IRS Collection Efforts to Change and Step Up

For several years the Internal Revenue Service has been outsourcing some of its delinquent tax collection work to private contractors. After a recent study by the MITRE Corp. indicated that private contractors achieved a far lower success rate for collecting delinquent taxes than IRS employees, IRS Commissioner Doug Shulman and Treasury Secretary Timothy Geithner announced that the practice of outsourcing collections would end.

The IRS further announced that they would be hiring 1,000 new collection personnel during FY 2009. Though it is still uncertain what kind of personnel the IRS will hire (automated collection agents, revenue agents, or criminal investigators), it is clear the IRS is having problems collecting from delinquent taxpayers.

A recent government study showed that the number of small businesses and individuals delinquent in owing past due federal taxes is increasing at an alarming rate, especially given the enormous budget deficit the government is facing.

Just among federal employees the amount of unpaid taxes is staggering. As of September 2007, federal employees including active duty and retired military personnel owed over $3.5 billion. The largest number of federal employee offenders are in the U.S. Postal Service with 4.16% delinquency rate. According to the IRS, the only federal agency that can fire an employee for unpaid federal taxes is the IRS. Even then, the IRS reported that it had slightly less than 1% of its employees in the delinquent category.

Even the Executive Office of the President had delinquent taxpayers for 2007 with 58 employees owning nearly $358,000.

With all the recent rhetoric from the Obama administration about cracking down on delinquent taxpayers, it will be interesting to see if the IRS actually increases their collection rate success. Small businesses need to toe the line when it comes to paying their IRS withholding taxes because those taxes (called “trust taxes”) are the ones that the IRS has the most leverage over, even if your business is defunct. The law requires officers and owners of a company to be held jointly and severally liable for any unpaid employee withholding taxes.

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