Mon, Mar 17, 2008 (2:06 a.m.)

Congress was told last week that the Internal Revenue Service’s use of private companies to collect unpaid tax debts is costing, rather than saving, the government money.

Nina Olson, appointed as national taxpayer advocate by the Treasury secretary, provides oversight of the IRS. Olson told the House Ways and Means Committee the agency is losing at least $81 million a year by using private debt collection companies, The New York Times reports.

At the direction of Congress, the IRS has been using private companies to collect undisputed tax debts of less than $25,000 since 2004, ostensibly to save money and net better collections. But the $71 million in startup costs, combined with the $7.65 million in annual operating costs and the $4.6 million in commissions paid to the companies, has resulted in the opposite happening, Olson told the lawmakers.

The private companies brought in $32 million last year and are expected to collect only $23 million this year. Minus the operating costs, the companies brought in only $11 million. Originally, the IRS said the program would bring in $150 million to $220 million a year in unpaid taxes, the Times reports.

What’s more, Olson told the House panel last week that if the $7 million in annual operating costs for private collections were put into the agency’s existing automated debt collection system, the IRS could net $92 million to $145 million a year.

In an editorial in 2006 we opposed the IRS’ use of private debt collection after its own advisory board and members of the National Treasury Employees Union noted that the plan places Americans’ sensitive personal data into the hands of private companies.

Now we learn that the government is also losing money and failing to collect even a third of the unpaid taxes it is owed under this program.

Taxpayers expect that the taxes they pay will be spent wisely. A secure and effective means of collecting those taxes is one of the most basic services government should offer. Congress should end the IRS’ practice of using outside companies to do its job.