The Government Accountability Office’s recent audit report of the IRS showed that the IRS collected an extra $54.3 billion through enforcement efforts. That is a great return on investment. However, a troubling fact was buried in Note 5 on the 110th page of the report: The IRS is owed $178 billion in back taxes, interest, and penalties, but expects to collect only $49 billion.

To put it in plain English: The IRS expects to write off as uncollectible $129 billion of its receivables. So, what is Congress’ answer to this challenge? They voted to place outstanding tax accounts with private debt collectors and let them keep a percentage of what they collect. This venture will fail just like a similar project 10 years ago. Let me explain.

Inevitable Crash and Burn

In 2004, Congress authorized a pilot program to assign delinquent tax accounts to private debt collectors.The IRS assigned about $1.87 billion in delinquent accounts to private debt collectors on a commission basis. According to a report by the IRS Taxpayer Advocate (an office that reports directly to Congress and not the IRS Commissioner), the private collectors managed to collect $86 million before the accounts were returned to the IRS. The IRS then collected a further $139 million. That means that the IRS collected $53 million more than the private debt collectors.

The federal government is $20 trillion in debt. It adds hundreds of billions more every single year. This can’t go on forever.

Congress now wants a do over. Alas, this program will crash and burn also for several reasons. First, Congress has placed several counterproductive restrictions on the private firms. For instance, the delinquent taxpayer can tell the private debt collector to send their accounts back to the IRS. I don’t think the private debt collectors will collect much money if the delinquent taxpayers can tell them to buzz off. Second, the private debt collector has no authority to settle the tax debt for a lower amount. So, the delinquent taxpayer will have little reason to bargain.

What’s wrong with this picture?

We Need to Stop Adding Debt

I would like to propose two better options:

1. President Trump could scrap his proposed $238 million cut in IRS funding in favor of a $2 billion increase. This increase would level the IRS budget at roughly the 2010 funding level (adjusted for inflation), and reverse over a half decade of budget cuts to the agency. The IRS would then be responsible for closing the $406 billion Net Tax Gap. That’s the amount of taxes the IRS fails to collect, due mostly to a lack of resources.
2. Auction the $178 billion in tax, interest, and penalties to the highest bidder. If the IRS can get more than $49 billion on the open market, then the federal government comes out ahead. Maybe the IRS can sell the debt on EBay. Or maybe they can entice U.S. multi-national corporations who have $1 trillion in cash overseas to repatriate the money (tax free of course) if they use the repatriated funds to buy the tax debts. The tax debts would be sold (in accounting parlance) “without recourse,” which means that all sales are final. The new owners of the debt would then be free to pursue collection actions against the delinquent taxpayer. They would earn a profit if they can collect more from the delinquent taxpayer than they paid to the IRS. This option, however, would require a major revision to IRS Disclosure Laws.

The federal government is $20 trillion in debt. It adds hundreds of billions more every single year. This can’t go on forever. We need an IRS that can enforce the Internal Revenue Code (IRC) to ensure that the government can pay more of its bills. It’s time for our congressional leaders to put partisanship aside and get to work.