In a February 2024 report, the U.S. Government Accountability Office (GAO) made recommendations for the IRS to strengthen performance and increase capital for its private debt collection program (PDC) (Private Debt Collection Program: IRS Could Improve Outcomes and Better Promote Fair Outcomes for TaxpayersRep’t No. GAO-24-106140 (February 6, 2024)).

Background: The IRS collects unpaid tax debts through the PDC program, which it has administered since 2017. Under this program, the Service employs PDC agencies to assist in the collection of inactive tax debts of certain taxpayers. In 2023, the accounts of more than 2 million individual taxpayers and approximately 1 million business taxpayers have been allocated 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 some cases to the PDC program, but others depend on IRS models that determine how to actively pursue those cases and by what methods. If the Service determines that it cannot collect a taxpayer’s debt, it assigns the debt to the program unless certain exclusions apply, such as if the taxpayer is under 18 years of age or has died. The Taxpayers First Act of 2019, PL 116-25, expanded these exclusions to include taxpayers whose reported adjusted gross income does not exceed 200% of the poverty level, as well as taxpayers whose income is primarily from Supplemental Security Income or Social Security Disability Insurance. .

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

Exam results: GAO collected information regarding the demographics of taxpayers whose debts were funneled into the PDC program. It found that around 70% were men and 78% were between 30 and 59 years old. However, the IRS did not have consistent information on more than half of the taxpayers participating in the program, given that the majority of them did not file their returns on a given schedule. year between the start of the program and 2022. Of the data that could be collected, GAO found that in general, more than half of taxpayers reported one or more of the following: being a single filer, having income of $50,000 or less, or have no dependents. GAO also determined that most taxpayers participating 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.

GAO also identified opportunities to more effectively utilize the program’s Special Compliance Staff Fund (see also TIGTA Rep’t No. 2018-30-052 (September 5, 2018)). This fund includes up to 25% of payments collected and is used to hire collections personnel called special compliance personnel as well as to pay administrative expenses of the PDC program. GAO found that special compliance staff revenues collected have exceeded special fund costs every year since FY 2019. This is due to a conservative hiring approach used between 2020 and 2022 to account for several factors that have decreased PDC program revenues, including COVID-19. pandemic and a reduction from four to three private contractors in 2021. However, PDC program payments exceeded IRS projections, so the fund saw a substantial increase in its balance.

In FY 2022, special compliance staff increased by more than 350 people, and in FY 2023, the IRS employed an average of more than 700 people under this fund. In its report, GAO recommends setting clear goals for this special fund balance, such as minimum and maximum reserves, utilization goals, and strategies to maintain accountability and transparency.

GAO also noted that the IRS has not established standards for evaluating taxpayer fairness under the PDC program. Recent independent studies and IRS presentations have shown potential disparities in audit fairness 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 (January 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 consider fairness issues. The GAO said the IRS cannot track progress toward meeting Treasury’s goals and its own broader fairness goals without first setting fairness standards in the PDC program.

Finally, GAO found that the IRS does not properly tailor its notices to individuals excluded from the PDC program, including victims of tax-related identity theft, individuals under 18, and individuals living in certain designated combat zones. The IRS does not actively work on these cases due to the low probability of collection, but reevaluates them annually using routing models and does not close them. The Service sends annual notices to these taxpayers; However, the notices are written 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 taxpayers to apply for offers in compromise or to provide information about low-income tax clinics or voluntary income tax assistance programs. In this report, GAO recommends developing strategies for more proactive communication for these individuals, consistent with The Taxpayer’s Bill of Rights (Publication 1) and the IRS Inflation Reduction Strategic Operational Plan (see also Tax Debt Collection Contracts: IRS Analysis Could Help Improve Program Outcomes and Better Protect TaxpayersGAO Rep’t No. GAO-19-193 (March 29, 2019); Internal Revenue Service Inflation Reduction Act Strategic Plan for Fiscal Year 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 personnel goals. The IRS agrees with this recommendation and has begun working toward it. For example, the Department has already created a fund guide focused on fund balance and endowment goals. The IRS will also regularly monitor fund balances and personnel.
• The IRS should create “standards to assess fairness for taxpayers who are either affected by 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 for assessing fairness.
• The IRS commissioner should evaluate the department’s performance against its fairness standards and resolve any problems he discovers. The IRS agrees with this recommendation and is developing methods to evaluate its performance against fairness standards that it is also developing.
• The IRS should provide “personalized, taxpayer-centered 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 revamping its annual reminder notice to these taxpayers.

■ Private Debt Collection Program: IRS Could Improve Outcomes and Better Promote Fair Outcomes for TaxpayersRep’t No. GAO-24-106140 (February 6, 2024)

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