Tax debt is a problem for everyone, not just the one million taxpayers with delinquent accounts (source).
Americans fail to pay approximately $630 billion a year in taxes, according to the latest tax gap estimates (source). The tax gap is the difference between what taxpayers owe in taxes and what they pay on time. These estimates also include taxes on income taxpayers don’t declare. The latest tax gap estimate is based on the statistical work of academic and IRS researchers. Nobody knows exactly how much taxable income taxpayers don’t declare.
Compare a tax gap of $630 billion with the federal budget deficit of 2021, which was $2.8 trillion (source). The U.S. government’s annual deficit could have been reduced by over 20% if the IRS had collected the money it was owed. In 2019, which had a more “modest” federal budget deficit ($984 billion), it would have been reduced by over 40% had that year’s $441 billion tax gap been collected (source).
Growing tax gap, but reduced IRS resources
While the tax gap continues to grow, IRS resources have dropped. On an inflation-adjusted basis, they are at pre-1998 levels, thanks to budget cuts implemented during the Bush, Obama, and Trump administrations (source). The IRS funding for 2021 was $11.5 billion (source). $11.5 billion in 2021 dollars is equivalent to roughly $6.8 billion in 1998 dollars. The actual budget back in 1998 was closer to $7.6 billion (source, source).
A note on IRS funding in 1998
The preceding figure is an approximation. The presidential administration’s budget request for fiscal year 1998 was $7.37 billion (source), and the IRS financial statement for that fiscal year indicates the agency used $7.41 billion in appropriations (source).
Despite all this pressure, the IRS has somehow managed to increase overall collection. The agency has done this mainly through increased use of an unlikely set of tools: tax relief programs.
How much do Americans owe in tax debt?
The largest component of tax debt is underreporting, which represents about 84% of the tax gap. Underreporting of taxes is hard to reduce. This is because more than 60% is owed by businesses and self-employed workers, whose income the IRS cannot easily verify. (Source.)
The tax gap creates serious problems for policymakers. They must choose between piling on more debt through deficits, spending less on their priorities, or increasing taxes further to account for the lost revenue. Choosing the last option means compliant taxpayers will have to carry an even higher percentage of the load.
Underpayment of taxes is easier to quantify because it is based on audits or the self-assessments of taxpayers through their tax returns. According to IRS estimates, tax underpayment amounts to $39 billion a year. The three main components are individual income taxes ($29 billion), employment taxes ($6 billion), and corporate income taxes ($3 billion). However, these are just estimates.
What hard data do we have on tax debt?
As mentioned above, the Treasury’s latest compliance report puts the number of taxpayers with delinquent accounts in fiscal year (FY) 2020 at one million. This is down somewhat from the 1,131,000 in FY 2019. (Source.) Note that the Treasury’s FY runs from October through September. For example, FY 2020 ran from October 2019 through September 2020.
In 2020, delinquent taxpayers owed, on average, $61,553 in back taxes. The IRS audited 509,917 tax returns, which resulted in $12.9 billion of additional tax debt.
Half a million audits sound like a lot, but it only represents 0.3% of tax returns. (Taxpayers filed roughly 164 million returns for tax year 2020.) The chances of being audited by the IRS are low. But if the IRS does disagree with your tax return, the average tax liability increase is $8,432 (source). Still, increasing tax liability doesn’t mean the IRS can always collect the taxes it assesses.
From FY 2019 to FY 2020, taxpayer delinquent account (TDA) closures decreased from 6,766,952 to 4,552,050 modules. (A module represents a single filed return, whether for a year or a quarter.) The number of closures for taxpayers coming into compliance by fully paying their delinquent account decreased from FY 2019 (1,462,084 modules) to FY 2020 (1,163,535 modules).
IRS and private collection agencies
A big chunk of the increase in case closures is due to the IRS’ efforts to provide private collection agencies (PCAs) with an inventory. By the time FY 2020 drew to a close in September 2020, delinquent taxpayer accounts in PCAs’ inventories totaled 2,514,034. These accounted for $25.6 billion in outstanding tax liabilities. This is according the latest data from the Treasury Inspector General for Tax Administration (TIGTA).
The Private Debt Collection program was launched in 2016. From then through September 2020 (FYs 2016–2020), it generated $969 million in total revenue. This included $580.6 million in commissionable payments, $43.3 million in payments that were noncommissionable, and $345.1 million in Special Compliance Personnel Program revenue. The total cost of the program over this time was $236 million. And the resulting net revenue to the General Fund/Treasury was $678.7 million.
This net collection revenue reflected 2.65% of the total outstanding tax liability assigned to the program. A recent TIGTA audit found that the average age of delinquent accounts assigned to private collection agencies was 5.31 years. Typically, cases this old are uncollectable.
Although doing away with tax debt altogether may be unrealistic, there are tools to help reduce it. Tax relief is one of them.
Tax due by state
According to the latest IRS statistics available (tax year 2020), the states with the most returns with taxes due at time of filing are California (25.84%), Maryland (23.22%), and New Jersey (22.79%). Were it a state, the District of Columbia (23.48%) would rank second.
According to the same IRS statistics, the states with the largest average amount due, among taxpayers who owe taxes at time of filing, are South Dakota ($8,724), Wyoming ($8,549), and Washington ($8,452). However, returns filed from “other areas,” which include filings by U.S. citizens stationed on military bases or living abroad, had a higher average balance due than any state ($10,526.78).
The amount owed at time of filing is whatever portion of one’s total tax liability remains unpaid. For reference, here is what the state-by-state breakdown looks like for total tax liability (on average):
Note that the preceding averages are among returns with some tax liability. Returns with no tax liability are excluded.
Tax due by zip code
At the zip code level, among returns with taxes due at the time of filing, Parkers Lake, Kentucky, had the highest average due ($2,222). But only 4.26% of the returns there had taxes due at filing. Dresden in New York, Blackwater in Virginia, and Dingess in West Virginia had the second largest average due ($2,000). But only Dresden and Blackwater had a significant percentage of returns with taxes due (16.67% and 15.38%, respectively). Only 5.41% of Dingess returns required payments with filing.
Hovering over any zip-code area in the map below will bring up key tax statistics and other information. These including county names, percentages of returns with some tax liability and with balances due, average amounts due at filing per return, and average total tax liability per return.
What is tax relief?
Tax relief includes any program or method that helps taxpayers pay off their tax debt. Some programs, such as installment agreements, give you more time to pay. Other programs reduce your debt. Examples include offers in compromise and the penalty abatement program.
When done well, tax relief programs are a win-win for the IRS and taxpayers. The IRS knows the longer taxpayers are behind on their taxes, the less likely they are to pay. The Taxpayers Advocate Service (TAS), “an independent organization within the IRS” tasked with ensuring that taxpayers are treated fairly and know their rights (source), highlighted this fact in a study it completed several years ago. According to that 2015 TAS study, the IRS collects twice as much on delinquent accounts in the first year than in the second year; and three times as much in the first year as in the third year. (Source.)
Typically, the IRS has 10 years to collect taxes. As the years tick by, the IRS gradually loses the ability to collect any revenue on accounts that reach the 10-year limit. From 2003 to 2011, the IRS wrote off 19% to 28% of back taxes each year, according to the 2015 TAS report already cited.
IRS provides a wide selection of tax relief programs
Tax relief programs give taxpayers a way to settle delinquent tax debt and avoid the tax liens, levies, and wage garnishments the IRS can impose. At the same time, tax relief programs help the IRS increase revenue.
Unfortunately for taxpayers, tax relief programs are typically hard to apply for and even more difficult to qualify for. Negotiating with the IRS is a complex and lengthy process that many taxpayers can’t manage without help. But just getting in touch with an IRS agent can be a challenge. And this is not a new phenomenon.
Back in 2015, TAS reported that the IRS answered only 37% of taxpayers’ calls routed to customer service representatives (CSRs) (source). The agency has not improved since then. TAS’s 2021 Annual Report to Congress showed even worse percentages for FY 2018 through FY 2021: 35% for 2018, 29% for 2019, 24% for 2020, and 11% for 2021 (source).
TAS attributes the worsening problem to there being too few CSRs working for the IRS and the IRS’ lack of a centralized Enterprise Case Management system.
So, not only are IRS tax relief programs complex, but the support resources available from that agency are inadequate for many applicants. This has helped create a niche for tax relief companies that provide representation to taxpayers applying for tax relief programs before the IRS.
Tax relief programs offered by the IRS include:
- Installment agreements.
- Currently not collectible status.
- Offer in compromise.
- Bank levy release.
- Tax lien release.
- Penalty abatement.
- Innocent spouse relief.
Every year the IRS writes off billions of dollars in bad tax debt. However, that tax forgiveness is not spread evenly. Neither is it necessarily good news for taxpayers. Tax abatement typically occurs when the IRS has exhausted all other tax collection methods, such as tax liens and tax levies. A better use of tax relief programs could help the IRS collect more revenue and reduce the hardship of tax debt on taxpayers.
Installment agreements don’t reduce the amount of money taxpayers owe. Instead, they provide a payment plan that allows them to pay their debt over time. In recent years, the IRS has expanded the criteria for the streamlined processing of installment agreements. Roughly 80–90% of people who owe money on their taxes qualify for an online payment agreement (source). To qualify, taxpayers must owe $50,000 or less (in combined taxes, penalties, and interest) and be up to date with their tax returns.
In FY 2021, the IRS processed over 16.5 million Direct Pay settlements. As well, taxpayers started or modified 1.5 million online installment agreements. And 78.1 million taxpayers requested their tax transcripts through the IRS website or by mail.
Direct debit has made this tool even more effective. In 2016, the Treasury reported that defaults on installment plans with direct debit are lower than defaults on installment plans overall, roughly 10% lower on average. (Source.)
Offers in compromise
The offer in compromise (OIC) program is a flexible tax relief initiative that reduces the tax liability of people who can’t afford to pay their tax balance. In exchange, taxpayers agree to pay a discounted amount of their tax debt within a certain time period. This is a win for the IRS, which gets money it would not have otherwise collected. It is also a win for taxpayers, who see their tax debt reduced.
In FY 2021, taxpayers proposed 49,285 offers in compromise to settle existing tax liabilities for less than the full amount owed. The IRS accepted 15,154 of these during the year, amounting to $220.9 million. (Source.)
There is a strong incentive to remain current on monthly payments because the initial debt is reinstated if you default.
Currently not collectible
The IRS assigns the “currently not collectible” (CNC) status to taxpayers who meet two criteria. First, they agree they owe money to the IRS. Second, their current financial situation doesn’t allow them to qualify for a payment plan. The idea is to give people time to get their finances in order. In most cases, the IRS will not try to levy the assets or income of taxpayers with CNC status. However, the IRS will withhold their tax refunds to offset their debt.
Applying for CNC status is more complex than proposing an offer in compromise. This is probably why applications for CNC status are so underused. For example, in 2016, nearly 300,000 taxpayers who should have qualified for CNC status entered into an installment agreement instead. Hiring a reputable tax relief firm can help taxpayers navigate the bureaucracy and qualify for CNC status. (Source.)
Bank levy release
The IRS has the authority to seize the property or assets of delinquent taxpayers when they are behind on their taxes and don’t respond to notices. That includes bank accounts. The IRS can make a one-time withdrawal of whatever money is in the bank account or file a continuous levy that takes a percentage of the taxpayer’s salary until the debt is paid. However, the IRS may release a bank levy when:
- taxpayers have already paid what they owe.
- taxpayers have entered an installment agreement.
- the levy creates an economic hardship.
- taxpayers can prove that releasing the levy would help them pay their taxes.
IRS agents are realizing that other tax collection methods can be more effective. So, they are starting to shy away from the use of levies.
In FY 2021, the IRS filed 305,610 levies, a (rounded) 23% decrease from the 396,269 it filed in 2020 (source).
Nearly a quarter drop is significant enough. But this decrease likely under-represents the trend. This drop in levies for FY 2021 (October 2020 through September 2021) occurred in spite of the IRS having suspended filing of most new liens and levies from April 1 through July 15 of 2020 as part of its pandemic-response People First Initiative (source). This suspension means the FY 2020 figure is almost entirely for levies filed outside a suspension period of three-and-a-half months. Even so, the full year’s levies for FY 2021 were still lower.
Tax lien release
The IRS can place a lien, or claim, on the property and assets of a delinquent taxpayer. A tax lien is different from a levy. Instead of seizing assets, a lien signals to other creditors that the IRS has a legal right to a taxpayer’s property. If there is a lien on a home, for instance, the owner will not be able to sell it until the debt is paid or the IRS agrees to a lien release. The IRS will sometimes grant a tax lien release to taxpayers who are still behind on their taxes if it helps them pay their tax debt.
Penalties for late filing or payment quickly add up when taxpayers are behind on their taxes. The combined penalties of failing to pay and failing to file can add up to 5% of the unpaid taxes a month. The IRS’ penalty abatement programs can reduce or even remove tax penalties for a variety of reasons, such as first-time penalty abatement or penalty relief because of reasonable cause.
In 2020, the IRS assessed $37.33 billion in penalties and abated $13.32 billion. This is above the $11.39 billion abated in 2019. But it falls significantly short of 2020’s abatement peak of $23.88 billion.
Innocent spouse relief
The innocent spouse relief program allows taxpayers to avoid the responsibility of paying tax, interest, and penalties caused by a spouse or former spouse who improperly reported items on a joint tax return.
It can take up to eight months to receive a determination when requesting innocent spouse relief due to a lack of resources. For example, in 2015, the IRS received 47,400 requests for innocent spouse relief. However, there were only 140 employees working on these cases (source).
IRS collection process
To most effectively modify human behavior, one must reward desirable actions and punish undesirable ones. Better known as the “carrot and stick” approach, this two-pronged method is just what the IRS uses with delinquent taxpayers.
The stick: effectiveness of IRS enforcement
When it comes to taxpayer misbehavior, audits, tax liens, tax levies, and criminal prosecution act as persuasive deterrents.
As already noted, the IRS saw a significant budget reduction over the course of three presidential administrations. The effects of these cuts remain evident. In inflation-adjusted 1998 dollars, in fact, the agency’s 2021 budget was still roughly a billion dollars less than its budget in 1998. This loss of spending power may have reduced the number of tax audits the IRS can perform each year, but the agency’s conviction rate for tax (and other) investigations is impressive.
The carrot: benefits of tax relief programs
Tax relief programs such as installment agreements, offers in compromise, and penalty abatement are the “carrot” in the IRS’ approach. They provide taxpayers with an incentive for staying on track.
The IRS data indicate tax resolution programs have been a much more effective way of collecting revenue than tax liens and levies. The graphs below compare the number of levies issued and liens filed to the delinquent taxes the IRS managed to collect. Despite a large reduction in levies and liens filed (down 45% and 51%, respectively), the delinquent taxes the IRS was able to collect increased by 14% (1.7% if you adjust for inflation) from 2010 to 2014.
Despite a large reduction in levies and liens filed (down 91.5% and 80.6%, respectively), the delinquent taxes the IRS was able to collect increased by 109.7% (64.9% in inflation-adjusted 2010 dollars) from 2010 to 2021.
If tax liens and levies are not responsible for the increase, what is? As indicated by the graph below, installment agreements, refund offsets, and the use of regular collection notices have been the primary reasons for the increase.
Conclusion: the carrot is mightier than the stick
The bottom line is that, despite being underused, tax relief programs have increased revenue collection for the IRS and outperformed tax levies and liens.
Tax relief programs not only improve the IRS’ ability to collect revenue but also provide delinquent taxpayers with the incentive to change their long-term behavior, so they stay out of debt.
A 2012 study by the Taxpayer Advocate Service looked at taxpayers who held “not collectible” status, a label used for taxpayers who are temporarily unable to pay their tax debt (as noted earlier). The study then compared taxpayers in this status who were presented with an offer in compromise to those who were not. By the end of the study, 80% of the taxpayers who had an offer in compromise had no tax liability, as opposed to only 20% of the taxpayers without an offer in compromise.
A brief history of tax relief programs
IRS tax relief programs have been around in some form or another for decades. For example, Congress passed the Innocent Spouse Act in 1971. However, it was the IRS Restructuring and Reform Act of 1998 (RRA 98) that set out the structure and policies that regulate tax relief programs as we know them today. The goal of the act was to improve customer service, expand legally specified taxpayer rights, and simplify tax relief programs. Although there were improvements, tax relief is anything but simple.
One of the ideas that came out of RRA 98 was that the IRS should adopt a “liberal acceptance policy” toward offers in compromise. This would give delinquent taxpayers an incentive to continue filing tax returns and pay their taxes. As mentioned above, the offer in compromise (OIC) program has an impressive compliance rate. Unfortunately, a lack of staffing has limited the benefits of the OIC program (source).
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA 2005) clarified the rules that regulate the OIC and installment-agreement programs. For instance, taxpayers had to make a good faith 20% lump-sum payment of delinquent taxes owed for the IRS to consider their application.
In 2012, and again in 2014, the IRS’ “Fresh Start Initiative” expanded its tax relief programs. These changes made it more likely the IRS would consider and accept tax relief settlements from taxpayers.
What is the tax relief sector?
The tax relief sector is made up of companies that provide advice and representation to taxpayers who want to settle their tax debt with the IRS and state tax agencies. Many taxpayers struggle to understand the eligibility criteria and complete the necessary application forms for such programs.
Tax relief companies help taxpayers determine what programs they qualify for and assist with the application and negotiating process. Some have tax lawyers, enrolled agents, and certified public accountants on staff. Certain law and accounting firms also have tax relief departments that help clients facing audits and tax debt problems.
What is the size of the tax relief industry?
The tax relief companies currently operating are all private entities that do not publicly disclose their revenue, number of clients, or clients’ cumulative tax debt. This makes tax relief industry statistics difficult to obtain. However, most tax relief companies will only deal with the cases of taxpayers who owe $5,000 or more to the IRS. Every year, the IRS has about 1.2 million cases in which a taxpayer owes $5,000 or more; those cases total $35.2 billion of tax debt (source).
Should taxpayers hire a tax relief company?
Tax relief companies are a convenience service. They are not cheap, but they provide representation to taxpayers who don’t have the know-how or time to negotiate with the IRS.
“There are two conditions that would allow someone to benefit from tax resolution services,” says Phil Hwang, lead tax attorney for Optima Tax Relief. ”They have to owe enough to justify hiring a tax relief company. And they must lack the time and/or expertise to navigate the IRS and its codes and regulations to take care of the issues themselves.“
The complexity of the tax code and several years of IRS budget cuts helped the tax resolution industry grow to its current size and profitability. Granted, the IRS employee count has recently been growing. The IRS had 6,042 more employees at (roughly) the end of FY 2021 (80,411) than at the end of FY 2019 (74,369) (source, source.)
But one should keep this recent growth in perspective. The IRS had 107,621 employees in FY 2010, when the agency processed 141 million individual income tax returns (source). In FY 2021, when its employees numbered only 80,411, the IRS processed 168 million returns (source). That’s 27 million more returns processed by 27 thousand fewer employees.
While the IRS has fared better in more recent Congressional appropriations, it still appears understaffed and, in inflation-adjusted terms, underfunded compared to 2010.
Negotiating yourself vs. hiring a company
In theory, all taxpayers should be able to negotiate directly with the IRS. Unfortunately, tax regulations are too complicated for most people. “We have people who come for help that shouldn’t have to,” says Bob Wheeler, Founding Partner of an accounting firm in Santa Monica who is also a CPA. “They should be able to do it by themselves. But a couple of details will complicate their entire case to the point they can’t go forward without professional help.”
When shopping for a tax relief company, look for firms that have tax lawyers on staff, such as Optima Tax, Tax Hardship Center, and Victoria Tax Lawyers.
Benefits of using a tax relief firm
Tax debt resolution experts also help taxpayers know when to apply for tax relief programs.
Say, for example, a delinquent taxpayer is considering applying for an offer in compromise. This can provide a fresh start to a taxpayer who fits the IRS’ eligibility criteria. To qualify, the taxpayer has to submit a comprehensive list of assets, including bank accounts, retirement funds, cars, real estate, and other valuables. The IRS also wants to know where the taxpayer works. This information can be used to garnish wages, levy bank accounts, and file tax liens if the application is denied.
It can take up to six months to get a reply on an OIC application, and the IRS hits the pause button on the 10-year statute of limitations during that six-month period. For a taxpayer close to the end of the 10-year statute, an offer in compromise may not be the best option.
Tax resolution experts have the experience and software to evaluate the merits of a case and determine whether the IRS is likely to accept an OIC. They understand the eligibility criteria of tax relief programs and don’t have their clients go through the time and effort of applying unless they have a good chance of acceptance. That is why leading tax relief companies have an acceptance rate for offers in compromise of more than 90%; the IRS’ average acceptance rate (FY 2021) is only 30.75% (source).
Potential benefit is greatest for those who owe the most
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates. Check out which tax relief company is the best fit for you.
How does the United States tax system compare to other countries?
The United States first experimented with an income in 1861. At that time, Congress, to pay Civil War expenses, imposed a 3% tax on income over $800. This law, as modified, was repealed in 1872, but arguments for and against income taxes, and occasional passage of them, continued. In 1913, the 16th amendment to the U.S. Constitution secured the legal status of a national income tax. Ironically, it was opponents of such a tax who proposed the amendment, hoping its failure would end repeated income tax bills. But the amendment was ratified. Under the first income tax authorized by this amendment, less than 1% of Americans paid income tax. And those who paid had to surrender only 1% of their net income. (Source.)
Today, of course, both these percentages are much higher. Though this doesn’t sit well with all Americans, fewer than in the past think the percentages are too high. A 2016 Gallup survey found that 57% of Americans thought the federal income tax was too high. But a 2021 Gallup survey found that only 50% of Americans still think their taxes are too high. Even more, 55%, now think their taxes are fair. Still, 50–55% approval better indicates mixed feelings than a mandate.
The good news: other nations tax more
Comparison of the United States with other advanced nations may fuel this ambivalence. Simply put, income taxes in the United States are not especially high when compared to other developed countries. And when it comes to the burden of all taxes combined, the U.S. compares even more favorably to such nations.
According to the Organisation for Economic Co-Operation and Development (OECD), U.S. personal income taxes as a percentage of gross domestic product (GDP) in 2020 were 10.4%. This is above the average for all OECD nations (8.3%), but well below the personal income tax burden of, say, Denmark (25.5%).
Though personal income taxes are most relevant to the tax relief industry and this study, they are not the best measure of the overall tax burden of government on a country. For that, total tax revenue as a percentage of GDP is more pertinent. The OECD indicates that, on this measure, the U.S. ranks well below the OECD average (33.6%). Only six countries — Turkey, Costa Rica, Ireland, Chile, Colombia, and Mexico — had lower 2020 rates than the United States.
Additional good news: early tax rates were not as low as they seem
Wolters Kluwer provides a helpful overview of the top U.S. tax rates since 1913. From 1913 to 1964, the top income tax rate, such as the 1% pointed out earlier, was only part of the actual rate paid by top taxpayers. Those taxpayers also had to pay an added “surtax.” This made for higher top rates from the beginning. (Source.) Here is a visual depiction of Wolters Kluwer’s figures:
The bad news: U.S. taxes confuse many
The bad news is the U.S. tax system is also incredibly complex and difficult to navigate.
In 2014, the Tax Foundation determined that you would need to read 70,000 pages — two full sets of the Encyclopaedia Britannica — to get through all the laws, regulations, and rulings necessary to fully comprehend the U.S. tax code. According to the Foundation, the Government Printing Office (GPO) then sold Title 26 of the U.S. Code, containing just the legal statutes, in two volumes totaling 2,652 pages. (Source.) Though current GPO product pages do not list page counts, the 2016 product pages for these statues (same 2012 edition) spanned three volumes (18–20) totaling 3,998 pages . In the most recent edition of the U.S. Code (2018; new editions come out every six years), Title 26 starts partway through volume 18 and concludes in volume 21 (source, source, source, source).
Rather than referencing Wolters Kluwers’s Standard Federal Tax Reporter (learn more), the apparent basis of the 70K word count, or GPO printed editions, the National Taxpayers Union Foundation (NTUF) bases its page counts on the online version of the Code of Federal Regulations. Its estimates of the pages counts — which apparently include tax-relevant laws from more than just Title 26 — show the page counts growing from 15,179 pages in 2010 to 17,707 in 2021. (Source). All sources agree that the American tax system just keeps getting longer and more complex.
Rising compliance costs
As tax law increases in complexity, complying with it becomes more time-consuming and costly. According to NTUF, Americans in 2021 spent 6.53 billion hours, losing potentially productive work time worth $249 billion. Since income taxes began, NTUF estimates, Americans have dedicated a cumulative total of 745,000 years to tax compliance. In addition, taxpayers in 2021 spent $89.93 on out-of-pocket costs in order to complete their tax forms as required. (Source.)
The privatization of IRS collections
The incentives are all wrong. Collecting taxes is one of the few jobs you want the government working on instead of the private sector.” — Bob Wheeler, CPA
The IRS is painfully aware of the complexity of the tax code, not to mention the restrictions imposed by prior years’ budget cuts. It has a plan, called the IRS Future State.
It’s hard to argue with the goals of this plan. It includes streamlining the federal tax system and making it easier for taxpayers to interact with the IRS online, much as they do now with their banks. It should be noted that “streamlining” here has in view modernization and enhanced procedures, not simplification. Since simplification of the tax code would require action by Congress, it is beyond the purview of the IRS. The IRS specifies a goal of “managing,” not simplifying, the tax system’s “increasing complexity” (source). The IRS is also looking for ways to fight noncompliance, identity theft, and fraud.
Among its methods for achieving these goals is the privatization of some collection functions. But not everyone thinks this is a good idea.
Concerns with the private collection agencies
Among those concerned with the privatization of IRS collections are tax relief experts. In April of 2017, the IRS started a program that privatizes the debt collection of certain accounts as a way to offset its lack of resources. These private companies are assigned overdue tax accounts the IRS has shelved as bad debt. As mention above, the latest figures put the number of delinquent tax accounts assigned to private collection agencies at 2,514,034 with a total value of $25.6 billion (source).
Possibly perverse incentives
Private collection agencies are compensated based on how much they collect, not on the quality of their service. And they receive 25% of whatever they collect. At times, the incentives will work against treating taxpayers fairly and helping those suffering financial hardship to qualify for tax relief programs.
The practice of rewarding employees based on how much they collect in overdue taxes was the method of operation before the IRS Restructuring and Reform Act of 1998 (IRRA). A series of scandals caused by overzealous agents pushed Congress to reassess these methods, which is why the IRRA specifically states in Section 1204 that the “Internal Revenue Service shall not use records of tax enforcement results to evaluate employees; or to impose or suggest production quotas or goals.”
The IRS sidesteps this law by hiring private collection agencies to act in a way IRS employees are not allowed to operate. For example, private collection agencies offer installment agreements that last up to 7 years, but the law that authorizes the IRS to hire private agencies (26 U.S. Code 6306) sets a limit of 5 years.
Perverse incentives producing bad advice
The other concern is the language collectors use when talking to taxpayers. Internal documents show PCAs instructing employees to suggest taxpayers use their 401(k) funds, get a second mortgage, or use credit cards to pay their balance.
There is also concern about scam artists taking advantage of changes in the way the IRS communicates with taxpayers. As Wheeler points out: “We have always told our clients they will never get a phone call from the IRS, that if they do, it’s a scam, and they can hang up. Not anymore.” Since calls may now be from authorized IRS contractors, old advice that maximized security can no longer be given.
The IRS has tried using private debt collectors in the past
Every one of those experiments failed. The incentives for these private contractors are poorly implemented and even if all these private collectors acted reasonably and ethically – a big ‘if’ considering their track record — they are set up for failure because they don’t possess the resources and expertise available to the IRS.” — Harry Langenberg, founder of Optima Tax Relief
“Versions of the current private collection plan were tried out in the 1990s and 2000s,” says Harry Langenberg, founder of Optima Tax Relief. And, as noted in the quotation opening this section, “Every one of those experiments failed.” How many times should one retry a failed experiment before selecting a different approach?
Let’s review some past and present concerns with the IRS’ private debt collection program to see how the current experiment has fared.
2017: senators worry about legality of private debt collectors’ practices
Certain U.S. senators have expressed concerns about private collection of federal income tax debt. In a 2017 letter to Pioneer Credit Recovery, for instance, Sherrod Brown, Jeff Merkley, Benjamin Cardin, and Elizabeth Warren suggested that Pioneer was guilty of violating the tax code and other laws. Rather than directly accuse the company of wrongdoing, they expressed concern “that Pioneer may be (1) failing to adequately protect taxpayers from criminals posing as IRS agents; (2) pressuring taxpayers into risky financial transactions; (3) violating the Fair Debt Collection Practices Act (FDCP A) and provisions of the Internal Revenue Code; and (4) violating IRS guidelines and provisions of Pioneer’s IRS contract.”
To their expression of concern, the senators added an imperative making clear they were not really in any doubt Pioneer was breaking the law: “We urge you to remedy these matters and to end potential taxpayer abuse immediately.” One, of course, only calls upon others to correct their behavior when one knows their behavior is wrong, not when one is only concerned it might be.
Since Pioneer remained an authorized PCA working with the IRS after this, we must assume it was able to satisfy the senators that it had made a good faith effort to respond to their concerns.
2018: The National Taxpayer Advocate also has concerns
The National Taxpayer Advocate has also expressed concern about the practices and legality of private collection agencies. In its 2018 Objectives Report to Congress, this independent intra-IRS agency reported that “the IRS is implementing a PDC [Private Debt Collection] program in a manner that is arguably inconsistent with the law and that unnecessarily burdens taxpayers, especially those experiencing economic hardship” (source).
2019: Taxpayer First Act restricts private collectors
In 2019, Congress passed the Taxpayer First Act. This act excluded taxpayers with adjusted gross incomes at or below twice the federal poverty level from having their tax debts assigned to PCAs. This pleased the Taxpayer Advocate Service, which had been recommending this for years. The act also excludes taxpayers whose main income is Social Security Disability Insurance (SSDI) or Supplemental Security Income. These changes went into effect on the first of the year 2021. (Source.)
2020: senators remain concerned with safety of private debt collection
After the passage of the preceding act, but prior implementation of its changes to private debt collection, senators Warren and Brown expressed concerns about the pre-authorized direct debit (PADD) payments added to PCA tax-debt collections in 2019. In a January 2020 letter to IRS Commissioner Charles Retting, they worried that the sharing of bank information while setting up this process put the security of taxpayers’ bank accounts at risk. The IRS responded with reassurances based on the security protocols it requires PCAs to comply with, most notably the detailed guidance of its Publication 4812: Contractor Security & Privacy Controls. Should a collector fail to fully comply with these guidelines, the IRS could terminate its contract. “Also, the IRS stated that it holds the PCAs to the same standards as it holds itself, and any willful disclosure of taxpayer information could result in criminal and civil actions against the PCA employee.” (Source.)
Interestingly enough, TIGTA’s follow-up investigation found that only one of the four PCAs then contracting with the IRS had inadequate controls in place to limit employee access to taxpayer banking information. You guessed it: Pioneer. (Same source.)
When existing PCA contracts expired on 22 September 2021, the IRS chose not two renew its contract with Pioneer and one other prior provider. From September 2016 to September 2021, the four contracted PCAs were CBE Group, Continental Service Group, Performant Recovery, and Pioneer Credit Recovery. Post-September 2021, PCAs with IRS contracts include CBE and Continental Service Group from among the original four, along with a new PCA, Coast Professional. Though taxpayers still owe their back taxes, payment arrangements made with Performant and Pioneer are no longer in force. (Source.)
Positive spin: concerns do seem to be dealt with
This review of early and recent concerns and the legislative and IRS responses to them may allay some worries about private collection of IRS debts. Even so, Langenberg and Wheeler’s criticisms remain pertinent. That legislators and the IRS are trying to make the program work in a fair and equitable fashion doesn’t mean they will succeed. And, to put it bluntly, the actions that legislators and the IRS have taken only address some especially prominent problems the program has had. Other concerns about private debt collection remain.
What are the concerns with private debt collectors?
There are two main problems with the private collection program for IRS debt.
First, the private contractors offer taxpayers installment agreements that last up to seven years. (At last check, all contractors offered such terms.) But the code authorizing the IRS (26 U.S. Code 6306) to hire private tax collectors specifies a maximum of five years.
The other concern is the language collectors use when talking to taxpayers. When Pioneer Credit Recovery was still collecting tax debt, its scripts instructed employees to suggest taxpayers use their 401(k) funds, get a second mortgage, or use credit cards to pay their balance. Although Pioneer’s tax-collecting days are over, the incentives that made these scripts seem like a good idea (read: profitable) remain.
So, is a program that requires constant policing by legislators and regulatory agencies the best way to close the tax gap? For the time being, the IRS seems to believe that it is.
For more details on credit card debt and the consumer credit card industry read this report.
It is unclear how the IRS’ “Future State” changes will pan out. After all, not a lot has come of them since they were first drafted, and the IRS’ most current page for the proposal still cites a 2016 working draft. But what does seem clear is that tax relief companies will be a part of that future. As long as the tax code requires professionals to understand it, and the IRS doesn’t have the resources to give taxpayers the help they need, there will be a place for companies that provide tax resolution services.
If you are having tax problems, tax relief companies that have tax lawyers, enrolled agents, or certified public accountants on their staff can provide assistance. However, not all tax relief companies have the expertise or experience to provide effective help. The Federal Trade Commission warns about tax relief companies that promise they can provide relief from tax liabilities or misrepresent how long it will take to process debt relief application.
SuperMoney provides expert reviews and consumer comments on leading tax relief companies to help taxpayers do their due diligence before they commit to a company, product or service.
View Article Sources
- 16th Amendment to the U.S. Constitution: Federal Income Tax (1913) — National Archives
- Briefing Book: What is the tax gap? — Tax Policy Center
- CPI Inflation Calculator — Bureau of Labor Statistics
As the calculator does not work with numbers above 10 million, higher amounts have been approximated based on smaller figures. For convenience, all comparisons use December as the month.
- Direct Debit Installment Agreement Procedures Addressing Taxpayer Defaults Can Be Improved — Treasury Inspector General for Tax Administration
- Financial Audit: IRS’ Fiscal Year 1998 Financial Statements — U.S. Government Accountability Office
- Financial Audit: IRS’s Fiscal Years 2010 and 2009 Financial Statements — Government Accountability Office
- Fiscal Year 2021 Biannual Independent Assessment of Private Collection Agency Performance — Treasury Inspector General for Tax Administration via Council of the Inspectors General on Integrity and Efficiency
- Fiscal Year 2021 Budget in Brief — U.S. Department of the Treasury
- Fiscal Year 2022 Agency Financial Report — Internal Revenue Service
- Form 656 Booklet: Offer in Compromise — Internal Revenue Service
- Half in U.S. Think Their Taxes Too High, but Also “Fair” — Gallup
- Hearing on IRS Budget for Fiscal Year 1998 and the 1997 Tax Return Filing Season — U.S. Government Publishing Office
- Historical Income Tax Rates — Wolters Kluwer
- How many volumes are in the print Standard Federal Tax Reporter and what is included in each volume? — Wolters Kluwer
- How Many Words are in the Tax Code? — Tax Foundation
- Increasing Complexity Brings Back Bigger Compliance Burdens — National Taxpayers Union Foundation
- Internal Revenue Service Data Book, 2021 — Internal Revenue Service
Note that you may always find the latest edition of the Data Book at this location.
- IRS Criminal Investigation Annual Reports — Internal Revenue Service
- IRS Data Books for prior fiscal years 2000–2020 — Internal Revenue Service
- IRS Future State — Internal Revenue Service
- IRS Future State: The Path Traveled and the Road Ahead [Working Draft — December 2016] — Internal Revenue Service
- IRS Private Debt Collectors Accused Of Pressuring Taxpayers, Breaking The Law — Forbes
- IRS Should Do More to Expand Taxpayer Use of the Internet To Arrange Payment Agreements — Treasury Inspector General for Tax Administration
- Most Americans in 15 Years Say Their Tax Bill Is Too High — Gallup
- National Taxpayer Advocate Annual Report to Congress 2015, Volume Two: TAS Research & Related Studies — Taxpayer Advocate Service
- National Taxpayer Advocate Annual Report to Congress 2016: Executive Summary — Taxpayer Advocate Service
- National Taxpayer Advocate Annual Report to Congress 2021 — Taxpayer Advocate Service
- National Taxpayer Advocate Reviews Filing Season and Identifies Priority Areas and Challenges in Mid-Year Report to Congress — Internal Revenue Service
- New payment option available to taxpayers in private debt collection program — Internal Revenue Service
- NTA Blog: The IRS and Private Collection Agencies: Four Contracts Lapsed and Three New Ones Are in Place: What Does That Mean for Taxpayers? — Taxpayer Advocate Service
- Objectives Report to Congress, Fiscal Year 2018, Volume 2 — Taxpayer Advocate Service
- Offers in Compromise: Despite Congressional Actions, the IRS Has Failed To Realize the Potential of Offers in Compromise [Most Serious Problem No. 20 in 2014 Annual Report to Congress] — Taxpayer Advocate Service
- Public Law 105-206, 105th Congress: Internal Revenue Service Restructuring and Reform Act of 1998 — U.S. Government Publishing Office
- Public Law 109–222, 109th Congress: Tax Increase Prevention and Reconciliation Act of 2005 — U.S. Congress
- Public Law 116–25, 116th Congress: Taxpayer First Act — U.S. Congress
- Publication 4812: Contractor Security & Privacy Controls — Internal Revenue Service
- Several Changes Sought by the Internal Revenue Service Restructuring and Reform Act of 1998 Remain a Challenge — Treasury Inspector General for Tax Administration
A prior edition of this study cited an earlier TIGTA discussion of the IRS’ implementation of this Act. While the older document’s reference number no longer shows up in a TIGTA site search, curious readers may find it archived here.
- SOI Tax Stats – Filing Season Statistics, Mid-July Filing Season Statistics by AGI data for 2022 (2021 tax year) [most recent data available as of January 2023] — Internal Revenue Service
- SOI Tax Stats – Historic Table 2 — Internal Revenue Service
Tax Year 2020 was the most recent data available when this study was updated in 01/2023.
- SOI Tax Stats – Individual Income Tax Statistics – 2020 ZIP Code Data (SOI) — Internal Revenue Service
- Streamlined Installment Agreements — Internal Revenue Service
- Tax on personal income — Organisation for Economic Co-operation and Development
- Tax revenue — Organisation for Economic Co-operation and Development
- Temporarily Delay the Collection Process — Internal Revenue Service
- The Case for a Robust Attack on the Tax Gap — U.S. Department of the Treasury
- The Federal Budget in 2019: An Infographic — Congressional Budget Office
- The Federal Budget in Fiscal Year 2021: An Infographic — Congressional Budget Office
- The War on the IRS — Tax Policy Center
Note that the IRS budget chart in this article uses 2009 figures. $10 billion in 2009 dollars converts to roughly $7.6 billion in 1998 dollars.
- Topic No. 204 Offers in Compromise — Internal Revenue Service
- Trends in Compliance Activities Through Fiscal Year 2018 — Treasury Inspector General for Tax Administration
- Trends in Compliance Activities Through Fiscal Year 2019 — Treasury Inspector General for Tax Administration
- Trends in Compliance Activities Through Fiscal Year 2020 — Treasury Inspector General for Tax Administration
- United States Code, 2012 Edition, volumes 18, 19, and 20 — U.S. Government Publishing Office via Internet Archive
- United States Code, 2018 Edition, volumes 18, 19, 20, and 21 — U.S. Government Publishing Office
- Who We Are — Taxpayer Advocate Service
In addition to these external sources, readers may find multiple links to helpful SuperMoney pages in the study above.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.