Expatriate Owl

A politically-incorrect perspective that does not necessarily tow the party line, on various matters including but not limited to taxation, academia, government and religion.

Wednesday, January 11, 2006

IRS Problem Number 4

Nina Olson, the National Taxpayer Advocate, submitted her 2005 Report to Congress on 31 December 2005. It discusses 21 of the most serious tax problems afflicting the taxpayers. They are all serious, but, without in any way negating or detracting from the gravity of the other 20, this posting will spotlight Problem Number 4, the training of the private debt collectors who will shortly be engaged by the IRS to help collect the revenue.

The American Jobs Creation Act of 2004 permits (and indeed, encourages) the IRS to engage hired guns to help collect the taxes. Conceptually simple and straightforward, but it presents several practical problems that, in my humble opinion, our congresscritters didn't fully appreciate when they enacted it into law.

Ms. Olson is concerned, quite appropriately, that the hired guns might not fully comprehend the tax laws and, in their ignorance and/or zeal, might severely compromise the taxpayers' rights. The IRS itself understands that it is a problem, but is much less cautious than Ms. Olson about the potential pitfalls of implementation.

After reading Ms. Olson's well-written analysis of Problem Number 4, my own concerns and observations, in no particular order, include (but are not limited to) the following:

1. The IRS is not liable to the taxpayer for collections contractors' acts and omissions [I.R.C. ยง 6306(d)]. This should give you pause even if you are not a rocket scientist. Even the fact that the hired guns are personally liable for their damages gives only small reassurances at best.

2. The hired gun tax collectors will be paid a percentage of what they collect. At first blush, this should present few issues. After all, almost all commercial collection agencies and collections attorneys are compensated on a percentage contingency fee basis, which gives them incentive to maximize the dollars collected for the creditor. There supposedly will be safeguards to ensure that the hired gun collectors do not violate the taxpayer' rights; indeed, they specifically are not permitted to do anything forbidden to an IRS employee on the official IRS payroll. What concerns me is the organizational cultural conflicts, because it is illegal to evaluate IRS employees based upon dollar collection results. The IRS already has problems ensuring that this rule is honored; bringing on the hired guns can only further complicate the situation.

3. [Parenthetical historical note: Under the Income Tax Act of 1862, revenue collectors were compensated on a commission basis.]

4. It has been tried before! King Louis, preoccupied has he was with his partying at Versailles, also saw fit to farm out the tax collection function to the high bidder. These private tax collectors were more abusive by far than Louis's men ever could be. The public did not take too well to those abuses, and the result was the Reign of Terror, when blood flowed in the streets of Paris, and lots of people (including Louis and Marie Antoinette) lost their heads.

5. The following recent incidents are noted:

A. Carolyn R. Harris, who was the manager of the IRS's Refund Inquiry Unit in Kansas City , was indicted for stealing refund checks and for accessing taxpayer information about her boyfriend's ex-wife.

B. IRS Revenue Officer William Koskos took bribes from the principal of the entity whose back taxes he was supposed to be collecting.

C. IRS mail clerk Shawnda E. Schmidt was indicted for stealing the taxpayer remittance checks out of the envelopes, and giving them to her brother to cash (her brother pleaded guilty for his part in the scheme). This one is particularly troubling because the checks, in all likelihood, were not timely posted to the accounts of the taxpayers involved. It is not difficult to imagine the consequences of this to the taxpayers involved.

D. IRS employee Michael Sapp illegally accessed taxpayer information and sold it to identity thieves, who then used the info to file fraudulent tax refund claims with the IRS.

E. At his retirement party, IRS Special Agent Greg Heck publicly disclosed information which should have been kept confidential regarding a criminal tax investigation.

F. Other IRS employees have pulled shtick of a similar nature.


As matters currently stand, the IRS has more than a just single isolated problem with its own boys and girls committing fraud, abusing the taxpayer rights, and other misdeeds which compromise the integrity of the tax system. If the IRS cannot control its own employees, what makes anyone think that they will be able to control the hired gun tax collectors?

Like Karl Marx's analysis of the economic systems, it may well look good on paper, but there will be some very serious -- and possibly insurmountable -- practical problems in making the system work.

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