U.S. IRS to end contracts with private tax debt collectors

WASHINGTON, March 5 (Reuters) - The U.S. Internal Revenue Service said on Thursday it will end its contracts with private debt collectors to bring in unpaid tax debts after a study found in-house collection efforts were more cost-effective.

The decision ends a controversial program started in 2006 aimed at collecting small, undisputed debts that the normal IRS collection apparatus was not well-equipped to pursue.

Democrats in the U.S. Congress have been trying to kill the program almost since its inception, raising concerns about its effectiveness and reports of taxpayer harrassment by private debt collectors.

“After a thorough review of this program, I have decided not to renew the contracts,” IRS Commissioner Doug Shulman said in a statement. “I believe this work is best done by IRS employees, and I believe we have strong support from the Administration and the Congress for increased IRS enforcement resources.”

Shulman, who was appointed to his job by the George W. Bush administration, said the IRS intends to hire over 1,000 new collection employees in this fiscal year ending Sept. 30. These new employees will provide more flexibility in deciding which debts to pursue for collection.

The independently reviewed study showed it is reasonable to conclude that when working with a similar debt inventory, IRS collection is more cost effective than using private contractors.

It found that the IRS automated collection system cost seven cents per dollar collected, while the private contractor cost was 24 cents per dollar collected. The IRS system collected 11 percent of the balance due while the private contractors collected 4 percent of the balance due from the study cases.

Shulman also said that, by law, IRS employees also have a range of options in attempting to resolve difficult collection cases that private contractors do not have.

“In these challenging economic times, I have asked all IRS employees to go the extra mile to help financially distressed taxpayers,” Shulman said.

Still, the decision drew the ire of some lawmakers, including Sen. Charles Grassley of Iowa, the top Republican on the tax-writing Senate Finance Committee.

“The administration has decided that after spending nearly a trillion dollars in the stimulus bill to keep people working across the country, they are going to cut a program that provides jobs to hundreds of people during the middle of a recession, including 60 in Iowa,” Grassley said in a statement.

“It’s hard to believe that after worrying so much about keeping people employed, the administration has chosen this route,” Grassley said.

Sen. Richard Durbin, an Illinois Democrat, applauded the decision, saying tax collection was a core goverment function.

“Until private debt collectors can prove they can do the job better, do it more efficiently and do it at a lower cost than the IRS, there is no reason we should continue this program,” he said. (Reporting by David Lawder; Editing by Kim Coghill)