Back Taxes and Fixing Highways……Oh, What a Mix!

Well, well, well. Talk about strange bedfellows.

Recently, (December 4, 2015), President Obama signed into law the Fixing America’s Surface Transportation Act, or the “FAST Act”. It provides long-term funding for transportation projects, including new highways, over a period of ten years. And as you would expect in a bill targeting highways and infrastructure, it also requires the Internal Revenue Service (IRS) to use private debt collection companies.

Oh wait minute! You didn’t expect that? Well of course you didn’t. Because tax policy, in my opinion, has no business being jammed into an already extremely large bill of
1,301 pages mainly focused on highways
(here are all 1,301 pages of the FAST Act in case you are looking for a nice weekend read).
But that isn’t anything new for Congress. Is it?

But lo and behold there it is, at Section 32102 of the FAST Act: REFORM OF RULES
RELATING TO QUALIFIED TAX COLLECTION CONTRACTS
(I’ll save you a little
trouble; Section 32102 is on page 1,124 of 1,301. See the link in the prior paragraph).

So why “reform” you might ask? Under current law, the IRS already has the authority to use private debt collection companies to locate and contact taxpayers owing outstanding tax liabilities and to arrange payment of those taxes.
But historically, farming out collection hasn’t worked out to well for the IRS.

Under the new law, there’s little in the way of discretion: the IRS is required to use private debt collection companies to collect “inactive tax receivables.” Inactive tax receivables are defined as any tax debt that has been:

  • removed from the active inventory for lack of resources or inability to locate the taxpayer;
  • for which more than 1/3 of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or
  • for which, a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third-party for purposes of furthering the collection.

For purposes of the law, a tax receivable is any outstanding assessment which the IRS includes in potentially collectible inventory.

Debts which are not eligible for collections from private debt collection companies include those that are subject to a pending or active Offer-In-Compromise (OIC) or installment agreement as well as innocent spouse cases. Also excluded are cases currently under examination, litigation, criminal investigation, or levy and those subject to appeal as well as any taxpayer who has been identified as deceased, a minor under the age of 18, in a designated combat zone, or a victim of identity theft. The bill also allows for procedural discretion for matters involving taxpayers in presidentially declared disaster areas.

The language regarding disclosure is, of course, sufficiently vague. Private debt collection companies “may” – not must – identify themselves to taxpayers as IRS contractors, as well as the subject and reason for the contact. Disclosures are “permitted only in situations and under conditions approved by the Secretary.”

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