WASHINGTON — Two private debt-collection companies based in western New York would be awarded contracts to collect delinquent federal taxes under legislation proposed by Democratic Sen. Chuck Schumer of New York.
ConServe in the Rochester suburb of Fairport and Pioneer Credit Recovery of Arcade in rural Wyoming County would be among four firms sharing about $60 million in annual commissions from an estimated $240 million in "inactive tax receivables'' owed to the Internal Revenue Service.
Schumer said his proposal would create jobs in upstate New York and increase tax collections while addressing the shortcomings that affected previous efforts to use private debt collectors.
The two previous experiments in 1996-1997 and 2006-2009 lost money and led to widespread consumer complaints.
"In the past these private companies were sort of given free rein,'' Schumer said. "This time it's much more limited. We ran the traps on this. Look, I want to create jobs, but only with a good program, and I think we've done both.''
Schumer's proposal would limit eligible debt-collection companies to the four currently under contract with the Treasury Department's Bureau of Fiscal Service to collect non-tax federal debts. He described them as "best practices'' firms that operate ethically.
Chi Chi Wu, an attorney specializing in tax-related consumer issues for the National Consumer Law Center in Boston, doubted it's possible.
"There were consumer protections in the last bill," Wu said. "Collecting taxes is such an innately government action."
IRS officials have discretion to declare a tax debt uncollectible because of the taxpayer's financial condition. But a private debt collector's mission "is to get blood out of stone,'' even when paying back taxes might leave a taxpayer unable to pay for groceries or rent, she said.
"When you pay someone on a percentage, the incentive is to get whatever you can get,'' Wu said.
The debt collection firms would receive 25 percent of the tax money they collect, with another 25 percent going to the IRS for administration and the remaining 50 percent going to the Treasury as tax revenue.
The Senate Finance Committee recently added Schumer's proposal to a bill to renew various tax provisions that recently expired. However, the future of the EXPIRE Act is uncertain because of a partisan dispute over how many amendments will be allowed when it reaches the Senate floor.
When it does reach the floor, Democratic Sen. Ben Cardin of Maryland plans to offer an amendment to remove Schumer's proposal.
"Sen. Cardin is concerned that previous attempts at instituting similar private tax collection programs resulted in net revenue losses and harassment complaints from taxpayers,'' spokeswoman Sue Walitsky said in an email. "He also is especially worried about how low-income taxpayers would be affected. Both Treasury and the IRS oppose the private tax collection provisions.''
The IRS recently estimated that 79 percent of the taxpayers targeted by Schumer's proposal live at or below 250 percent of the federal poverty level, according to a May 13 letter from Taxpayer Advocate Nina Olson.
In her letter to members of the congressional committees that write tax policy, Olson said it's incorrect to assume the IRS has a large number of inactive accounts.
"The IRS is required by law to send a collection notice to every taxpayer with a delinquent account at least once annually,'' she wrote. "Second, the IRS collects significant revenue each year via refund offset.''
Those offsets, which withhold tax refunds from taxpayers who owe money for earlier years, amounted to $3.9 billion last year.
Olson suggested Congress should, as an alternative, increase funding for the IRS Automated Collection System, which collects about $20 in back taxes for every $1 spent.