IRS Uses Private Debt Collection Agencies – Are My Clients Affected?

Beginning in 2016, IRS is allowed to assign a person’s tax debt to a private company for collection. Oddly enough, this fairly new law is both tax law and transportation legislation, namely, the “Fixing America’s Surface Transportation Act” (or FAST). The idea was to facilitate an expedited collection of tax, to expedite American highway and infrastructure repairs.

This is a significant change in IRS procedure. This law introduces outside organizations into the complex function of handling your personal, private information. Further, the assignment also introduces new additional procedures in order to satisfy your clients’ tax debt.

No one enjoys having to interact with collection agencies. Without a defined set of procedural rules, there seems to be the threat of nonstandard, unexpected acts taken by that agency. Further, we all loathe the idea of some tax matter causing damage to our credit profiles. This change creates an intimidating new frontier for clients and tax practitioners alike.
This short article focuses on an important first concern about privacy.

What Can These Agencies Do with My Clients’ Personal Info?

According to the FAST Act, all cooperating agencies have a responsibility of strict protection of Taxpayer privacy. These agencies, as well as every person they employ, are held to the same standard of service as IRS employees.

Unless specifically excepted under 26 U.S. Code §6103, IRS employees and officers are prohibited from disclosing tax returns and information contained within tax returns. The statute includes practical exceptions (such as criminal enforcement agencies, state governments, even lien and levy sources), to whom information may be disclosed. The government may also disclose your clients’ private information to certain agencies for school loan collection, child support enforcement, and for law enforcement data researching.

Additionally, for IRS to be certain of agencies’ compliance with these same standards, each agency or contractor must agree to conduct an “on-site review” every three years, of each to determine compliance with these requirements. (See 26 U.S.C. §6103(b)(5)(B)(iii)(II) for that very specific rule.)

So Which Information is Protected by this Rule?

Congress demonstrated its full intent to include all tax return-relevant information be kept private. A Taxpayer client’s “return information” includes the following:

  • The person’s identity (name, address, Social Security number), as well as dependents’ identity;
  • The nature, source, or amount of his income;
  • The nature, source, or amount of his payments, receipts, deductions, exemptions, and credits;
  • Any information regarding his assets, liabilities, net worth;
  • Debt information, particularly tax liability, withholdings, deficiencies, refunds, or payment history;
  • Whether his return was, is, or will be under audit or investigation;
  • Any other data received, recorded, prepared, furnished, or collected by IRS with respect to a return;
  • Any other information regarding penalty, interest, fine, forfeiture, or other imposition, or offense.
  • This is only a portion of the exhaustive list (this part from subsection 6103(b)(2)(A) of the same statute).

So What Does This Mean? – Why is This Important to My Clients?

Let’s go back to the privacy rules. There is one certain path of disclosure that is notably missing from 26 U.S.C. §6103. Regarding the general rule of non-disclosure of private info, there is no exception for credit reporting bureaus. Put another way, the statute forbids employees of IRS and private collection from disclosing Taxpayer’s information to credit reporting bureaus!

Further, the FAST Act did not empower these private agencies with the power to issue enforcement actions of levy of tax lien. Those actions may only be taken by an assigned IRS employee or officer.

Think about that for a moment. One of the most threatening tools a private collection agent controls is the threat of reporting someone’s liabilities and payment history to the credit reporting bureaus. Further, because these agencies cannot enforce collection the way IRS can, the public has a de-facto buffer of protection against harmful or threatening acts by any private agency.

The power of these agencies has been cautiously limited. That being stated, maybe the idea of IRS using private collection firms is not quite so threatening after all.