When private firms handle your unpaid tax debt

What's old is new again. Earlier this year the IRS reactivated a program from 2004 of using private firms to collect tax debt.

A dozen years ago, the program was canceled because of problems, costs and taxpayer complaints. However, a law enacted last year allowed the IRS to again contract with select firms to attempt to reconnect with delinquent taxpayers and collect overdue tax debt.

But according to recent reports, similar complaints are popping up. Several members of Congress have also called attention to what they believe to be abusive and potentially illegal collection tactics at one of the private firms.

If you're contacted by any firm saying it's working with the IRS to collect a tax debt, here's what you need to know.

First, you would have to be deemed to have an "inactive tax receivable." A tax debt is declared "inactive" when the IRS removes it from the agency's active case list for lack of resources or inability to locate you, or if more than a year has passed since the IRS has had any interaction with you regarding the overdue tax.

The IRS can't assign a tax debt to private collections in cases involving a deceased taxpayer, an individual under age 18 or in the military and assigned to a combat zone. Also exempt are those who are a victim of tax-related identity theft, classified as an "innocent spouse" and anyone currently involved in a tax exam, installment payment agreement or offer in compromise.

The IRS selected just four private firms to operate the program, and they're the only ones that should be legitimately contacting you:

  • CBE Group in Cedar Falls, Iowa
  • Conserve in Fairport, New York
  • Performant in Livermore, California
  • Pioneer in Horseheads, New York

If you have an inactive tax debt that's assigned to one of these firms, the IRS will send you a notification letter -- on official IRS letterhead -- called a Notice CP40. You should also receive a separate letter from the private firm that confirms the assignment. Both will have the same unique 10-digit identifier number in place of your Social Security number. This number will allow two-party authentication between you and the private collection agency.  

These private collectors won't ask you to pay them any fees or tax owed, and they won't accept any payments. They will inform you that any payments for taxes you owe should be paid by check and sent directly to the IRS or paid via debit or credit card on the IRS website. 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.)

You can call the IRS to confirm that your debt has been assigned. If you try to discuss your debt with the IRS, the agent 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 agencies can't enforce collection actions against you, such as issuing a levy or filing a notice of federal tax lien. And they must strictly follow IRS rules under the Fair Debt Collection Practices Act.

  • 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.