When Treasury Secretary Steven Mnuchin was asked at his confirmation hearing what he thought about using private companies to collect money owed to the government, he replied that it “seems like a very obvious thing to do.”
It may have been obvious, but it certainly was not economical.
Private debt collectors cost the Internal Revenue Service $20 million in the last fiscal year, but brought in only $6.7 million in back taxes, the agency’s taxpayer advocate reported Wednesday. That was less than 1 percent of the amount assigned for collection.
What’s more, private contractors in some cases were paid 25 percent commissions on collections that the I.R.S. made without their help, according to the annual report by Nina E. Olson, who heads the Taxpayer Advocate Service, an independent office within the I.R.S.
While Republicans have been the most vocal proponents of privatizing public services, congressional Democrats are equally responsible for the I.R.S.’s program. Despite the pointed failure of similar efforts in the past, Congress passed a law in 2015 requiring the I.R.S. to use outside contractors to make a dent in the $138 billion that taxpayers owe the government.
The outsourcing began last April. Since then, the report stated, “the I.R.S. has implemented the program in a manner that causes excessive financial harm to taxpayers and constitutes an end run around taxpayer rights protections.”
The I.R.S. excuses hardship cases from collection efforts to ensure that households can still pay for basic living expenses. But an analysis by the advocate’s office found that 45 percent of the collections by private contractors were from taxpayers whose incomes fell below the minimum threshold, including those who received Social Security disability payments.
The report underscored Ms. Olson’s repeated complaints that Congress is underfunding the agency, warning that the new tax law will bring added pressures that will further impair its ability to respond to taxpayers, update technology and maintain compliance programs. Since 2010, funding for the I.R.S. has shrunk by a fifth, after taking inflation into account.
The agency receives more than 95 million phone calls a year, for example, but it expects to answer only about 60 percent during the current filing season; that number is estimated to decline to 40 percent for the rest of the year. And that was before the new law was passed. If previous tax code changes are any guide, the number of queries is likely to rise significantly, pushing down the response figure even more.
A preliminary estimate by the I.R.S. figured that the new law would require an additional $495 million over the next two fiscal years to handle tasks like updating programming, answering phone calls, drafting and publishing new forms, revising regulations and training employees on the new code.
Ms. Olson said in the report that “the discussion about I.R.S. funding has largely proceeded based on false choices — either ‘you can’t trust the I.R.S. to administer the tax system, so don’t fund it’ or ‘because the I.R.S. doesn’t have enough funding, it can’t do the things it needs to do to administer the tax system.’” Both added that funding and service improvements are needed, she said.
The I.R.S. is rushing to move taxpayer services online and limit personal contact, she said, but the problem is that many households aren’t in a position to keep up. A 2016-17 survey by the advocate’s office found that 41 million taxpayers had no broadband connection in their homes, including 14 million with no internet access at all. Many other Americans who do use the agency’s online service still want to be able to speak to a person on the telephone or face to face at times, the I.R.S. has found.
Among the most serious problems identified by the advocate’s office is a lack of advance notice when citizens are in danger of losing their passports because they owe the I.R.S. more than $50,000.
In addition, Ms. Olson reiterated previously expressed worries that the expedited process of approving organizations’ tax-exempt status was resulting in rubber-stamp approvals of groups that had not established their qualifications. She cited an error rate of 46 percent in a sampling last year.
The streamlined process, for charities with assets under $250,000, was partly a response to a furor over the agency’s intensive scrutiny of certain political groups, including some associated with the Tea Party movement. Flaws in the new process, the report said, can undermine public trust in the charitable sector.
Sarah Allen, an I.R.S. spokeswoman, said the agency’s leaders would review the taxpayer advocate’s proposals.
Representative Kevin Brady, Republican of Texas and the chairman of the House Ways and Means Committee, who helped spearhead the tax revision efforts, has said he plans to focus on reforming the Internal Revenue Service this year. Ms. Olson’s office issued a new publication that includes its top 50 legislative recommendations.