The IRS has recently awarded new contracts to private collection agencies, but what exactly are private debt collectors and what do they do?
The IRS has been plagued by a drop in employees and resources for years, leading to lower and lower auditing rates, and increased concern over the fact that the agency may be becoming toothless when it comes to pursuing the biggest tax criminals in the country. In part to combat these issues, and help lower the tax gap, Congress passed a law requiring the IRS to work with private debt collectors from time to time.
Let’s go over what that means exactly.
Does the IRS Use Private Debt Collectors?
Yes, it does, albeit sparingly. The IRS is currently only working with three private debt collection agencies as of September 2021, and previously used four (two of which they still outsource debt collection too).
These private debt collectors do exactly as you’d expect – they pursue taxpayers with outstanding tax debt to the government. According to the IRS, a taxpayer’s account may be approached by a private debt collector if:
- The IRS doesn’t have the resources to tackle their case.
- The IRS cannot find them.
- Over a year has passed and there has been no movement on the account.
- Over two years have passed since the initial tax assessment that determined a delinquent payment or debt, and the account has not been assigned for collection.
Rule Out Private Debt Collection
If any or multiple of these factors apply to any given tax account with an unpaid tax liability, the IRS may put one of its three partnered private collection agencies to work on the case.
Just as there are factors that call for private debt collection, there are also factors that rule out private debt collection. You should not expect to hear that the IRS has asked private debt collectors to take care of the process if:
- The taxpayer is/has
- a minor.
- in a combat zone.
- a victim of tax-related identity theft.
- receiving supplemental security income or social security disability insurance.
- total adjusted gross income (AGI) is less than 200 percent of the current poverty level.
- under levy.
- is under criminal investigation.
- under legal examination or litigation.
- waiting on a pending offer in compromise.
- in an installment agreement with the IRS.
- has chosen to exercise their right to appeal.
- is classified as an innocent spouse in tax fraud or evasion.
- is currently in a disaster zone as declared by the president, and is requesting relief from tax collection.
- The taxpayer is/has
Who does the IRS Use as Private Debt Collectors?
As of September 2021, only these three companies may act as private debt collectors for the IRS:
This means that if any other company contacts you pretending to collect taxes for the IRS, it may be a scam. Please be sure to check the up-to-date information on the IRS’s website regarding private collection agencies, to ensure that you’re being contacted by a legitimate private collection agency.
The IRS also notes that a private collection agency will NEVER:
- Charge a fee prior to a payment agreement.
- Request that a payment is made to them directly, especially through gift cards, etc.
- Collect your financial information.
- Try to issue a federal tax lien or levy.
- Determine whether or not to accept a payment plan or offer in compromise.
A private collection agency will ALWAYS:
- Contact you via letter first.
- Explicitly identify themselves as IRS contractors.
- Will set up payment arrangements for you, with a total term length of seven years OR the debt’s expiration date (ten years from tax assessment date plus tolling period).
Aside from the aforementioned letter from the private collection agency, the IRS itself will also send you a letter if your case has been transferred to a private collection agency. This letter is called a Notice CP40.
What Does This Mean for Me?
If you have a debt with the IRS, you should take whatever measures you can to resolve it. For substantial debt, be sure to contact a tax professional for help.
If there hasn’t been any activity on your tax account for some time, or if the IRS hasn’t taken any action against you, or is presently backed up, you may be pursued by a private agency. All this really means is that you will receive a series of letters, first from the IRS and then from the private agency, followed by phone calls by the agency.
While the agency cannot place a lien or levy on you, the IRS can and will if you continue to ignore your tax bill. Furthermore, tax debt is subject to certain penalties and interest.
What Can a Tax Professional Do?
Getting in touch with a tax professional can help you resolve the issue as swiftly and cost-effectively as possible. If your bill feels insurmountable, you can rely on a professional to help you work through the steps needed to have it reduced, or to minimize and temporarily halt collection efforts, until you can get back on your feet.
Reduced Tax Debt
Once you’re able to pay your bill, you have the option of choosing to pay in monthly installments, in lump sums over less than six months, or all at once. However, If you cannot pay your debt in monthly installments before it expires, you can consider getting a reduced tax debt from the IRS in the form of an offer in compromise. You must make this offer first.
The IRS is very particular about offers in compromise, and there are stringent qualifications. A tax professional can help you determine whether it’s an option you should consider and can help you navigate the IRS’s requirements. Alternatively, you can work with a tax professional to pursue an appeal if you find that your tax debt has been erroneously attributed to you.