Monday, August 21, 2006

The Magic of Privatization

Via Angry Bear, I read this wonderfully entertaining article on the Internal Revenue Service's new policy of using private debt collectors to harass poor people recover unpaid back taxes. But only when the amounts owed are relatively small. If you are a major culprit you get better treatment, naturally.

Privatization is often touted as a cost-saving measure. In this particular case privatization costs tax payers a lot of money:

If you owe back taxes to the federal government, the next call asking you to pay may come not from an Internal Revenue Service officer, but from a private debt collector.

Within two weeks, the I.R.S. will turn over data on 12,500 taxpayers — each of whom owes $25,000 or less in back taxes — to three collection agencies. Larger debtors will continue to be pursued by I.R.S. officers.

The move, an initiative of the Bush administration, represents the first step in a broader plan to outsource the collection of smaller tax debts to private companies over time. Although I.R.S. officials acknowledge that this will be much more expensive than doing it internally, they say that Congress has forced their hand by refusing to let them hire more revenue officers, who could pull in a lot of easy-to-collect money.

The private debt collection program is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar.

By hiring more revenue officers, the I.R.S. could collect more than $9 billion each year and spend only $296 million — or about three cents on the dollar — to do so, Charles O. Rossotti, the computer systems entrepreneur who was commissioner from 1997 to 2002, told Congress four years ago.

I.R.S. officials on Friday characterized those figures as correct, but said that the plan Mr. Rossotti had proposed had been forestalled by Congress, which declined to authorize it to hire more revenue officers.

Did you get it? The private debt collectors get around 22 to 24% of the total, whereas the IRS could have done the same job at a cost of 3% of the total. Someone is enjoying a real boon here and it's not the people who actually pay their taxes. Or even those who don't.

What IS the idea here? It can't be trying to make the government look worse as the figures tell a different theory.

How can you tell if the guy knocking at your door is from the IRS now? And what collection methods will the private debt collectors employ? I probably have read too many hard-boiled detective stories, but I get visions of rough-looking guys throwing me against the wall. Not that I owe any taxes but if I did. Then they'd kidnap Henrietta the Hound. Here the visions break because she would just eat them all and then come home for a nap. But it's still a little worrisome.

Far-fetched, sure. But perhaps not all that far-fetched in some ways:

Critics of the privatization plan point not only to the higher cost but also to what they say is a greater potential for abuse. With private companies in the mix, they say, debtors could more easily be tricked into paying money to scam artists using spoof Web sites or other schemes, a problem the I.R.S. alerted taxpayers to in April. Brady R. Bennett, collections director for the I.R.S., said that by 2008, about 350,000 past-due tax records will be distributed among about 10 private debt-collection agencies. To guard against fraud, he said, the agencies will contact taxpayers only by telephone or mail — not the Internet — and will instruct them to send all payments directly to the United States Treasury, not the private collection agency.

One of the three companies selected by the I.R.S. is a law firm in Austin, Tex., where a former partner, Juan Peña, admitted in 2002 that he paid bribes to win a collection contract from the city of San Antonio. He went to jail for the crime.

Last month the same law firm, Linebarger Goggan Blair & Sampson, was again in the news. One of its competitors, Municipal Services Bureau, also of Austin, sued Brownsville, Tex., charging that the city improperly gave the Linebarger firm a collections contract that it suggested was influenced by campaign contributions to two city commissioners.