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Why You Could Be Scammed by Fake Tax Collectors More than Ever This Year

Eric Pianin
Most Americans Are in Debt: Here’s How Much We Owe

Since the fall of 2013, more than 10,300 Americans have been victimized by a telephone scam in which the caller presents himself as an IRS or Treasury Department employee and demands immediate payment of unpaid taxes under threat of prosecution or even jail time. 

The gullible have forked over more than $55 million to these criminals using gift cards, prepaid debit cards, and wire transfers. Far from representing the federal government, these crooks typically work out of boiler rooms in India and other distant locals. 

Related: IRS Still Lacks Enough Auditors to Close the $485 Billion Tax Gap 

J. Russell George, the Treasury Department inspector general for tax administration, testified on Capitol Hill this month that the scheme made it to the top of the IRS’s “Dirty Dozen” tax scams and constituted “the largest, most pervasive impersonation scam in the history of our agency.” 

As bad as this sort of fraudulent activity has been, George is afraid it might increase dramatically after the IRS moves ahead with one of Congress’s more ill-conceived ideas – to hire four private collectors to go after hundreds of thousands of tax dodgers. 

On the face of it, it might make sense to bring in high powered collection agencies to go after billions of dollars of unpaid taxes when the IRS is underfunded and understaffed because of budget cuts by congressional Republicans over the past decade. There is a startling $485 billion annual gap between what the Treasury is owed in taxes and how much is paid. 

“It seems like a very obvious thing to do,” Treasury Secretary Steven Mnuchin testified during his Senate confirmation hearing. 

Related: IRS May Have Allowed Insurers to Escape Millions in Fees and Penalties 

Yet George, other IRS experts, and consumer advocates fear that once the four collection agencies are fully unleashed, they will harass taxpayers and invite more criminals to phone unsuspecting people and impersonate either IRS agents or the bill collectors recruited by the agency. “I can imagine the bad guys will soon catch on to this,” George testified on Capitol Hill earlier this month, as The New York Times reported late last week.  

David C. Vladeck, a professor at Georgetown Law School and a former director of the Federal Trade Commission’s consumer protection bureau, said in an email to The Fiscal Times late last week that Congress’s experimentation with hiring outside bill collectors to maximize tax collections failed twice before, in 1996 and 2006, and isn’t likely to do any better this time. 

At the same time, the move will end up subjecting more Americans to scam artists operating from overseas and in the U.S. 

“Tens of thousands of people fall victim to these scams each year,” he said “In my experience, the numbers go up after announcements like this.  And on the other side of the ledger, this targeted tax collection effort is likely to drill dry holes.  You can't collect money from folks who are genuinely broke.” 

Related: The IRS Just Invited More Tax Cheating by the Public

The idea for hiring private tax collection agencies was among a slew of budget gimmicks included in a six-year federal highway bill approved by Congress in July 2015 designed to help offset the $275 billion long-term cost of the program. The measure, heavily promoted by Sen. Chuck Schumer (D-NY) and Chuck Grassley (R-IA), purportedly would raise $2.4 billion over the coming decade through private debt collection of taxes owed.

The main idea is that the collection agencies can operate more freely than IRS employees in tracking down tax dodgers and hounding them until they pay. For example, in most cases, IRS agents are not permitted to call delinquent taxpayers by phone and demand payment or threaten legal action. Almost all communications are handled by mail or the internet. Yet private bill collectors can use other tactics to extract payment for which they are entitled to a percentage of the haul.

There is a long history of the government’s efforts to recruit private bill collectors to help with government tax collections.

The IRS first launched a pilot project in 1996 to use private debt collectors to whittle away a mountain of unpaid taxes. After a year, however, the effort was abandoned after the firms were found to have repeatedly violated the Fair Debt Collection Practices. The IRS incurred a net loss of $17 million in the debacle, according to the Center for Effective Government.

Related: IRS May Have Allowed Insurers to Escape Millions in Fees and Penalties

There was another attempt to utilize for-profit debt collectors as part of a major jobs creation law in 2004 during the administration of President George W. Bush, but that also lost money and was rife with abuses. One of the worst examples was the time debt collectors placed 150 phone calls to the elderly parents of an adult child who hadn’t paid his taxes on time.

These two failed efforts should have been a cautionary tale to Congress when it was assembling the highway bill, but Schumer, Grassley, and other lawmakers forged ahead with the idea.

Now critics fret that the IRS’s use of private collection agencies will greatly confuse taxpayers. Many will be uncertain whether they are dealing with a government employee or bona fide representatives.

“The public announcement of this program and the widespread publicity given to it gives scammers a cover,” said Vladeck. “People now know that the IRS has hired outside debt collectors, and that enables the scammers to tell a better story about why the targeted consumer is in arrears with paying taxes and that unless they pay up immediately, they'll be arrested or prosecuted.”

Note: If you get a call from a tax collector – legitimate or not -- do not give them your social security number or any other personal information. Do not give them any payment over the phone, either. Write down all the information and immediately call the IRS. If you do owe back taxes, better to deal directly with the IRS than some scammer or tax collector. 

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