GAO recommends improvements to IRS’s private debt collection program

In a February 2024 report, the U.S. Government Accountability Office (GAO) developed recommendations for the IRS to bolster the results and increase the equity of its private debt collection (PDC) program (Private Debt Collection Program: IRS Could Improve Results and Better Promote Equitable Outcomes for Taxpayers, Rep’t No. GAO-24-106140 (Feb. 6, 2024)).

Background: The IRS collects outstanding tax debts through the PDC program, which it has administered since 2017. In it, the Service employs PDC agencies to assist in the collection of inactive tax liabilities of certain taxpayers. As of 2023, the accounts of over 2 million individual taxpayers and approximately 1 million business taxpayers were assigned to the PDC program. The majority of taxpayers in both categories had a tax debt of $5,000 or less.

The IRS is legally required to assign certain cases to the PDC program, but others depend on IRS models that determine how actively to pursue these cases and by which methods. If the Service does not believe it can collect a taxpayer’s debt, it assigns it to the program unless certain exclusions apply, such as the taxpayer being under age 18 or deceased. The 2019 Taxpayer First Act, P.L. 116-25, expanded these exclusions to include taxpayers for whom reported adjusted gross income does not exceed 200% of the poverty line, as well as taxpayers whose income is mostly from Supplemental Security Income or Social Security Disability Insurance.

The IRS’s management of the PDC program includes periodically selecting private contractors and establishing procedures for collection efforts. The IRS submits an annual report to Congress on PDC activities as well as special PDC fund balances. The Treasury Inspector General for Tax Administration (TIGTA) also submits biannual reports evaluating the program’s performance, with its most recent report in 2022 finding that contractors generally follow IRS procedures and applicable debt collection laws (TIGTA Rep’t No. 2023-30-005 (Dec. 27, 2022)).

Results of review: The GAO collected information regarding the demographics of taxpayers whose debts were routed to the PDC program. It found that approximately 70% were male and 78% were between the ages of 30 and 59. However, the IRS did not have consistent information about over half of the taxpayers in the program, given that a majority did not file in a given calendar year between the start of the program and 2022. Among the data that could be gathered, the GAO found that generally over half of taxpayers reported one or more of the following: being a single filer, having an income of $50,000 or less, or having no dependents. The GAO also determined that most taxpayers in the program owed $5,000 or less, with that percentage varying between 66% and 79% throughout the program’s history for individuals and around 84% for businesses.

The GAO also identified opportunities to more efficiently use the program’s special compliance personnel fund (see also TIGTA Rep’t No. 2018-30-052 (Sept. 5, 2018)). This fund comprises up to 25% of payments collected and is used to hire collection staff known as special compliance personnel as well as pay PDC program administrative expenses. The GAO found that special compliance personnel revenue collected has exceeded special fund costs each year since fiscal year 2019. This is due to a conservative hiring approach used between 2020 and 2022 to account for several factors that decreased PDC program revenue, including the COVID-19 pandemic and a reduction from four to three private contractors in 2021. However, PDC program payments exceeded IRS projections, so the fund has seen a substantial increase in its balance.

In fiscal year 2022, special compliance personnel increased by over 350, and in fiscal year 2023, the IRS employed an average of over 700 individuals under this fund. In its report, the GAO recommends setting clear goals for this special fund balance, such as minimum and maximum reserves, usage targets, and strategies for maintaining accountability and transparency.

The GAO also noted that the IRS has not defined standards to evaluate taxpayer equity within the PDC program. Recent independent studies and IRS presentations showed potential equity disparities in audits and identified algorithmic biases as a potential source of these disparities (e.g., Elzayn et al., Measuring and Mitigating Racial Disparities in Tax Audits, Stanford Institute for Economic Policy Research (Jan. 30, 2023)). The IRS uses models and legal requirements to assign cases to the PDC program based on likelihood of recovery, but it does not take equity concerns into account. The GAO stated that the IRS cannot track progress toward meeting Treasury’s and its own broader equity goals without first outlining standards for equity in the PDC program.

Finally, the GAO found that the IRS does not adequately tailor its notices to individuals excluded from the PDC program, including victims of tax-related identity theft, individuals under 18, and individuals in certain designated combat zones. The IRS does not actively work on these cases due to the low probability of collection but reevaluates them once per year using routing models and does not close them out. The Service sends annual notices to these taxpayers; however, the notices are in “boilerplate” language that does not adequately inform them of their options, the GAO said. For example, the IRS does not use its data to encourage tax-payers to apply for offers in compromise or provide information about low-income tax clinics or Volunteer Income Tax Assistance programs. In this report, the GAO recommends developing strategies for more proactive communication for these individuals, consistent with The Taxpayer Bill of Rights (Publication 1) and the IRS’s Inflation Reduction Act Strategic Operating Plan (see also Tax Debt Collection Contracts: IRS Analysis Could Help Improve Program Results and Better Protect Taxpayers, GAO Rep’t No. GAO-19-193 (March 29, 2019); Internal Revenue Service Inflation Reduction Act Strategic Plan FY 2023–2031, IRS (Publication 3744)).

Recommendations to the IRS: The GAO report made four recommendations for the IRS, with the Service’s comments also included below:

• The IRS commissioner should create goals for the special compliance fund, including fund balance goals and/or staffing targets. The IRS agrees with this recommendation and has begun work in this vein. For example, the Service has already created a guide for the fund with a focus on fund balance and staffing goals. The IRS will also regularly monitor the fund balance and staffing.
• The IRS should create “standards for evaluating equity for taxpayers who are either assigned to or excluded from the PDC program.” This recommendation includes the IRS’s process of moving taxpayers to its inactive inventory. The IRS agrees with this recommendation and is currently working with stakeholders to develop standards to evaluate equity.
• The IRS commissioner should evaluate the Service’s performance versus its equity standards and address any issues it finds. The IRS agrees with this recommendation and is developing methods to assess its performance against the equity standards it is also developing.
• The IRS should provide “tailored taxpayer-centric information about their debts and options for resolving them” to taxpayers in the inactive inventory and those excluded from the PDC program. The IRS agrees with this recommendation and has already begun work on redesigning its annual reminder notice to these taxpayers.

■ Private Debt Collection Program: IRS Could Improve Results and Better Promote Equitable Outcomes for Taxpayers, Rep’t No. GAO-24-106140 (Feb. 6, 2024)

— Isaac Chasen is a J.D. candidate at Cornell Law School, and Thomas Godwin, CPA, CGMA, Ph.D., and John McKinley, CPA, CGMA, J.D., LL.M., are both professors of the practice in accounting and taxation in the SC Johnson College of Business, all at Cornell University. To comment on this column, contact Paul Bonner, the JofA’s tax editor.