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Private Collectors©2007

By Robert E. McKenzie

The American Jobs Creation Act, 26 U.S.C. §6306 provided that the IRS may hire private collectors to collect unpaid taxes.  Three preliminary contracts were issued by the IRS in March of 2006.  After appeals by the losing contractors the IRS began using the three selected contractors to collect taxes in September, 2006.  Bill collectors may receive up to 25% of any collections.  Congress provided certain protections in the bill by providing a new IRS §7433A allowing suits against private collectors who violate the law while attempting to collect taxes.  It also provided that the provisions of the Fair Debt Collection Practices Act apply to private collectors of federal taxes. 

  When Does it Begin:

  Private collection agencies (PCA's) began contacting taxpayers in September, 2006.  The contracted program will run on a trial basis for a year after awarded contracts with the option for another year if all goes well.  Full program implementation is planned for January, 2008.  The contractors will help the IRS collect a portion of the estimated 12 billion dollars in unpaid taxes that the IRS is unable to because of limited resources.  By law, the contractors can receive up to 25% of the money they help to collect.

Taxes To Be Collected: 

 At this time, the private contractors will only be contacting individual taxpayers to collect individual income taxes.  The contractors will not be seeking to collect employment taxes or other taxes.  Accounts with balances of less than $25,000 will be assigned to the contractors for collection.

  Authority to Grant Installment Agreements: 

 The private collection agencies (PCA's) have been granted the authority to offer installment agreements of up to 5 years by the IRS.  The IRS grants taxpayers with less than $25,000 total liabilities 5 years to pay. Therefore taxpayers naïve enough to deal with PCA's will be granted less time to pay than those who exercise their rights to have the account returned to the IRS under the provisions of the Fair Debt Collection Practices Act discussed later in this material. 

No Enforcement Powers: 

 These agencies cannot take enforcement actions, such as liens, seizures or levies, threaten or intimidate taxpayers nor can they work technical issues such as Offers-In-Compromise, tax abatements or take other any inherently governmental action.

How Will This Program Work? 

 When a taxpayer’s case has been assigned to one of these agencies, the taxpayer will receive a notification letter from both the IRS and the collection agency.  These letters will explain how the collection process works and their rights as a taxpayer throughout the process.  The letters will provide contact information for the taxpayer and will explain the various payment options available.

 Privacy Concerns: 

Many commentators have expressed concerns about protection of taxpayer privacy by the private collectors. The National Taxpayer Advocate's Report to Congress of 2005 notes that private collection employees will only receive 20 minutes of training on privacy rights.

 Privacy Rules: 

 Due to extreme sensitivity of tax data, the IRS requires all work done by contractors must be performed within the United States.  The contractors are also required to agree to purge taxpayer financial information from their IT systems once their work on a given taxpayer account is completed.  If the contractor isn't able to immediately purge this data, they are responsible for protecting that data from unauthorized inspections or disclosures. Of particular concern is the lack of quality background checks of employees of the collection agencies.  The IRS conducts individual background checks for each of its employees.  The background checks of the private collectors will not be as thorough as those performed on IRS employees.   It can be anticipated that at some point in the future some taxpayers' privacy rights will be violated by these paid bounty hunters. 

Even before the program began in September scammers began calling taxpayers pretending to be private collectors as a means of identity theft. 

Civil Damages and Other Protections: 

 To prevent unauthorized collection activities from being performed under qualified tax collection contracts IRC §7433A provides that Code §7433 civil damage provisions apply to the acts and omissions of any person who performs services under a qualified tax collection contract to the same extent, and in the same manner, as if that person were an IRS employee. Therefore when a taxpayer's rights under the Internal Revenue Code are violated she may sue for up  to $100,000 in actual economic damages for negligent violations and up to $1,000,000 for reckless or intentional violations.

Code §7433A:  The civil damages provisions apply as follows: 

1.         any civil action brought under the Code §7433 rules by reason of Code §7433A  must be brought against the person who entered into the qualified tax collection contract with IRS ("private tax collector"), and must not be brought against the U.S., 

2.         the private tax collector, and not the U.S., is the party liable for any damages and costs determined in the civil action, 

3.         the civil action is not the taxpayer's exclusive remedy against the private tax collector, and 

4.         the following Code §7433  provisions do not apply: 

·           Code §7433(c), which provides that amounts payable in an action against the U.S. under Code §7433  can only come from amount appropriated for judgments awards, etc. under 31 U.S.C. § 1304

·           Code §7433(d)(1), which requires that a taxpayer exhaust his administrative remedies within IRS before filing a Code §7433  action against the U.S.

·           Code §7433(e), which pertains to actions for violations of certain bankruptcy procedures, such as the automatic stay

Taxpayer Advocate Assistance Code §7811(g):  

In addition to the Code §7433 rules, taxpayer assistance orders apply to private tax collectors. Specifically, any order issued or action taken by the National Taxpayer Advocate under Code §7811  applies to persons performing services under a qualified tax collection contract to the same extent and in the same manner as the order or action applies to IRS.

  §881(d), PL 108-357, 10/22/2004:  

An individual won't be allowed to continue to perform any services under any qualified tax collection contract if IRS makes a final determination under the contract that the individual committed any act or omission described under §1203(b) of the '98 IRS Reform Act (PL 105-206, 7/22/1998) in performing tax collection services.

§881(d), PL 108-357, 10/22/2004:  The acts or omissions requiring termination of the collector's contract include:

1.         the willful failure to get the required approval signatures on documents authorizing the seizure of a taxpayer's home, personal belongings, or business assets; 

2.         providing a false statement under oath for a material matter involving a taxpayer or taxpayer representative; 

3.         with respect to a taxpayer, taxpayer representative, or other IRS employee, the violation of:

·           any right under the U.S. Constitution; or

·           any civil right established under:

i)          title VI or VII of the Civil Rights Act of 1964;

ii)         title IX of the Education Amendments of 1972;

iii)        the Age Discrimination in Employment Act of 1967;

iv)        the Age Discrimination Act of 1975;

v)         section 501 or 504 of the Rehabilitation Act of 1973;

vi)        title I of the Americans with Disabilities Act of 1990; 

·           falsifying or destroying documents to conceal mistakes made by any employee for a matter involving a taxpayer or taxpayer representative; 

·           assault or battery on a taxpayer, taxpayer representative, or other IRS employee, but only if there is a criminal conviction, or a final judgment by a court in a civil case, for the assault or battery; 

·           violations of the Code, IRS regulations, or IRS policies (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer representative, or an IRS employee; 

·           willful misuse of Code §6103, regarding the confidentiality and disclosure of returns and return information, to conceal information from a congressional inquiry 

·           willful failure to file any tax return required under the Code on or before the date prescribed therefore (including any extensions), unless this failure is due to reasonable cause and not to willful neglect; 

·           willful understatement of Federal tax liability, unless the understatement is due to reasonable cause and not to willful neglect; and 

·           threatening to audit a taxpayer for personal gain or benefit. 

Fair Debt Collection Practices Act 15 U.S.C. §1692:

The Fair Debt Collection Practices Act provides sanctions and damages where a creditor or collection agency uses unfair or deceptive collection practices while collecting a debt.  IRC §6306 specifically provides that private collectors must abide by the provisions of the Fair Debt Collection Practices Act.  That Act provides protections against the nature and type of communications with debtors and a right by the debtor or its representative to refuse to deal with private collectors.

 Communications With The Debtor 15 U.S.C. §1692c(a):   

Without the prior consent of the consumer given directly to the debtor collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with the consumer in connection with any debt: 

1.         At any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer.  In the absence of knowledge of circumstances to the contrary, a debt collector shall assume that the convenient time for communication with a consumer is after 8:00 a.m. and before 9:00 p.m. local time at the consumer's location; 

2.         If the debt collector knows the consumer is represented by an attorney or power of attorney with respect to such debt and has knowledge of or can readily ascertain such attorney's name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the collector or unless the POA consents to direct communications with the consumer; or 

3.         At the consumer's place of employment if the debt collector knows or has reason to know the consumer's employer prohibits the consumer from receiving such communications. 

  2:34.64 Ceasing Communication 15 U.S.C. §1692c(c): 

If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communications with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt except:

1.         To advise the consumer that the debt collector's further efforts are being terminated; 

2.         To notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor; or 

3.         To notify the consumer that the debt collector or creditor intends to invoke a specified remedy; 

4.         If such notice from the consumer is made by mail, notification shall be complete upon receipt. 

Deal With IRS Not Collectors  

Each time a client is contacted by a private collector the POA should notify the debt collector that he/she is invoking this provision under the Fair Debt Collection Practices Act.  Given the extreme danger of violating the taxpayer's privacy by these private collectors, there is no reason to engage in any dialogue with them.  Upon invocation of this right, the private collectors are instructed by the IRS to return the taxpayer's account to the IRS for further collection action.  

  Amount of Damages 15 U.S.C. §1692k.  

The debt collector who fails to comply is liable to the taxpayer in an amount equal to the sum of:

            1.         actual damage sustained as the result of such failure;

2.         in the case of any action by an individual such additional damage that the court may allow, but not exceeding $1, 000; or

3.         in the case of a class action, such amount for each named plaintiff as could be recovered under the above provisions or such amount as the court may allow for all other class members without regard to minimum individual recovery not to exceed the lesser of $500,000 or 1 percent of the net worth of the debt collector.

2:34.67 Representing Your Client:  

In representing your client you have several remedies available to you:

1.         You could choose to negotiate with the bill collector although it is strongly advised against such a strategy.

2.         You can invoke the provisions of 15 U.S.C. §1692C concerning ceasing of communications and the matter will then be returned to the IRS collection division.

3.         If you believe that a debt collector has violated your client's rights under the Fair Debt Collection Practices Act, you may recommend to your client that he/she seek damages pursuant to the Act.

4.         If the PCA has violated the provisions of IRC §7433A seek damages from the PCA.

2:34.60 Do Not Deal With Private Collectors:  

It seems that the choice should be: DO NOT DEAL WITH PCA's: deal with the Internal Revenue Service.   The dangers of privacy violations are less and your client will receive a more generous installment agreement.

   02/08/2007