Lawmakers propose using private companies to collect unpaid taxes

A proposal would utilize private collection companies to collect old tax debt. The measure has been widely opposed, since past efforts to use private companies have failed.

The Internal Revenue Service has a wide range of options to collect unpaid tax debt. Several senators, however, believe that private companies could aid the IRS in its collection efforts.

This proposal is part of a tax bill extending a number of temporary tax breaks, which mostly benefit corporations. With the aid of private companies, the estimate is that an additional $4.8 billion could be collected over 10 years. That added revenue would offset the cost of the tax breaks.

Past experiments with private debt collection companies have not lived up to expectations. Results from a prior three-year private debt collection program that ended in 2009 were net revenue losses and taxpayer harassment complaints. Nina Olson, the National Taxpayer Advocate opposes the plan saying that it would place a "bulls-eye on the backs of low-income taxpayers."

Taxpayers already working with the IRS or facing certain hardships would be exempt from private collection efforts. Some wonder why private collectors are necessary with the numerous collection tools already available to the IRS.

The continuum of IRS collection efforts

When a taxpayer owes past due taxes, penalties and interest accrue as with any other debt. The agency uses a computer system that will generate a series of notices. The first letter is a "Request for Payment" and explains there was a balance due on the tax return, lists the amount of tax and any penalties or interest. Usually a taxpayer will receive four more notices before the agency starts administrative collection measures.

The next IRS collection efforts may include:

  • Filing a Notice of Federal Tax Lien
  • Serving a Notice of Levy or
  • Keeping a portion of a future refund

A federal tax lien will go into effect when the taxes are not paid within 10 days of the first notice. The government can file a Notice of Federal Tax Lien, which publicly notifies creditors that the IRS has a claim against your property. This includes property you obtain after the lien.

The filing of Notice of Federal Tax Lien can negatively affect your credit rating. The lien may limit your ability to sell a property or business. The agency does not release liens until taxes, penalties, interest and recording fees are paid or the 10-year statute of limitations to collect the debt has expired.

The IRS can also levy assets to collect taxes. Wages and bank accounts are some of the immediate assets sources, but Social Security benefits and retirement income can be levied. The agency is able to seize property, such as a home, car or boat to sell to satisfy the tax debt as well.

Moving assets to a shell corporation or transferring property into the name of a relative will not protect property. These schemes could also lead to serious fines and prison time.

With the tools that the agency has available, you do not want to face the IRS alone. When you owe a tax debt that you cannot pay, contact a tax attorney who has experience working with the agency and can help you develop a strategy to avoid collection efforts.

Keywords: federal tax debt, tax lien, tax levy, private collection efforts