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Privatized tax debt collection stands to hurt taxpayers the most

When the Internal Revenue Service believes that someone has not paid his or her tax burden in full, the agency will likely issue a notice of deficiency. In essence, this means that IRS tax collectors will pursue a taxpayer to settle the outstanding bill. Although this is how tax collection has worked for quite some time, a congressional proposal could introduce dramatic change.

According to a report from Forbes, a provision was attached to a tax-break extension bill that would turn collection of delinquent taxes over to private agencies. Although this legislative move was made in a relatively quite fashion, a number of critics have stepped up to the plate.

One observer points out that similar efforts have been made twice in the last two decades -- and neither occasion was considered a success. About 20 years ago, private debt collectors entered the picture, but lasted for only one year as the result of reported malfeasance and creditor abuse.

The Forbes report points to two primary issues with the congressional proposal, and they are both unfortunate for distressed taxpayers.

Gaps in tax collection are the primary motivation for the potential shift being voiced by proponents. However, the report notes that the collection shortfall will probably not be closed, largely because many people simply will not be able to pay back taxes. In other words, people have tax debt because they are facing financial hardship, rather than willfully skirting tax law. As a result, people could be endlessly harassed by collection agencies.

Additionally, IRS tax collectors have the ability to offer settlements for unpaid taxes. When a person doesn't have the wherewithal to pay a debt in full, a settlement can help make up the difference and allow the individual to move forward. Unfortunately, private collectors will not be able to offer the same kind of flexibility.

No matter what tax debt collection efforts look like in the coming years, it will be important for individuals to respond to IRS claims. Whether collectors work for the government or a private company, they will be concerned about their bottom line, rather than a person’s extenuating concerns and circumstances.

Source: Forbes, "Congress, Ignoring History, Considers Turning Over Tax Debts To Private Collection Agencies," Kelly Phillips Erb, May 20, 2014

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