A "most serious problem" at the IRS: Private debt collectors

Last year the IRS reactivated a program using private debt collectors to collect unpaid taxes from individuals with delinquent tax debts. According to the National Taxpayer Advocate, the IRS' Private Debt Collection (PDC) program is a "most serious problem."

A troubling finding of a recent report was that taxpayers, whose tax debts were assigned to private collection agencies, entered into installment agreements that they are unable to afford, with approximately 43 percent earning income below their allowable living expenses. 

To make matters worse, the program costs the U.S. Treasury more than the money it brings in. Part of the reason may be that the private collection agencies can keep up to 25 percent of what they collect.

The taxpayers most likely to be contacted by the program's private debt collectors are those identified by the IRS to have an inactive tax receivable. A tax debt is deemed to be "inactive" when the IRS removes it from their active case list for lack of resources or inability to locate the individual, or if more than a year has passed since the taxpayer had any interaction with the IRS for the collection of the over-due tax. 

Private collection agencies will first request full payment of the debt. If the taxpayer can't immediately pay, the agency will then offer an installment agreement.

Beware of phone scams

There have been many reports of phone scams by individuals who claim to represent the IRS and demand payment for tax debts, so it's important to know the difference between these scams and a legitimate IRS collection program.

Taxpayers should know that the legitimate collection agencies will not call you. Instead, the IRS will send a letter on official IRS letterhead, called a Notice CP40. This will explain that your tax debt has been assigned to one of the private debt collection firms. A separate letter from the private collection agency will confirm the tax case has been assigned to them.

Both letters will have the same unique 10-digit identifier number in place of your Social Security number. This special identifier will allow two-party authentication between you and the private collection agency.

Red flags

Below are additional tips to determine whether firms claiming to work with the IRS are legitimate.

  • The IRS' private debt collectors will not ask you to pay them any fees or owed taxes, and they will not accept any payments from you. 
  • They will inform you that any payments for taxes should be paid by check and sent directly to the IRS or paid via debit or credit card on the IRS website. 
  • Any checks sent should be payable to "United States Treasury." Neither the IRS or the private collector will suggest or take payment in the form of gift cards, prepaid debit cards, or iTunes cards (which are commonly requested by scammers.)
  • If you're contacted by a tax collector, you can call the IRS directly to confirm your debt has been assigned to the private debt collector. If this is the case, the IRS will instruct you to speak directly with the private collector. 
  • The IRS will provide direction only on making payments and calculating a payoff on your tax debts. These private collection agencies cannot enforce collection actions against you, such as issuing a levy or filing a notice of federal tax lien and they must follow the IRS rules under the Fair Debt Collection Practices Act.

Agencies with IRS authorization

The four private debt collection agencies selected by the IRS to operate the program are the only firms that should be legitimately contacting taxpayers. They are: CBE Group in Cedar Falls, IA; Conserve in Fairport, NY; Performant in Livermore, CA; and Pioneer in Horseheads, NY.

Finally, the IRS cannot assign a tax debt to private collections in cases involving a deceased tax payer, an individual under age 18, or military in a designated combat zone. Also exempt are folks who are a victim of tax-related identity theft, classified as an innocent spouse, and currently involved in an exam, installment agreement, or offer in compromise.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.