IRS Meets Repo Man

Republican proposal to use private debt-collection firms for the recovery of delinquent taxes has heightened fears that an Internal Revenue Service data-matching program will violate individuals' privacy and prompt harassment of taxpayers.

"That could be a very dangerous combination.... Arming a private collection firm with that information could open temptations for abuse," said Pete Sepp, a spokesman for the National Taxpayers Union, a Washington-based tax watchdog group that claims 300,000 members across the nation.

David Bonisar, an advocate for electronic privacy with the Washington-based Electronic Privacy Information Center, said the IRS' data-matching plan is "an incredibly dangerous idea" that would only be worsened by combining it with debt collectors' aggressive pursuit of delinquent taxes. "Privatization

is going too far when critical government

activities are given to private firms," he

said.

The IRS data-matching program is called Compliance 2000. It combines computerized information from tax, credit card, loan-tracking, payroll and other databases to estimate company and individual incomes, allowing IRS officials to spot possible underpayment of taxes, said Hank Philcox, the IRS' chief information officer.

The Compliance 2000 program, in combination with better agency computer systems and several thousand additional tax inspectors, is intended to help boost tax-payment rates to 90 percent, generating $68 billion in additional revenue every year for the Treasury Department, said Philcox.

Individuals and companies pay the IRS an average of 82 percent of what they owe, says Philcox. For every percentage point increase in this compliance rate, the Treasury gains about $8.5 billion, he said.

Because of its computer modernization efforts and an increased number of tax inspectors, the IRS already expects to gather an extra $9 billion in otherwise unpaid taxes by 1999, Philcox said.

But following protests by the NTU, EPIC and other electronic privacy groups, the IRS has slowed its Compliance 2000 plan to remedy privacy concerns. For example, Philcox said the Compliance 2000 system will not try to calculate a tax bill for each taxpayer, but will try to determine the average tax bill for groups such as restaurant workers, car dealerships and gas station operators.

"We do not intend to overreach in any area where the compliance rate is high," but will use data matching to identify groups that underpay taxes, he said. "We're very concerned about the privacy issue" and the agency will release the final Compliance 2000 policy in three to six months, Philcox said.

But privacy advocates want tougher controls on Compliance 2000. Without new laws or tight regulations, "there will be almost no oversight" of the IRS' use of data-matching capabilities, said Bonisar.

"They could sent out blanket tax-due notices [to people] that fit a computer profile... the technology is moving far faster than the IRS' wisdom," said Sepp.

Bonisar's and Sepp's concern about Compliance 2000 is heightened by the prospect of private debt collection firms working hand-in-glove with the IRS.

They aren't the first to raise concerns about computer modernization at the IRS and fears of dwindling privacy. The IRS is currently in its third modernization effort since the 1960s. And this latest multibillion dollar effort, like the failed ones before it, faces nearly constant scrutiny from Congress and the General Accounting Office. Partly, complaints have focused on privacy, but they have also centered on fears that the agency is not technically adept enough to convert to new systems without bringing the tax collection system to a crashing halt.

The proposed use of debt collection firms is a spin-off of the House Republican task force on privatization, which is headed by Wisconsin Rep. Scott Klug. Debt collectors could generate $25 billion to $30 billion for the Treasury Department by pursuing an estimated backlog of $150 billion in delinquent taxes, he told a hearing on privatization held before the Government Reform Committee's panel on management and information technology.

"My recommendation [is] to move forward aggressively with debt collection" by private firms, initially with a pilot program, Klug told the panel March 14. The privatization plan will be included in a seven-year budget plan to be released in May by the House Budget Committee, chaired by Ohio's Rep. John Kasich

But under Klug's plan, "an unscrupulous private collection firm might be able to use [Compliance 2000] information to their advantage [unless there is] very tight control," charged Sepp.

"You have the potential for a lot of trouble" once debt collection firms begin pursuing individuals identified by the IRS as owing delinquent taxes, says David Burnham, author of a 1988 book on the IRS, titled A Law Unto Itself: The IRS and the Abuse of Power.

However, IRS officials have no plans to use private debt collection firms, because of concern about taxpayers' privacy and because the IRS has enough legal power and people to get the job done, Philcox said. Congress should not try to privatize tax collection, he said because "we think it is an inherently government activity."

Private debt collection by states has a mixed record, according to a February 1994 GAO report titled "Tax Administration; State Tax Administrators' Views on Delinquent Tax Collection Methods." At least 31 states use debt collectors to recover unpaid taxes, but the recovery rate is low. State officials received between 45 percent and 0.5 percent of tax debts handled by debt collection companies, according to the report.

But proposals to privatize debt collection or to restrain the IRS' data-matching misses the core problem, according to Daniel Mitchell, an analyst at the Washington-based Heritage Foundation. "The problem is that the tax code is too complex," and should be replaced by a simple flat tax under which individuals would pay a standard percentage of their income -- such as 20 percent -- to the government, he said. "We'd be far better off to fix these [unpaid tax and data-matching] problems by having a simpler tax code."