How Congress is pulling the IRS off the rich — and siccing it on the poor

What happens when the IRS privatizes tax collection? Nothing good.

Take from the poor.
(Image credit: iStock)

Congress ran an experiment last year with the Internal Revenue Service. It had the tax collection agency enlist private debt collectors to help bring in hundreds of millions in unpaid taxes. But a new report by an independent office within the IRS suggests the experiment was a bust: The IRS paid the collectors $20 million in fees but only got $6.7 million in revenue back — less than 1 percent of the $920 million the collectors were assigned.

But this wasn't just an embarrassment for the lawmakers who usually cheer when government agency functions are contracted out to private companies. Something much uglier is going on.

Back in 2015, when Congress was still debating the idea of private collectors for tax debt, Chi Chi Wu, a lawyer with the National Consumer Law Center, told HuffPost that "about 79 percent of outstanding tax debt is owed by low-income taxpayers who are essentially too poor to pay." Wu continued: "They're going to try to get blood out of a stone, and that's not good for anyone but the debt collectors."

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Indeed, the IRS itself estimated that around 80 percent of the taxpayers who handed over money to private collectors in 2017 were "relatively low income."

This shouldn't be a surprise. One of the main reasons people can't pay their taxes, and wind up building up a big chunk of tax debt, is that they can't afford it. Low-income Americans are also easy marks for private debt collectors: They're scared, vulnerable, and have few resources with which to defend themselves.

Indeed, private debt collectors have a long and inglorious history of getting into legal trouble for bullying, harassing, or deceiving the people they're collecting from. In fact, of the four debt collection agencies the IRS hired, two were sued by the Consumer Financial Protection Bureau, and one was terminated from another contract with the Education Department over abusive practices going after student debt. (And the latest program follows on the heels of two previous efforts to outsource tax collection to private companies over the last two decades, despite both ending in net revenue losses!)

“The program as implemented has not generated net revenues and results in the IRS improperly paying commissions to [private collection agencies] for work they did not perform,” the new IRS report concluded. “In the meantime, the most vulnerable taxpayers are making payments and entering into installment agreements they cannot afford, according to the IRS's own measures.”

Here's the thing: Unpaid taxes are the taxes that everyone — you and the IRS — agree that you owe.

But there's another bucket of "unpaid" taxes that's much more difficult to quantify. That's the revenue lost to tax avoidance; to people and businesses using loopholes and other accounting games to lower their tax bill. Low-income people don't engage in tax avoidance for obvious reasons: They can't afford the lawyers and accountants. Rather, it's the wealthy and big corporations who are the major players in this arena.

While all unpaid tax debt now amounts to $458 billion, research suggests corporate tax avoidance alone costs America $189 billion annually. In other words, three years of corporate tax avoidance costs more money than all the unpaid tax debt currently on the books.

The IRS itself is the institution with the time, resources, manpower, and expertise to police tax avoidance. When enforced, the threat of IRS audits has a real deterrent effect on corporate tax avoidance, for example. The IRS often lets low-income Americans slide on unpaid taxes precisely because it concentrates its efforts on the big fish. For that reason, more funding for the IRS — as opposed to more fees for private debt collectors — tends to be a fiscal winner: Every $1 in extra funding tends to deliver $4 in additional revenue.

So what's Congress up to? It's defunding and dismantling the IRS: Adjusted for inflation, the IRS's budget is down 18 percent since its peak in 2010, and its lost 14 percent of its staff — about 13,000 people. In 2015, then-IRS Commissioner John Koskinen noted that audits had already dropped 22 percent over the previous five years.

The other thing Congress did for the wealthy was pass the recent tax overhaul. Cutting their taxes obviously lost revenue in a very big and straightforward way. But by taking a chainsaw to the rates paid by corporations and other businesses, Congress also opened up a host of new tax avoidance opportunities. To take one prime example: So-called "pass-through" businesses got a big tax break under the bill. That's made it way more likely that lots of wealthy individuals will file as such and thus pay far less taxes than they would under the individual income tax.

The IRS is going to need oodles of money and manpower to push back at the tax avoidance scams the new law will likely unleash. But it's not at all obvious Congress will be forthcoming with those resources.

Our lawmakers just rewrote the tax code to make it easier than ever for the rich and powerful to reduce their tax bills. They've also spent the last few years systematically dismantling the IRS's ability to police that behavior. And now, in the name of improving the IRS, they're hiring the most cutthroat debt collectors in the private market — for a mission that will overwhelmingly harass and bleed the least fortunate Americans, all while losing even more government revenue in the process.

Enjoy your tax day 2018, everyone.

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