Private Debt Collectors Can’t Reach IRS’s “Low-Hanging Fruit”

The Washington Post article this week on the poor performance of the private debt collectors working for the Internal Revenue Service is a classic story of wrong-headed federal outsourcing. The paper reported that the companies, set loose in 2006 to collect $1 billion owed to Uncle Sam by deadbeat taxpayers, “have rounded up only $49 million, little more than half of what it has cost the IRS to implement the program. The debt collectors have pocketed commissions of up to 24 percent.”

What makes the story more galling is that the contractors were handed the work on a silver platter. By the early 2000s, the IRS was being underfunded to the point that it had to ignore many scofflaws. Rather than allowing the agency to hire more employees, who typically bring in much more than they cost, the Bush Administration and the Republican-controlled Congress gave in to long-standing lobbying (and ample campaign contributions) by the private debt collection industry to get a piece of the action. The private collectors were to be given the “low-hanging fruit”—taxpayers who had not disputed their debt but were slow in paying. Nonetheless, there were widespread misgivings about giving private parties access to personal financial information and having them represent the government in an activity so prone to abuse.

The initial companies chosen by the IRS in 2006 to participate in the program included one firm that had a particularly questionable track record: Linebarger Goggan Blair & Sampson LLP, an Austin-Texas based law firm that became a leading figure in outsourced debt collection for government agencies around the country. The Houston Chronicle once wrote (10/13/2002) that the firm was frequently criticized for its “political rainmaking and hardball collection tactics.” In 2004 a former name partner in the firm was convicted in a bribery case involving payments to city councilmen in San Antonio to secure a debt collection contract. Around the same time, the Linebarger firm privately settled a lawsuit in which a competitor alleged it had engaged in bribery and bid rigging in various locations. A collection contract awarded to the firm by New Orleans was reported to have been the subject of an FBI investigation.

The IRS removed the Linebarger firm from its private debt collection program last year without explanation. That left two contractors: CBE Group of Waterloo, Iowa and Pioneer Credit Recovery of Arcade, New York. Both companies have been sued multiple times over aggressive tactics in their efforts on behalf of clients other than the IRS.

Pioneer is a unit of SLM Corporation, otherwise known as Sallie Mae, which started out as a government-sponsored enterprise but was subsequently privatized and started trading on the New York Stock Exchange. It was to have been taken private in a leveraged buyout last year but the deal collapsed. The company, which has been suffering heavy losses, is being investigated by New York Attorney General Andrew Cuomo.

Leave it to the Bush Administration: Not only does it contract out functions that by all rights should be done by public employees, it makes highly dubious choices in selecting the companies to carry out the work. So it should come as no surprise when we end up with the worst outcome, which in this case means abuse of taxpayers and poor financial results. Ah, the magic of private enterprise.