LINDER. Does that concern you?
    Ms. KELLEY. Well, it concerns me for a number of different 
reasons than probably what you would suggest.
    First, I think everyone should pay their taxes and I think 
that IRS employees know that they are held to a higher 
standard. No other employee in the public or private sector 
will lose their job for not paying their taxes or paying them 
on time. They are held to a higher standard.
    But I also know that many of those employees who were fired 
are employees who do not do tax compliance work for the--they 
are clerical or administrative.
    Mr. LINDER. Thank you.
    Ms. Kelley, is it true--I want to get to Mr. Blumenauer's 
concern about return to taxpayers. Isn't it true there are 300 
full-time equivalent employees who are paid by the IRS to do 
work for the National Treasury Employees Union? When you 
include the value of the benefits, the cost to the taxpayers is 
about 150,000 per.
    If your ratio of 13 to 1 is correct, that opportunity cost 
is about $585 million a year. Does that concern you?
    Ms. KELLEY. I have not done the math, as you have done 
them, and it does not concern me.
    Here is what does concern me.
    Mr. LINDER. The taxpayers are paying to support and run 
your union and do the work for you, and----
    Ms. KELLEY. Taxpayers are not paying to run our union, with 
all due respect. We have a statutory responsibility and 
obligation to represent the employees who elected the union. 
That is in statute. It recognizes that that is good for the 
country and good for the agency.
    Management approves all the time that is spend on NTEU 
business by NTEU representatives. So, if there are issues, they 
have a right to deal with those; and we have the right to be 
accountable, and we are.
    Mr. LINDER. Thank you.
    Chairman RANGEL. Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    Mr. Chairman, I am very much disturbed by the Pioneer 
Credit Recovery sheet, for those who are making the calls for 
private collection. If I go down to the middle of the 
questionnaire after--once all the information is obtained, the 
following is written: ``Okay''--the taxpayer's name--'' based 
on the information you provide me, it appears you may be able 
to borrow the money to pay this past-due obligation.''
    Then, ``Instruction: Give the taxpayer some ideas on how to 
borrow. Use the information from the financial statement.''
    Before I ask my question of you, Mr. Penaluna, I want to 
ask a question of Ms. Olson.
    Ms. Olson, isn't it true that the IRS employee is trained 
to give counseling to the taxpayer, to find out what the cause 
of the problem is so that it does not occur in the future?
    Ms. OLSON. Yes.
    Mr. PASCRELL. Now, why is that done specifically, do you 
think?
    Ms. OLSON. Because we are the government and we want 
taxpayers to continue to be in compliance. Having a taxpayer in 
compliance is the cheapest way to address a problem. It is 
ongoing if they become incompliant.
    Mr. PASCRELL. We have concluded from what many of you have 
said on the panel that the IRS can do it cheaper and we have 
also concluded that the IRS needs more resources to do its job.
    Ms. OLSON. Yes.
    Mr. PASCRELL. If you had more resources, it still would be 
cheaper and the return would be greater; is that correct?
    Ms. OLSON. Yes, it is.
    Mr. PASCRELL. Mr. Penaluna, I want you to give me your 
impression of what I read from the form of Pioneer Credit 
Recovery. I want you to tell me how that struck you, or if it 
did at all.
    Mr. PENALUNA. First of all, that is not our company's form.
    But my response to that is, most of these taxpayers that we 
can authenticate usually have some kind of financial problems 
to begin with. So, we try to work with them to offer them 
possibilities of how they could pay their tax debt.
    Mr. PASCRELL. You are also in the business of not only 
working for the IRS; you are a private contractor. But are you 
also in the business of providing the possibility in many 
areas--because you go through a number of these in this 
particular form that I am looking at--of how you might borrow 
your money, sir or miss, in order for you to pay or begin to 
pay your debt to the Federal Government; is that correct?
    Mr. PENALUNA. Amongst other things, yes.
    Mr. PASCRELL. There is the possibility you will loan them 
money to pay this off?
    Mr. PENALUNA. We do not loan them the money. We provide 
them with financial resources.
    Mr. PASCRELL. That is correct. That is correct.
    Now, from the Committee's investigation of the private 
firms that have been contracted by IRS, they have concluded 
that the Private Debt Collection Program targets low-income 
taxpayers. They did not dream this up. The IRS claims it does 
not know the income levels of taxpayer cases sent to private 
collectors. That is what their claim is.
    [12:29 p.m.]
    Mr. PASCRELL. However, planning data which the Committee is 
investigating indicates that 70 percent of the taxpayers had 
incomes of $50,000 or less. I put the two things together and 
it would seem, I would conclude, that we are placing the 
collectors in a very particular position, maybe a procuring 
position. I mean, not only trying to get the dollars that are 
owed to the Federal Government, but also to loan the taxpayer 
the money to pay it off at whatever interest. I am sure they 
are not going to do it for nothing, are they Mr. Penaluna?
    Mr. PENALUNA. I would not imagine.
    Mr. PASCRELL. Thank you. I want to go on now, if I may.
    What costs, Ms. Olson, is the IRS incurring as a result of 
transferring this work over to the private collection agencies? 
Monitoring their progress, including the lost opportunity, of 
course, the cost of employees working with the collection 
agencies instead of collecting taxes, what is the cost to the 
IRS?
    Ms. OLSON. The IRS has said it is $71 million.
    Chairman RANGEL. Yes, could you submit that answer in 
writing to Mr. Pascrell?
    [The information is being maintained in the Committee 
files.]
    Mr. Pomeroy, please.
    Mr. POMEROY. Thank you, Mr. Chairman. I will follow up 
immediately on the questioning offered--or the line of 
questioning being pursued by Mr. Pascrell.
    Ms. Olson, would you provide the number? The question was, 
how much does this cost the IRS to get this going? Your answer?
    Ms. OLSON. It is $71 million through fiscal year 2007, the 
IRS projects.
    Mr. POMEROY. Seventy-one million dollars. I would like to 
introduce into the Committee record testimony elicited at a 
hearing 4 years almost to the day, May 13, 2003, before the 
Oversight Committee. As this concept was being rolled out in 
this particular hearing, you have then-Commissioner Everson, 
who testified to our Committee: My understanding is that this 
would require an additional incremental investment now, 
something $10 to $15 million to develop a system because we 
would have to work very carefully with the PCAs in terms of the 
data they would gather.
    I want us to contemplate, we thought this was going to cost 
us $10 to $15 million, commissioner's testimony. We have now 
spent $71 million. I suggested at the time that going through 
private contractors as opposed to staff employees, this was 
like building the $600 toilet seat in debt collection, the most 
expensive, least efficient way to do it. Certainly having a 
startup figure come in, a multiple of what was advertised by 
the Commission, would certainly raise some question about this 
whole thing. So, let's look at what we are netting, all right, 
how much are we bringing in? Commissioner, how much are we 
bringing in?
    Mr. BROWN. Over the next 10 years it will be $1.5 to $2.2 
billion.
    Mr. POMEROY. That is not what I asked you. How much are we 
bringing in so far?
    Mr. BROWN. Approximately $20 million a year to date.
    Mr. POMEROY. Seventy-one million dollars out, $20 million 
in.
    Mr. BROWN. We would note the program will break even next 
spring and be profitable.
    Mr. POMEROY. The program will break even next spring. We 
are going to lose money on this darn thing for a couple of 
years, and then we may make a little in the outyears, although 
your projections so far haven't been worth a heck of a lot to 
this Committee on this matter.
    Commissioner, do you have any notion of what we might have 
received if we had taken that $71 million and instead of taking 
it from the IRS, from public resources to private vendors, what 
we would have done if we had staffed up and gone after this 
owed debt? Do you have any estimate in terms of what $71 
million additional resources would have brought you if invested 
clearly in the investment side?
    Mr. BROWN. Well, I can just point to returns on investment 
generally from our ACS program, and generally the return on 
investment would be about 13 to 1.
    Mr. POMEROY. 13 to 1.
    Mr. BROWN. I have to point out that the returns are 
different because of the tools that we have.
    Mr. POMEROY. Right. The tools you have are better.
    Mr. BROWN. Our tools, yes.
    Mr. POMEROY. I will introduce into the record additionally 
the envelopes used by some of your private collection agencies 
that are supposed to trigger this taxpayer response. In the 
corner of one, it says 131 Tower Park, Suite 100, PO Box 1800 
Waterloo, Iowa. Is that your return address there, Mr. 
Penaluna?
    [The information is being maintained in the Committee 
files.]
    Mr. PENALUNA. Yes, sir.
    Mr. POMEROY. On another one, another contractor, apparently 
P.O. Box 50, Perry, New York. They are in plain envelopes as 
the record will show. I will tell you what; either one of these 
come to my house, it would end up in the garbage can. I would 
figure it would be some unwanted credit card solicitation or 
something. I would just ask the IRS collection representative 
from Buffalo, now when you send out a letter, what does the 
envelope look like?
    Ms. PARAY. It is an official Internal Revenue Service 
envelope.
    Mr. POMEROY. An IRS envelope?
    Ms. PARAY. Yes.
    Mr. POMEROY. Then that is followed up with a call where the 
caller identifies themselves from the IRS?
    Ms. PARAY. Yes, sir.
    Mr. POMEROY. Commissioner, back to your point, when you 
talk about the tools available to the service, pound for pound, 
the service is going to collect more dollars if you are doing 
it with an in-house employee versus an outsourced employee.
    Mr. BROWN. Yes.
    Mr. POMEROY. In fact, having spent $71 to make $20, well, 
that is not nearly a 13-to-1 ratio. Now, let's talk about----
    Mr. BROWN. This program will be 4 to 1.
    Mr. POMEROY. This program hopefully will be 4 to 1.
    Mr. BROWN. That is correct.
    Mr. POMEROY. Although I would say the only 4 to 1 ratio I 
am aware of so far is that it costs four times what the 
commissioner advertised, what he testified here. That is the 4 
to 1 ratio I see. You have got a commissioner who said it would 
cost $13 million. It costs $71 million to get up and running, 
and so far we haven't even brought in $20. This is a loser.
    What we ought to do is recognize the 10-year score 
repealing this program contemplates that all of the investment 
made is going to go away from collection. Well, if--we would 
turn this to a positive score in a heck of a hurry if we ditch 
4-to-1 private collection and go to 13-to-1 public collection. 
If there is anything inherently governmental, it is the 
collection of revenues necessary to sustain the government. 
This runaway ideology we have to outsource everything the 
government does is costing taxpayers a lot of money to enrich a 
few private bill collectors, while subjecting taxpayers to 
private bill collectors on what ought to be a government 
responsibility.
    Thank you, Mr. Chairman. I yield back.
    Chairman RANGEL. Thank you. Mr. Van Hollen.
    Mr. VAN HOLLEN. Thank you, Mr. Chairman.
    At this point in the hearing, obviously a lot of territory 
has been plowed. So I am not going to go into great detail on a 
number of issues, and try to get back to sort of the basic 
framework you started with with the opening statement of the 
Chairman.
    I would say, Mr. Brown, you pointed out that this was as a 
result of a congressional initiative. Just for the record, this 
was a provision that was tucked into a bill, hundreds of pages 
long originally, a number of years ago called the American Jobs 
Creation Act. It was rushed through the House without Members 
having an opportunity to vote up or down on this particular 
provision. In fact, the one time the House did have a chance to 
vote on this provision was when I joined with my colleague, 
Congresswoman Shelley Moore Capito, and offered an amendment to 
the Treasury appropriations bill to deny funding for this 
program. It was actually accepted on a voice vote by both the 
Republican floor leader and the Democratic floor leader.
    So, the one time that the Congress--the House has gone on 
record on this particular issue has been in opposition to this 
particular program.
    Now let me just ask--go back to the big picture. I think 
the testimony has been undisputed, Mr. Brown, that you agreed 
with the statements made by your predecessor, Mr. Everson, 
which is that this could be done more efficiently -this tax 
collection could be done more efficiently by the IRS if you are 
given the resources; is that not right?
    Mr. BROWN. Yes. I would hasten, we would not put our next 
dollar on this slice of work. We would work on more complex 
cases, higher-priority cases.
    Mr. VAN HOLLEN. Which could potentially collect more money 
for the taxpayer.
    Mr. BROWN. That is correct. But I would ignore this slice.
    Mr. VAN HOLLEN. Right. But, were you given the resources to 
do it, you agree with your predecessor that you could do it 
more efficiently; is that right?
    Mr. BROWN. Yes.
    Mr. VAN HOLLEN. I heard on both sides of the aisle one of 
the principles of our tax collection should be the efficient 
collection of taxes for the American people. Wouldn't you agree 
that that should be one of the priorities?
    Mr. BROWN. We strive for that every day.
    Mr. VAN HOLLEN. Okay. Is there anybody on this panel who 
contests the fact, the testimony of Mr. Brown and his 
predecessor, that giving the IRS resources to have these taxes 
be collected is not the most efficient way?
    Okay. So, I would assume that putting aside your hats as 
representatives of different--but just as taxpayers, you would 
agree, I think everybody, that the American taxpayer gets the 
best return if the IRS is given the resources to collect this 
money; is that not right?
    Mr. BROWN. I agree with that.
    Mr. VAN HOLLEN. It seems to me the other theme here, in 
addition to efficiency, is fairness. We want a system that is 
both efficient and we want a system of collection that is fair.
    I go back to another bill that Congress passed in the 1990s 
regarding tax collection that was mentioned in the Chairman's 
opening statement, that IRS agents are prohibited by law from 
being compensated based on the amount they collect. Is that not 
right?
    Mr. BROWN. That is correct.
    Mr. VAN HOLLEN. Now, I understand that in the contracts of 
the private debt collectors, the individuals do not get 
particular bonuses based on the amount they collect. But there 
is no doubt, right, Mr. Penaluna, that the return, the profit 
to the company, is obviously based on the amount you collect. 
Is that not right?
    Mr. PENALUNA. That is correct.
    Mr. VAN HOLLEN. As I understand the contracts, of the 
amounts that you collect, is it 25 percent that you are allowed 
to keep?
    Mr. PENALUNA. It varies between 21 and 24 percent.
    Mr. VAN HOLLEN. Okay. So, out of every dollar you collect 
through this process for the public, you get to keep between 21 
and 24 cents; is that right?
    Mr. PENALUNA. Well, there are certain accounts that are 
noncommissionable that we get a zero fee for. But generally 
speaking, the ones we do get fees for are between 21 and 24 
percent.
    Mr. VAN HOLLEN. It is natural--I think anybody in the 
country would expect a for-profit company to try to maximize 
their profits. But there does seem to be a tension here, 
because the extent to which the company makes or does not make 
a profit is obviously based on the amount collected. The reason 
we have in place all these protections for the taxpayers is to 
prevent overly aggressive collection tactics.
    Let me just close with this question for Ms. Olson. I want 
to commend you for your work on this because it goes to the 
training issue of employees. Because, clearly, the more 
training people have in terms of the fair practices, the better 
off our constituents will be and the American taxpayers will 
be.
    In your report you mention the fact that the private debt 
collection employees receive limited training and also 
experience high turnover. Can you talk about that and the 
impact you think that has on the fair collection of these----
    Ms. OLSON. What we found was that among the collectors 
themselves, or the collectors/tax specialist, whatever they 
called them, that there was a turnover of 20 to 50 percent. So 
that means that if you get, you know, you don't--you are not on 
the job long enough to understand that tax debts are different 
from other debts; how you need to work with taxpayers; or 
really have reinforced--get second rounds of training. You just 
have one shot of training. You are on the contract for a short 
period of time, and then you are off again.
    That is so different from IRS employees, where over 77 
percent of IRS employees in ACS have been there for--or CSRs 
rather--the people who can do installment agreements or the 
equivalent to the PCAs have been on the job for over a year and 
have gotten duplicate training.
    Mr. VAN HOLLEN. I thank you all. Thank you, Mr. Chairman.
    Mr. HERGER. Are we concluding?
    Chairman RANGEL. Yes, we are concluding.
    Mr. HERGER. Thank you, Mr. Chairman. I think this has been 
a very informative hearing.
    I would just like to conclude just with what I have heard 
is what our goal is here. Our goal is we have a tax gap. We 
have people who are not paying their taxes after being--
receiving multiple notices from the IRS. We are looking at a 
way to try to bring some of that in to help reduce the burden 
on all the--the vast majority of all taxpayers who are paying 
their taxes. I think it behooves us to look at anything we can 
to make this work.
    It seems to me that as a pilot program we want to ensure 
that we give this enough time to see if it can work. We are 
basically taking those who aren't paying and allowing at least 
the private sector, being supervised in a proper way after 
making mistakes, we need to correct those mistakes; that we 
need to be, I believe, doing whatever we can in a judicious, 
fair way to get this money in. So, I personally would like to 
see this program continued long enough to see whether indeed it 
will work or won't work.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you. Let me thank Mr. Van Hollen and 
John Lewis and the staff for the excellent job they have done 
in focusing attention on what I consider a very serious 
problem.
    I don't know about most American taxpayers, but I think 
there is a very special relationship between the Internal 
Revenue Services and the taxpayer. I would like to be able to 
talk to my government if I have a problem in collections; say, 
can we talk? I don't want that person motivated by how much 
money the private company can get. I want that person and only 
that person to have all of my personal records there to 
understand the ups and downs I have had, how much I owed, what 
I have tried to do, and to be my friend, because they too are 
being paid by the U.S. Government.
    Whenever I have complaints--and I have many, coming from 
taxpayers--I tell them go to the Internal Revenue, they are 
there to help you. I find it very very difficult, no matter 
what their motivation is, to send them to somebody whose profit 
margin is going to be dependent on, not whether they help the 
taxpayer but, how much money they get from the taxpayer.
    Now, it just seems to me, Mr. Brown, that if you agree with 
your predecessor that you have more resources, you have the 
information, you can do the job cheaper and more effectively. 
Going into another contract would not only be the wrong thing 
to do but would go against the testimony that we received 
today.
    So, as we conclude, is there anything that you have found 
out since you have given your testimony to Mr. Van Hollen that 
would indicate that your shop can't do a better job than what 
you are about to contract out to other people?
    Mr. BROWN. No. I stand by Commissioner Everson's testimony. 
We are more efficient at this. Again, we have more tools the 
private debt collectors don't have.
    Chairman RANGEL. I have to tell you that we are from the 
Congress and we are here to help, but we are on the same team. 
Your taxpayers are our constituents. They get annoyed. Guess 
what? We get annoyed. If there is a better way to do it, we 
don't want to tell you how to do it. We want to work with you 
and to do it.
    So, how long are these proposed contracts that you are 
thinking about putting out for bids?
    Mr. BROWN. Five-year contract, renewable annually.
    Chairman RANGEL. That is not fair. I am 76 years old. That 
is almost unfair. I will never be able to see what happened.
    Let's see whether or not we can be partners in government 
and work this thing out, so that, at the end of the day, the 
taxpayer is the winner.
    Let me thank all of you for the hard work that you put into 
this hearing. Believe me, I am not just motivated by the 
efficiency and the cost savings. I don't like debt collectors, 
period. I don't like for them to know more about my private 
business than they should. I don't like them telling me the 
things that have been going on. Yet, I will accept it from the 
Internal Revenue Service, and our tax system is based on 
voluntary compliance, are a faith and belief that the Service 
is on their side. With all due respect to the private 
collectors, they don't enjoy the same reputation.
    Let me thank all of you for your participation and I look 
forward to working with you. Mr. Brown, the quicker we get 
together the better. When do you come up for confirmation?
    Mr. BROWN. I am sorry. I am just an acting commissioner. 
You would have to address the questions about who will be the 
confirmed commissioner to the White House or to Treasury, sir.
    Chairman RANGEL. Well, I really look forward to working 
with you. Thank you.
    [Whereupon, at 12:49 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]

                                 
                     Statement of ACA International
    Thank you for providing ACA International, the Association of 
Credit and Collection Professionals (ACA), the opportunity to submit 
written comments regarding the public-private partnership between the 
Internal Revenue Service (IRS) and private collection agencies. The 
following comments are respectfully submitted in response to several 
questions raised during the recent oversight hearing and comments made 
by key lawmakers about the public-private partnership between the IRS 
and private collection agencies.
ACA International
    ACA International is an international trade organization originally 
formed in 1939 and composed of credit and collection professionals that 
provide a wide variety of accounts receivable management services. 
Headquartered in Minneapolis, Minnesota, ACA represents approximately 
6,500 company members based in more than 55 countries and includes 
credit grantors, third-party collection agencies, attorneys, and vendor 
affiliates. ACA has numerous divisions or sections accommodating the 
specific compliance and regulatory issues of its members' business 
practices.
Being a Private Debt Collector
    ACA members range in size from small businesses with a few 
employees to large, publicly held corporations. Together, ACA members 
employ in excess of 100,000 workers. These members include the very 
smallest of businesses that operate within a limited geographic range 
of a single town, city or State, and the very largest of national 
corporations doing business in every State. The majority of ACA 
members, however, are small businesses. Approximately 2,000 of the 
company members maintain fewer than 10 employees, and more than 2,500 
of the members employ fewer than 20 persons. Many of the companies are 
wholly or partially owned or operated by minorities or women. ACA 
serves members and represents the industry by developing timely 
information based on sound research and disseminating it through 
innovative education, training and communications.
    As part of the process of attempting to recover outstanding 
payments, ACA members are an extension of every community's business. 
They represent the local hardware store, the retailer down the street, 
and your family doctor and State and local Government Nationwide. Many 
are approved government services contractors and collect debt for the 
Department of Education, the U.S. Treasury and all Federal regulatory 
agencies including, most recently, the Internal Revenue Service.
    ACA members work with these businesses, government entities and 
regulatory agencies, large and small, to obtain payment for the goods 
and services received by consumers. Together collection agencies 
returned $39.3 billion to U.S. businesses in 2005, representing a 22% 
reduction in private sector bad debt.\1\ The $39.3 billion returned to 
businesses was equivalent to an average savings of $351 per American 
household, had businesses been forced to charge higher prices in the 
absence of debt recovery.\2\ Additionally, during this same period, 
collection agencies returned $693.5 million to Federal, State and local 
Governments in public sector bad debt.\3\ Even with this effective 
private collection process, each American family pays $2,200 per year 
to compensate for unpaid Federal income tax debt.\4\ Through the 
combined effort of private collection agencies, billions of dollars are 
recovered annually, returned to business and government and reinvested. 
Should the use of professional collection agencies by private business 
and Federal, State and local Government be curtailed, the economic 
viability of these businesses as well as government--and by extension--
the American economy in general, is threatened. Moreover, without the 
partnership between private business and professional collection 
agencies and the partnership between government and professional 
collection agencies, Americans will be forced to pay even more to 
compensate for uncollected debts, including tax debt.
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    \1\ ``The Value of Third-Party Debt Collection to the U.S. Economy: 
Survey and Analysis,'' PricewaterhouseCoopers, June 2006.
    \2\ Id.
    \3\ Financial Management Service, U.S. Department of Treasury, 
Fiscal Year 2005 Report to Congress on U.S. Government Receivables and 
Debt Collection Activities of Federal Agencies, March 2006.
    \4\ National Taxpayer Advocate 2006 Annual Report to Congress.
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The Fair Debt Collection Practices Act
    During the hearing, several members of Congress posed questions 
about the collection practices of the agencies that are currently 
collecting uncontested tax debt on behalf of the IRS. The questions 
pertained to the absence of return addresses on collection notice 
envelopes identifying the IRS collection agencies, the failure of the 
collection agencies who presently collect uncontested tax debt on 
behalf of the IRS to disclose their identities when communicating with 
consumers by telephone, the need for the collection agencies to 
establish the identity of the called party before discussing the 
purpose of the call and the time of day when such calls are placed to 
the indebted taxpayer. The answers to each of these questions lie 
within the text of the Fair Debt Collection Practices Act (FDCPA).\5\
---------------------------------------------------------------------------
    \5\ 15 U.S.C. Sec. Sec. 1962-1692p (2006).
---------------------------------------------------------------------------
    Although members of ACA are subject to a host of Federal and State 
laws and regulations regarding debt collection, as well as ethical 
standards and guidelines established by ACA, the premier law 
controlling the conduct and communications of third-party debt 
collectors is the FDCPA. The FDCPA was passed with the support of ACA 
in 1977, to put a stop to unfair and abusive tactics and to balance the 
playing field between those debt collectors who collect debt in an 
ethical, consumer sensitive manner and those who may engage in 
unscrupulous debt collection activities.
    This Act prohibits third-party debt collectors from engaging in 
deceptive or abusive conduct in the collection of consumer debts 
incurred for personal, family, or household purposes including tax 
debt. In order to protect a consumer's privacy, the FDCPA prohibits 
private debt collectors from disclosing the existence of debt to anyone 
other than the consumer. The statute accomplishes this by regulating 
with whom and how collectors can communicate. According to 
Sec. 1692c(b) of the FDCPA, without consumer consent, ``a debt 
collector may not communicate, in connection with the collection of any 
debt, with any person other than the consumer, his attorney, a consumer 
reporting agency if otherwise permitted by law, the creditor, the 
attorney of the creditor, or the attorney of the debt collector.'' By 
definition, a consumer includes the consumer's spouse, parent (if 
consumer is a minor), guardian, executor or administrator.\6\ The 
disclosure of the existence of a debt to anyone other than the consumer 
who is obligated to pay the debt is a serious violation of the FDCPA. 
For the private collection agencies participating in the IRS's tax 
collection program, this means they cannot disclose they are calling on 
behalf of the IRS until they have verified they are speaking with the 
consumer or another permissible third party.
---------------------------------------------------------------------------
    \6\ 15 U.S.C. Sec. 1692c(d) (2006).
---------------------------------------------------------------------------
    Further, a debt collector is prohibited from communicating with 
consumers by mail using postcards or envelopes with language or symbols 
that disclose the letter is from a debt collector and, by extension, 
the possible existence of debt.\7\ To ensure compliance with this 
section of the FDCPA, all written communications from the private 
collection agencies must be approved by the IRS prior to use.
---------------------------------------------------------------------------
    \7\ 15 U.S.C. Sec. 1692f(7)-(8) (2006).
---------------------------------------------------------------------------
    The FDCPA also prohibits debt collectors from contacting consumers 
at inconvenient hours. They may only contact consumers between the 
hours of 8:00 a.m. and 9:00 p.m.\8\ They may not subject consumers to 
repeated telephone calls with the intent to harass.\9\ Debt collectors 
may not threaten legal action or any other remedy available at law that 
is not actually authorized and contemplated.\10\ Finally, under the 
FDCPA, third-party debt collectors must adhere to strict requirements 
concerning consumer disputes and validate debts as required by law.\11\
---------------------------------------------------------------------------
    \8\ 15 U.S.C. Sec. 1692c(a)(1) (2006).
    \9\ 15 U.S.C. Sec. 1692d(5) (2006).
    \10\ 15 U.S.C. Sec. 1692e(5) (2006).
    \11\ 15 U.S.C. Sec. 1692g (2006).
---------------------------------------------------------------------------
    Of noteworthy importance to this body's understanding of the FDCPA, 
is the fact the FDCPA is a strict liability statute. Even the most 
arguably minor infraction of the FDCPA entitles the injured consumer to 
act as a private attorney general and initiate legal action against the 
debt collector.\12\ This consumer right is preeminent. It exists 
regardless of the severity of the alleged violation or the intention of 
the debt collector. If successful, a consumer/plaintiff shall be 
entitled to his or her actual damages, statutory damages up to and 
including $1000 and attorney's fees and costs.\13\ But when enacting 
the FDCPA, Congress also recognized that even the most well-
intentioned, conscientious, professional debt collector is fallible. In 
order to balance the severe penalties that may be imposed by a court of 
law on the debt collector who violates this strict liability statute, 
Congress provided debt collectors with a defense to an action alleging 
an FDCPA violation known as the bona fide error defense. The bona fide 
error defense provides the debt collector /defendant with the 
opportunity to show the court that the alleged violation occurred 
notwithstanding the fact the debt collector maintained reasonable 
procedures likely to prevent such violation of the FDCPA from 
occurring.\14\ It is within this complex legal framework that debt 
collectors must operate, including those agencies that collect past 
due, uncontested Federal income tax.
---------------------------------------------------------------------------
    \12\ 15 U.S.C. Sec. 1692k (2006).
    \13\ 15 U.S.C. Sec. 1692k(a) (2006).
    \14\ 15 U.S.C. Sec. 1692k(c) (2006).
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Understanding the IRS-Private Collection Agency Relationship
    Collection agencies, by definition, are the agents of their 
principals. They function on behalf of their clients, including their 
government clients, and do not act independently or without oversight. 
As a result, third-party debt collectors must at all times act in 
accordance with the instructions given by their client on each account 
and the terms of their contract of engagement. From time to time the 
client may ask to review a collection agency's work process (letters, 
phone calls, etc.) and set parameters as necessary to ensure the 
agency's efforts are in line with the client's goals. Therefore, under 
the IRS-private collection agency program, collection agencies are not 
only regulated by State and Federal laws and ACA, but also are 
regulated by the terms of the government's contract requirements and by 
reference, the IRS's own collection rules. In short, the private 
collection agencies collecting on behalf of the IRS are indeed the 
``agents'' of their ``principal'' and act at all times under the 
direction and control of the IRS.
    The relationship between the IRS employees and the private 
collection agencies retained under this program is symbiotic. By 
working together in a cooperative matter, the IRS employees and the 
private collection agencies will be able to meaningfully reduce the 
amount of unpaid, uncontested Federal income tax debt. The private 
collection agencies have not to date and will not in the future, 
displace IRS employees. Rather, they will be utilized by the IRS 
employees to collect the tax debt that would otherwise go uncollected 
and allow the IRS employees to focus their attention on the accounts 
that require IRS enforcement power, are subject to offer in compromise 
or are otherwise disputed by the taxpayer. As is the case in the 
private sector, the professional debt collector provides a service to 
the creditor and acts on the creditor's behalf. Private collection 
agencies do not become the creditor. So too is the case in point. The 
private collection agencies under contract with the IRS are positioned 
to provide a service to the IRS and act on its behalf. They are not 
positioned to become the IRS.
Tax Collection is NOT Tax Assessment
    Some have queried whether the use of private collection agencies to 
collect uncontested past due Federal income tax debt is an abrogation 
of the Federal Government's exclusive, constitutional power to assess 
income tax. ACA believes the assessment of Federal income tax is indeed 
an inherent function and power of the U.S. Federal Government. However, 
ACA strongly disagrees that the IRS's use of private collection 
agencies to assist in the collection of past due, uncontested tax debt 
abrogates their tax assessment and enforcement power in anyway.
    Under the existing program, the IRS's use of private collection 
agencies is nothing more than the IRS's use of any other tool to 
collect past due tax debt. Like stamps on envelopes, telecommunication 
hardware, desks, computer system software or even paper, the private 
debt collectors are tools for the IRS employees to utilize on their 
behalf. In all instances, the tax debt subject to the private debt 
collection program was previously assessed by the IRS. In all 
instances, any discrepancy or dispute involving the assessed tax debt 
was previously resolved through communications between the IRS 
employees and the taxpayer before such debt was eligible for assignment 
to the private collection agencies for servicing. In all instances, the 
private collection agencies that perform services on behalf of the IRS 
under the program are only authorized to locate taxpayers, contact 
taxpayers and request and accept payment, either in full or in 
installments from taxpayers. Should any taxpayer have a question, 
concern, complaint or problem, they are immediately directed to the 
IRS. In no such instance does the private collection agency have the 
power to negotiate the amount due or initiate enforcement action. This 
means the efforts of the private collection agencies are a mere 
complement to the efforts of the IRS employees to collect this 
uncontested tax debt. They are not replacing IRS jobs nor are they 
engaging in collection practices that could be considered ``inherently 
governmental.''
    In case this fact needs restating, the power to assess tax, 
negotiate amounts due, issue liens, seize property, garnish wages or 
initiate any other type of enforcement action remains solely with IRS 
under the program. The updated data on the taxpayer's whereabouts, as 
provided by the private collection agencies, belongs to the IRS. 
Despite the restrictions imposed by the FDCPA and the contract 
requirements of the IRS-private collection agency partnership, the 
private collection agencies performing under contract have already 
recovered $19.49 million in delinquent taxes as of April 28, 2007.\15\ 
This is a program that should be applauded by Congress, embraced by 
those taxpayers who pay their fair share and heralded as a model for 
collection of uncontested, past due tax and government debt nationwide.
---------------------------------------------------------------------------
    \15\ Statement of Kevin M. Brown, Acting Commissioner, Internal 
Revenue Service, Testimony Before the House Committee on Ways and 
Means, May 23, 2007.
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Contact Information:
    Rozanne Andersen, CAE Senior Vice President, Legal and Government 
Affairs

                                 
     Statement of American Association of People with Disabilities
    Mr. Chairman and distinguished Members of the Committee, I 
appreciate this opportunity to comment on the Internal Revenue 
Service's (IRS's) use of private debt collection companies to collect 
Federal income taxes.
    I am here today on behalf of the American Association of People 
with Disabilities (AAPD). AAPD is the largest national nonprofit cross-
disability member organization in the United States, dedicated to 
ensuring economic self-sufficiency and political empowerment for the 
more than 50 million Americans with disabilities.
    As we prepare to recognize the 17th anniversary of the Americans 
with Disability Act (ADA) this July, there is little to celebrate in 
terms of the employment opportunities available to Americans with 
disabilities. While the national unemployment rate stands at about 4.7 
percent, more than two thirds of working age disabled people in the 
U.S. are currently without a job. And the number of people with severe 
disabilities is increasing daily. Many of the men and women who have 
served their country proudly in Iraq and Afghanistan are coming home 
with severe injuries. The high number of returning disabled American 
veterans will only serve to compound this already staggeringly low 
employment rate within the disability community.
    But Mr. Chairman, let me be clear--people with disabilities do not 
want a handout. We want to help ourselves. Today, more than ever, many 
jobs can be easily and readily adapted for people with disabilities by 
means of assistive technology. Unfortunately, discrimination and 
stereotyping are still barriers to many members of this community who 
are trying to return to or enter into the workforce.
    The fact of the matter is that companies that currently have hiring 
programs for workers with disabilities have found that training and 
employment costs for those employees are offset by existing programs 
and resources including the WOTC tax credit. The small initial 
potential increase in employment costs associated with hiring persons 
with disabilities more than pays for itself over the long run in 
reduced employee turnover and lower training costs. Research shows that 
people with disabilities typically are exceptionally loyal employees, 
remaining on average nearly four times longer than their non-disabled 
counterparts.
    When Congress enacted the American Jobs Creation Act of 2004 (P.L. 
108-357), it created a unique opportunity for the Federal Government to 
stimulate creation of well-paying jobs for disabled veterans and other 
persons with severe disabilities. The Act contains provisions that 
allow for the IRS to enter into contracts with third-party debt 
collection companies in order to collect past due Federal income taxes.
    Employment at third-party debt collection agencies can translate 
into high-paying careers. These jobs pay anywhere from $25,000 to 
$150,000 a year, with most averaging $40,000. These positions also 
include health and 401(k) benefits. Individuals with significant 
disabilities who take these jobs will no longer rely as heavily on 
government benefit subsidies from SSI or DI, Medicaid and Medicare. 
This would not only help to alleviate the current low employment rate 
of persons with disabilities, it would also generate substantial 
savings.
    On January 25, 2007, Senator Ben Nelson of Nebraska introduced S. 
Amdt. 208, the Disability Preference Program for Tax Collection 
Contracts, to H.R. 2, the Minimum Wage Act of 2007. The amendment would 
require that on all Qualified Tax Collection Contracts, a minimum of 15 
percent of persons with disabilities be employed by contractors. The 
specific numerical goal would apply to aggregate employment across all 
contracts, not to individual contracts. This provision recognized that 
not all contractors may be able to meet the 35 percent standard for the 
preference, but that all contractors should be able to contribute to 
the goal of increased hiring of people with severe disabilities.
    While I understand that there is opposition, for various reasons, 
to the IRS' outsourcing program, I would ask that you consider the 
positive impact that Senator Nelson's initiative would have across the 
board. An employment initiative such as the Disability Preference 
Program would provide a much needed demonstration to government 
contracting entities that similar contracting requirements should be 
used to provide good job opportunities for disabled veterans and other 
persons with disabilities.
    Mr. Chairman, nearly 17 years ago this country made a commitment to 
the disability community by enacting the ADA. The Disability Preference 
Program will help us make good on the promise to promote equal 
employment opportunities for Americans with disabilities and will allow 
this country to honor those who have sacrificed so much on our behalf.
    Thank you for this opportunity to present my views. The AAPD 
welcomes your comments and looks forward to working with the Members of 
the Committee on behalf of the more than 50 million individuals with 
disabilities and their families.

                                 
        Statement of James Wallace, Allied International Credit
    Allied International Credit Corp., (U.S.) testified before the Ways 
and Means Subcommittee on Oversight four years ago in support of 
legislation to authorize the Internal Revenue Service to partner with 
the private sector to collect debts owed to the people of this country. 
We appreciate the opportunity to comment on the initial phase of the 
private debt collection program implementation.
    In our testimony four years ago, we noted that the substantial 
resources and private sector best practices, expertise, and experience 
brought to the table by debt collection companies would help the IRS 
increase the number of cases resolved and shorten the resolution time. 
We said, ``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.'' In fact, as 
you know, the program authorized retains enforcement actions as the 
sole purview of the IRS, with the private debt collectors locating the 
delinquent taxpayers and eliciting payments from them. If, however, 
they are unable or unwilling to pay what they owe, the debt collectors 
provide the information and intelligence gained through the contacts to 
enable IRS to determine the appropriate actions to take.
    In 2004, Congress authorized the IRS to use private collection 
agencies (PCAs) to collect back taxes from a subset of taxpayers with 
outstanding, undisputed tax liabilities. A limited implementation phase 
is underway. Administration and Congressional interest in closing the 
tax gap has only intensified since then. The tax gap has been the focus 
of hearings in both the House Ways and Means and Senate Finance 
Committees; the Administration has proposed 16 initiatives in its FY08 
Treasury budget submission to close the tax gap; and the Treasury has 
been asked to develop a more aggressive strategy for reducing the tax 
gap even further.
    While there is no single solution that will close the tax gap, the 
private collection initiative is closing cases, collecting monies owed, 
and gaining useful insights for IRS about delinquents. As we said in 
our testimony four years ago, ``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.''
    According to Acting Commissioner Kevin M. Brown, as of April 28, 
2007, PCAs collected $19.49 million in gross revenue. He also said IRS 
placed 3,973 cases with private collection agencies that have since 
been paid in full, and IRS has approved 1,467 installment agreements on 
PCA pursued cases. The IRS expects to recoup all of its costs for the 
program, including sunk costs, in April 2008. For funds allocated in FY 
2007, all costs were recouped by April 2007.
    AIC welcomes the close scrutiny of this program has received. PCAs 
should be held to the highest standards in collecting delinquent 
Federal taxes. PCAs have fared well under objective scrutiny from 
Government Accountability Office (GAO) and Treasury Inspector General 
for Tax Administration (TIGTA), and have consistently met or exceeded 
standards and expectations. Unfortunately, some of the criticism that 
has been leveled against the program is without merit or basis in fact.
    Some have claimed that it would cost the IRS three cents to collect 
a dollar in unpaid taxes, while PCAs are being paid 21 to 24 cents on 
the dollar. Data from TIGTA indicates than when measuring comparable 
costs, the cost for an IRS revenue officer to collect $1.00 in unpaid 
taxes is as high as 31 cents. Hiring more IRS revenue officers would 
involve recruiting, training, paying salaries, providing benefits and 
pension coverage, and overhead costs, such as office space, computers, 
and telephone service. Further, as IRS has experienced, dramatic 
increases in the collection workforce places a temporary drag on the 
revenue officer cadre until the new employees can be trained and 
assimilated into the workforce and become fully productive.
    Funds collected by PCAs go directly to the IRS. Because the PCAs do 
not earn anything on accounts that make payments within ten days of 
being contacted by the PCA, the effective rate for PCAs is about 18.5 
cents on the dollar, not the 25 cents on the dollar authorized by 
Congress.
    If the Congress were to appropriate more funds for collection 
enforcement, the money would not be used to collect the delinquent 
accounts that are being collected by PCAs. As then-Commissioner Mark W. 
Everson told the Oversight Subcommittee on March 20, 2007, ``It is not 
realistic to expect that the Congress is going to give the IRS an 
unlimited budget for enforcement, and if Congress provided the IRS 
additional enforcement resources, I believe those resources would be 
applied best by allocating them to more complex, higher priority cases 
that are not appropriate for PCAs.''
    Acting Commissioner Brown was even more direct, ``In other words, 
the issue is not whether the IRS or PCAs can do a better job in 
collecting this revenue. The issue is whether the revenue is collected 
by PCAs or goes uncollected. If the program ceased today, the money we 
are currently investing in the PCA program would not be reassigned to 
IRS employees who would then pursue these cases.''
    Whether you believe the return to the government is greater if the 
IRS collects these debts or if PCAs do, if the dollar is not collected, 
the return to the government is the same: zero--which is also the 
degree of deterrence exerted on delinquent or potentially delinquent 
taxpayers.
    As the initial implementation phase draws to a close, the IRS and 
the Congress will be able to build on this experience and learn how the 
program can be improved. In evaluating the program, it will be 
important to compare apples to apples and to remember that with the 
accounts turned over the PCAs, the question is not who can collect for 
less, but whether the delinquent taxes will be collected at all and 
delinquency will be deterred.

                                 
                          Statement of Rothman
    Let me begin by thanking the Committee on Ways and Means for 
allowing me to submit a statement for the record on this critical 
issue. I want to especially recognize the leadership of Chairman 
Charlie Rangel. Under the Chairman's stewardship, this Committee is 
once again protecting American taxpayers and I thank him for his great 
work.
    Mr. Chairman and members of the Committee, I have long worked on 
this issue and thank you for taking up the important matter of the 
privatization of tax collection. When the Republican-led Congress 
attached a provision onto H.R. 4520, the American Jobs Creation Act of 
2004, it allowed the IRS to hand over the tax returns of millions of 
American taxpayers to private contractors to collect delinquent taxes. 
This provision has and will continue to wreak havoc upon our tax 
collection system and under the new Democratic majority, this provision 
must be reversed.
    When debating this issue, it is important to consider the 
compensation rates of the private collection agencies selected by the 
IRS to perform the work of IRS employees. While it costs the government 
only three cents for every dollar to have an IRS employee collect 
taxes, the Bush Administration thought it was wise to authorize the 
payment of almost 25 cents for every dollar collected by a private 
contractor.
    On January 9, 2007, in her annual report to Congress, the IRS's own 
National Taxpayer Advocate Nina Olson identified the IRS' private debt 
collection initiative as one of the most serious problems facing 
taxpayers and called on Congress to repeal the IRS's authority to use 
private collection agencies to collect Federal taxes. The Advocate's 
report illustrated why the IRS' private tax collection program wastes 
taxpayer dollars, invites overly aggressive collection techniques, and 
jeopardizes the privacy of American taxpayers:
    ``The IRS' Private Debt Collection initiative is not cost 
efficient, adds unnecessary costs and burdens to taxpayers, diminishes 
the improved image of the IRS, and surrenders too many valuable 
components of our tax administration system. Therefore, Congress should 
repeal IRC Sec. 6306 and thereby terminate the Private Debt Collection 
initiative.''
    As the Committee may be aware, I offered an amendment to the Fiscal 
Year 2007 Transportation, Treasury, and Housing and Urban Development 
Appropriation bill, which received approval of the full Appropriations 
Committee, that sought to stop the IRS from proceeding with this ill-
advised tax collection scheme. Unfortunately, because the Republican-
led Congress failed to enact most of the Fiscal Year 2007 
Appropriations bills, this Amendment was not enacted into law. I ask 
now for the Committee on Ways and Means to do now what the previous 
majority failed to do, which is to stand up for taxpayers and for the 
integrity of our tax collection system.
    Again, I would like to thank Chairman Rangel for his leadership on 
this issue and for allowing me to submit this statement for the record.

                                 
                       Statement of Sierra Group
    Please accept my testimony for the record regarding the major role 
that the Disability Preference Program for Tax Collection Contracts can 
play in reversing the negative employment trend for Americans with 
Disabilities, including recently injured Veterans, through the creation 
of 1000's of well paying jobs while successfully recouping millions of 
dollars in unpaid taxes.
Background:
    U.S. Census statistics show that 10 percent of all Americans have a 
disability. Of that total, 27 million Americans have a severe 
disability that affects their ability to see, hear, walk or perform 
other functions necessary for the workplace. Assistive technology is 
enabling thousands of these individuals to work; however, the 
unemployment rate for people with disabilities remains more than eleven 
times the national rate. Seventeen years following the passage of the 
Americans with Disabilities Act, which was enacted to prohibit 
discrimination solely on the basis of disability in employment, public 
services, and public accommodations; the unemployment rate for people 
with disabilities remains at 70--80%. Additionally, more than 22,000 
men and women are returning from the Iraq war, previously employed, now 
physically disabled, and in need of a totally different way to earn a 
living.
    Assisting people with disabilities in finding and maintaining 
competitive employment is important to society. Despite the fact that a 
person's natural talent and ability can be turned into competitive work 
skills, American businesses seem to need a catalyst that will show them 
how to benefit from hiring people with disabilities. This catalyst that 
would begin to change the dire unemployment picture for these persons 
with disabilities is the Disability Preference Program for Tax 
Collection Contracts. Once enacted into law, the initiative will serve 
as a pilot program to demonstrate to business the benefits of bringing 
these men and women into the workforce, in large numbers. The 
Disability Preference Program for Tax Collection Contracts is very well 
suited to be this catalyst for several reasons, including:

      It will provide well paying jobs with health benefits and 
401(k) benefits;
      It will provide jobs that require only a high school 
education or GED which is of particular import to returning veterans 
who have become disabled
      It will provide jobs that are well suited to 
accommodations, including use of assistive technology

    In my 15 years of experience providing services for job seeking 
Americans with disabilities, and to employers who hire them, it is 
often difficult to find work that is so well suited for those with 
severe disabilities. The jobs that would be created by the Disability 
Preference Program for Tax Collection Contracts involve work from a 
desk, computer and telephone, all of which can be readily adapted for 
people with the most severe disabilities including mobility 
impairments, mild traumatic brain injury; severe vision loss and other 
impairments.
    In addition, finding jobs with sustainable wages and benefits for 
individuals with a high school diploma or GED is difficult. Of 
individuals identified as both unemployed and having a severe 
disability, nearly 50% of them have an education that has not 
culminated in a high school diploma. In fact, nearly 40% of this total 
is educated at or below the 8th grade level. The Journal of 
Rehabilitation (July/August/September 2002, volume 68, Number 9) 
addresses the need for accommodations during GED testing for adults 
with disabilities because research demonstrates that people with 
disabilities ages 15 to 20 fail to complete high school at twice the 
rate as those without disabilities (41 percent vs. 21 percent). 
Therefore, those who go on to successfully gain their GED have even 
less opportunities than their non-disabled counterparts.
    Given these facts and the opportunities offered by the proposed 
legislation, the Disability Preference Program for Tax Collection 
Contracts is a pilot program that is certain to succeed in putting 
thousands of severely disabled men and women to work in meaningful, 
well paying careers. The success of this program will serve as an 
example that can allow additional opportunities for additional 
governmental contracts to business to encourage the employment of 
people with disabilities, at good wages and with benefits.
    This ``business first'' approach provides a reason to build upon 
the numbers of employees with disabilities a business includes in its 
workforce by offering an incentive during the contracting phase, in 
order to stimulate the hiring of a large number of qualified men and 
women with disabilities into our shrinking American workforce. The need 
for this program is further evidenced by the GAO Report in 2002 that 
found low numbers of businesses routinely using the Work Opportunities 
Tax Credit (WOTC), the Disabled Access Tax Credit (DAC) and the 
Architectural Barriers Removal Deduction. This study which I 
participated in, found that many businesses were unaware of the 
programs. I and others contacted recommended that Congress take steps 
to reach out to business to educate them about existing incentives.
    I have seen first hand how leveraging assistive technology and 
training in a third party debt collection production center gives 
people with disabilities the opportunity to obtain the skills they need 
to be successful tax collectors, and provides them with solid customer 
service skills that will be transferable should they wish to move on to 
another career. Armed with this career experience, those now on the 
ranks of the unemployed will become self sufficient-taxpayers 
themselves, while acquiring valuable employment skills to use in their 
future.
    Regarding the need to create jobs that can accommodate an assistive 
technology user, the National Organization on Disability (NOD) study in 
1998 revealed that 25 percent of all people with disabilities who work 
use assistive technology. This same study also noted that 45 percent of 
those with disabilities who are unemployed stated that they would 
require assistive technology in order to become employed. Therefore, 
the Disability Preference Program for Tax Collection Contracts, as a 
pilot program, is well suited to allow this large group of people with 
severe disabilities to have a chance to work.
    The Disability Preference Program for Tax Collection Contracts 
contains a requirement that 15 percent of employees hired by 
contractors in the aggregate across all contracts, be Persons With 
Disabilities, and this requirement will result in cost savings for the 
American Taxpayer and expanded job opportunities for disabled veterans 
and other persons with disabilities. For example, in the State of 
Nebraska, in 2005, about 5700 Persons With Disabilities were served by 
vocational rehabilitative services for employment services. Of that 
number, 1800 were hired or 31 percent. Thus, of the 3900 who remain 
seeking employment in Nebraska, if only 10 percent were qualified to 
work as collectors, that would be 390 people, and these numbers do not 
include veterans with disabilities who are traditionally served by a 
separate agency.
    Nebraska's experience is replicated across the country. The U.S. 
Department of Education Rehabilitative Services Administration (RSA) 
1999 Report regarding people with disabilities who would meet the 
definition contained in the Disability Preference Program for Tax 
Collection Contracts indicates that state vocational rehabilitation 
agencies have provided services to more than 1 million individuals with 
disabilities each year from 1995 through 1999. In 1998 and 1999 they 
provided services for 1.3 million individuals and in 1999 more than 85 
percent had significant disabilities. Again, this number does not 
include those who are veterans, another group of Americans who struggle 
to find work once disabled.
    Given this data, and the reasons outlined that indicate why debt 
collection is a job that many individuals with disabilities are 
qualified and able to perform, enactment of this program would make 
important progress on America's promise to veterans and other persons 
with disabilities to provide full access to our society.
    Additionally, the Federal Government, the largest employer in the 
country, is traditionally looked to as the largest employer of people 
with disabilities. Unfortunately, at this time, the overall total of 
people with disabilities employed in our Federal Government is under 1 
percent. This number is unacceptable in light of the assistive 
technology accommodations that can be made today. The Disability 
Preference Program for Tax Collection Contracts,--in a specifically 
targeted industry--will authorize the Secretary of the Treasury to 
create the structure to hire a targeted 15 percent of the overall, 
outsourced workforce, Persons With Disabilities, and therefore serve as 
a positive model for all private sector companies as well as a 
necessary example to our Federal Agencies.
    In the last 15 years, with the improvements in technology, and 
assistive technology, The Sierra Group, Inc., has trained and assisted 
over 3,500 individuals. Sierra has an 80% success rate--success being 
defined as four years after an individual is provided with assistive 
technology or training for vocational and educational purposes, they 
are still utilizing the services provided. Every day in America, 
thousands of job seeking people with disabilities are turned away by 
businesses that have not seen the proof that these people can work. 
This travesty in unemployment must be reversed if we are to be a fully 
inclusive society that values diversity in our workforce. American 
businesses obviously need and require both a straightforward incentive 
and a successful pilot program to prompt them to recruit, hire, train, 
and accommodate workers with disabilities. Congress and the Federal 
Government have a unique opportunity to make this happen simply by 
passing the Disability Preference Program for Tax Collection Contracts.

                                 
                Statement of the Tax Fairness Coalition
    Chairman Rangel and Members of the Committee, thank you for holding 
today's hearing on the IRS' Private Debt Collection program. We 
appreciate the opportunity to share the views of the Tax Fairness 
Coalition about this program and respond to some of the concerns raised 
about this public-private partnership.
    The Tax Fairness Coalition represents a group of private collection 
agencies committed to helping the IRS close the $345 billion tax gap. 
The undisputed delinquent tax debt collected and returned to the U.S. 
Treasury can provide vital funds for government services while reducing 
the tax gap burden on the average American's tax bill.
    Members of the Tax Fairness Coalition include AllianceOne 
Receivables Management, Inc., Allied Interstate Inc., The CBE Group, 
Inc., Financial Asset Management Systems, Inc., Linebarger Goggan Blair 
& Sampson, LLP, and Pioneer Credit Recovery, Inc. The CBE Group and 
Pioneer Credit Recovery are currently participating in the limited 
implementation phase of the IRS Private Debt Collection Program. The 
Coalition is a project of ACA International, an association of 
professional collection companies.
    Since this program began in September 2006, the participating 
members of the Coalition have worked diligently to ensure that we just 
didn't meet, but exceeded the expectations of the IRS. When it comes to 
operations, we are going beyond the letter of the law and Section 6306 
of the IRS.
    Our professionalism and upfront investments in technology and 
training are paying off. To date, we have collected approximately $20 
million, earned exemplary customer satisfaction and professionalism 
scores, and have helped the IRS close the estimated $345 billion tax 
gap.
    Despite our success, some critics who do not believe this program 
should continue and expand. We obviously do not agree with their 
conclusions and appreciate this opportunity to set the record straight 
about how the program works, our successes, and answer some of the 
myths and rumors about the initiative
    This program has its origins in the American Job Creation Act of 
2004 (P.L. 108-357), which allowed the IRS to enter into contracts with 
private debt collection agencies to recover delinquent taxes of 
relatively small assessed and undisputed tax amounts. The impetus for 
the program began as Congress looked for ways to reduce the $345 
billion tax gap. This enormous sum of money--which is the difference 
between the taxes owed and what's paid--creates a $2,700 ``tax gap 
burden'' or surcharge for law-abiding taxpayers.
    The IRS reviewed the credentials of 33 companies for participation 
in the initial phase of the program. Three companies were initially 
chosen to enter into contracts that began in September 2006. This 
limited implementation phase runs through March 2008. The IRS estimates 
that between $1.5 and $2.2 billion in delinquent tax revenue could be 
collected over a 10-year period through its Private Debt Collection 
Initiative.
    This program also has a significant job creation element for the 
IRS. A portion of the funds that are collected go directly to the IRS 
to fund enforcement efforts, which may include hiring additional 
personnel. This element of the program is an area we feel the Congress 
may want to examine as a way to encourage more collection efforts at 
the IRS.
    In addition to helping close the tax gap and creating new jobs at 
the IRS, the private collection agencies working on the contract are 
operating well, affording delinquent taxpayers all rights and 
protections provided under the law, as evidenced by the following 
successful outcomes:

      Customer service satisfaction--private collectors have 
achieved 95% satisfaction ratings, while IRS personnel have received 
ratings of 63.1 percent;
      Perfect score of 100% for professionalism and 98.1% for 
regulatory and procedural accuracy;
      Secure, monitored collection processes with no instances 
of abuse, loss or fraud with taxpayer information;
      Exemplary compliance in following all laws and 
regulations governing their collections activity; and
      Positive remarks and evaluations from officials charged 
with overseeing the program, including the Treasury Inspector General 
for Tax Administration and the Government Accountability Office.

    According to a letter dated May 21, 2007 from Senator Charles 
Grassley to Treasury Secretary
    Henry Paulson, the IRS' Return on Investment (ROI) ``is about 4 to 
1'' on average--basically the same as the projected ROI for the Private 
Debt Collection program, which is estimated to be ``between 4.0 to 1 
and 4.3 to 1, once the program is in steady state.'' These new IRS 
figures are in stark contrast to past figures citing the IRS' ROI to be 
10 to 1, 20 to 1, and higher. The numbers indicate that the PCAs are a 
cost-effective solution to collecting delinquent taxes. In other words, 
the IRS estimates it spends 25 cents for every tax dollar brought in, 
while the private collection agencies earn an average ``effective 
rate'' of 17.3 cents on the dollar.
    As former IRS Commissioner Mark Everson and Secretary Paulson have 
stated in testimonies before Congressional Committees, the IRS Private 
Debt Collection program is helping to clear a backlog of cases that 
would not be touched by IRS employees, even if Congress provided 
substantial new resources to the IRS.
    The private collection agencies' record in customer service and 
compliance is further proof of the critical service and invaluable 
assistance they provide to the IRS. The private debt collection 
agencies generate funds sent directly to the IRS that go to the U.S. 
Treasury to help reduce the tax gap. Indeed, without this important 
service, the tax gap would continue to grow.
Tax Collection: Inherently Governmental?
    When the IRS Oversight Board met earlier this month to discuss the 
status of the IRS Private Debt Collection Program and the IRS FY2009 
budget it reported that, ``Overall, this program seems to be working 
well--Through this program, the IRS has found a way to reach a specific 
segment of the non-compliant taxpayer population.''
    This initiative is forward-thinking in the sense that private 
sector firms are being asked to partner with the IRS. With this in 
mind, however, it should be noted that the IRS actually lags behind 
many States and other Federal agencies that partner with the private 
sector to collect delinquent income taxes and other governmental debts 
such as non-tax delinquencies and defaulted student loans.
    State governments and agencies have been working in partnership 
with private collection agencies for more than 25 years. Forty-one 
States currently employ private collection agencies to recover 
delinquent income taxes and other government debts. Thirty-four States 
collect delinquent income taxes. Hence, collecting delinquent taxes and 
other government fines is not an inherently governmental function. 
Rather, the use of professional collection agencies who have invested 
millions of dollars in technology and training is simply an efficient 
use of taxpayer dollars. In fact, the Congressional Research Service 
has determined in an analysis conducted in 2006 that the IRS use of 
private debt collection firms is not an inherently governmental 
function due to the very limited nature of the program's scope and 
authority provided to private collection firms.
    In addition to complementing the IRS, other Federal Agencies, 
States, and localities in its own collections, private collection 
agencies have supported thousands of jobs nationwide. In 2005, private 
collection agencies employed 426,700 workers with a payroll of $15 
billion, according to the Bureau of Labor Statistics. As an industry, 
the private collection agencies returned $39.3 billion in collections 
to the U.S. economy, saving the average American household $351.
    The reality is that if the private collection agencies were not 
collecting these delinquent taxes for the IRS, no one would. There are 
millions of Americans who owe acknowledge they owe Federal income taxes 
but have not been contacted by the IRS. Often, it simply takes one 
contact to have a taxpayer send in a check to the IRS or set up a 
payment plan that's been authorized by the agency. And when they pay 
within ten days of being assigned for collection to these firms, the 
companies working on the contract receive zero compensation.
    These are not relatively large tax debts that are owed, either. 
Rather they average around $5,000 going up to about $25,000 and the 
amount owed is not in dispute. The problem is that the IRS does not--
and will not anytime soon--has the staff or the required systems to 
contact these individuals as the private collection agencies can. The 
IRS takes a pyramid approach when it comes to collections and works on 
the larger debt cases first. Those more complicated and large 
collection cases required a level of sophistication for which the IRS 
and its professional staff are best suited.
    Our efforts are complementary to the IRS. Not one single IRS 
employee has lost or will lose his or her job or be displaced because 
of this program. Indeed, this program is structured so that it could 
fund additional IRS collections positions--and without an additional 
appropriation from Congress.
    Members of the IRS Oversight Board alluded to this complementary 
effort in a recent release, noting that the IRS Private Debt Collection 
program ``helps the IRS focus its resources on more complex cases.''
    Furthermore, the IRS is authorized to use the first 25 cents of 
every dollar collected by the PCAs for enforcement efforts, including 
hiring new collection employees. Based on a previous analysis conducted 
by the Coalition, at current collection rates, about $5 million will go 
to the IRS, which could fund 33 collection positions right now at the 
IRS. Based on the $1.5 billion estimate, roughly $60 million a year 
could then be available for the IRS to fund the employment of close to 
400 new collection officers. This is based on the $150,000 average cost 
to train, provide salary, benefits, bonuses, taxes and overhead for an 
IRS function collection officer, according to data from various Federal 
Government reports, including readily available data such as GS pay 
schedules and information from the IRS Oversight Board and TIGTA.
    Clearly the benefits of this program only strengthen the IRS' own 
efforts and encourage the Federal Government to be even more innovative 
in using and leveraging its resources to collect money it is owed.
The Issue of Cost
    There has been much misinformation about whether the IRS could 
collect these delinquent taxes cheaper than private collection 
agencies. According to IRS data, the true cost of collections for the 
agency is about 25 cents on the dollar when one takes into account 
that, unlike private collection agencies, the IRS has available to them 
tools that the private sector doesn't. These tools include the ability 
to compromise accounts, issue numerous automated demand letters and 
seizure of assets--both personal property and funds in bank and 
brokerage accounts--to satisfy a tax debt. Private collection firms do 
not possess these inherently governmental tools or powers--and are only 
authorized to set up voluntary payment arrangements with delinquent 
borrowers.
    The companies participating in this initiative are actually 
recovering these tax debts at a cost of roughly 17.3 cents on the 
dollar. This ``effective rate''--or their commission--is significantly 
lower than the 25 cents authorized as part of the companies' contracts 
with the IRS. And the costs actually will continue to go down as the 
volume of cases the companies receives and handles increases.
    From a cost perspective, the program is yielding significant 
results on behalf of the American taxpayer. The IRS has turned over 
37,869 cases worth $255 million in unpaid taxes to the PCAs since the 
limited implementation phase of the program began. To date, more than 
$20 million has been collected with more than $16 million going to the 
Treasury.
    The program, as noted before, also helps fund IRS enforcement 
efforts, which could include hiring new collection personnel. So far, 
about $5 million has gone to the IRS. This is a savings multiplier for 
the American taxpayer in that delinquent taxes are collected and funds 
are provided through the program for additional enforcement efforts to 
help close the tax gap and its associated $2,700 per taxpayer burden.
Securing Taxpayer Security and Ensuring Rights
    When it comes to protecting taxpayer data and ensuring their 
rights, the private collection agencies working on this contract takes 
its responsibilities seriously. Private collection agencies abide by 
even higher standards for security and privacy than those mandated for 
government collections programs. The PCAs taking part in the PDC 
program operate in accordance with IRS rules as well as the Fair Debt 
Collection Practices Act, Fair Credit Reporting Act, and all other 
applicable Federal and State collection and privacy regulations. 
Participant company employees--from collection personnel to managers to 
information systems personnel must pass an extensive background check.
    To protect taxpayers' privacy, the IRS provides PCAs with only the 
taxpayer ID number, address, tax year, and amount of taxes owed. PCAs 
use this limited information to contact taxpayers and help them enter 
into voluntary repayment agreements. Taxpayers' tax returns, wage or 
employer information, and other sensitive taxpayer data never leave the 
IRS.
    It should be noted that PCAs do not have the authority to compel an 
individual to speak with them. Taxpayers speak with private collection 
agency representatives voluntarily. When they are contacted, taxpayers 
are informed that they may also ask to have their case referred back to 
the IRS. According to the National Taxpayer Advocate's 2006 Annual 
Report to Congress, only one-half of 1% of taxpayers contacted by PCAs 
had requested to deal directly with the IRS. Also, less than one 
quarter of 1% of those taxpayers contacted by the PCAs have filed 
complaints with the IRS. Only one complaint, which was from a company 
not currently working on the program, was found to be valid by the IRS, 
according to the IRS Oversight Board.
    In fact, the Treasury Inspector General for Tax Administration has 
singled out the program for diligently working to protect taxpayer data 
and ensure their rights. ``Overall, the IRS effectively developed and 
implemented several aspects of the Program, thus providing better 
assurance that taxpayer rights are protected and Federal tax 
information is secure,'' according to a report issued by TIGTA in March 
2007.
    The report noted that ``contractor employees were adequately 
trained, background investigations were completed, telephone call 
monitoring and oversight procedures were established, and computer and 
physical procedures were established before cases were assigned.'' 
Also, the report stated that contractors ``implemented a strong system 
of computer and physical security controls.''
    TIGTA also stated that private collection agencies were receptive 
to recommendations for contract improvements and implemented them. 
Furthermore, security concerns were addressed prior to any tax cases 
being sent to the PCAs and ``therefore, the contractors had not yet 
received Federal tax information.''
    This report clearly shows that the program is making progress 
collecting delinquent taxes in an ethical, professional, and security-
focused way. Even though the contractors already had extensive security 
and privacy measures in place, there are always areas for improvement 
and as the report notes PCAs and the IRS responded promptly and 
effectively to TIGTA's additional recommendations to ensure the service 
delivers only the most ethical and strongest integrity while exceeding 
all financial and quality service expectations.
The Program's Future
    This Committee is keenly aware of our country's fiscal situation. 
Collecting every dollar counts when it comes to being able to fund 
current Federal Government programs and meet future challenges. This is 
where Private Debt Collection program comes into play.
    Currently the program is in its limited implementation phase. It is 
a time to incorporate the lessons learned during this limited 
implementation phase and incorporate industry best practices to further 
enhance the tax collection system. When necessary improvements have 
been identified, as has been noted by independent government 
organizations, the IRS and the PCAs corrected them quickly and to the 
benefit of the taxpayer.
    As we have stated before, this program complements the efforts of 
the hard-working people at the IRS. We do not wish, nor do we want, to 
be a replacement to this agency. Use of PCAs is only part of the 
solution and we encourage Congress and the IRS to develop a 
comprehensive set to programs and tools, including the continuation of 
the PDC program, to alleviate our national tax gap. Therefore, our 
future is simply based on the overwhelming numbers of cases that are 
out there that the IRS--even if it were to hire an additional 1,000 
collection agents--would never reach. Each year it is estimated that 
$20-billion goes permanently uncollectible because of the 10-year 
statute of limitations. We want to continue working with the IRS for 
the benefit of the American taxpayer.

                                 
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