If you owe the Internal Revenue Service tax money, you may know that some of the penalties for non-payment can become pricey: The IRS can impose additional late or underpayment penalties, and apply interest rate charges on amounts owed until the taxpayer resolves the debt. If the IRS fails to collect on the tax debt through voluntary action, more extreme collections measures may take place. For example, garnishment of a person’s wages or even imprisonment.
Despite that it has the ability to enforce such stiff penalties, however, the IRS’ end goal is to collect the money it’s owed—and that amount now totals $138 billion, according to the New York Times. The IRS’ has a bad track record for collecting unpaid tax debts with third-party tax debt collectors. It is evidenced by failed attempts in 1996, and again, in 2006. It seems the IRS believes “the third time’s the charm” when it comes to using third-party collectors. At the earlier part of 2017, the IRS secured the help of four third-party collection agencies who are tasked with convincing delinquent taxpayers to pay up. The goal is to collect at least $2.4 billion over the next decade, according to The New York Times.
Financial Advice You’ll Be Glad You Didn’t Take from a Third Party Tax Debt Collector
The IRS will primarily outsource collection efforts for those taxpayer accounts that have gone unpaid for several years. However, it may also include taxpayer accounts it merely lacks the resources to dedicate adequate time into managing.
The four private collections companies the IRS has hired (CBE, ConServe, Performant and Pioneer) are compensated in part by commission. A third party tax debt collector is not paid if it fails to convince a taxpayer to pay something. As a result, some private collection companies have reportedly turned to questionable collection tactics, including:
- Suggesting that a taxpayer withdraw retirement account funds to pay their tax bill. The advice has been provided even though the action could create an even more significant tax liability for the taxpayer. For example, incurring early IRA or 401k withdrawal penalties because of the person’s age and the type of account.
- Advising a taxpayer to borrow, or take out a home loan to pay off the tax debt
- Recommending that a taxpayer charge their tax bill onto a credit card
- Asking that a taxpayer borrow money from loved ones to pay a tax debt
Know That You Have Rights—Despite Your Tax Debt
Aside from resisting the unwise financial suggestions of private tax debt collectors, taxpayers who have tax debt should know their rights. For example, if the IRS assigns a taxpayer account to a private debt collector, the taxpayer will receive a letter. This letter from the IRS notifies a taxpayer that a collections agency has been assigned to their account. Furthermore, the agency will send a 2nd letter confirming that the taxpayer’s account has been transferred to a collections agency. If you do not receive formal notice that your account was assigned to a third party tax debt collector but a collections agency contacts regarding unpaid taxes claiming to work on behalf of the IRS, notify the IRS immediately.
The Fair Debt Collection Practices Act outlines a number of rules and procedures collections agents must follow when handling collections accounts. First, debt collectors cannot harass taxpayers regarding their tax debt. Specifically, a debt collector must obey the taxpayer if the taxpayer does want any contact at work. Second, they cannot threaten taxpayers to make a payment.
Taxpayers with debt can also refuse to work with a third party tax debt collector. They will need to send a formal letter to the collections agency stating as much. If you do decide to pay all or a portion of unpaid tax debt, the IRS states that payment should be issued to the U.S. Treasury and sent directly to the IRS–not the private collection agency. Finally, if you are having trouble working directly with the IRS or a third party tax debt collector, work instead with a licensed tax professional.