July 21, 2017 | Global Banking & Finance Review
Fund Forum Tax Flash

Someone Calling You About Your IRS Tax Debt May Be Real Now!

4 min

Starting in April of this year, private debt collectors have begun collecting on certain tax debts that the IRS had not previously been able to collect on. They have started by contacting several hundred taxpayers in the initial wave. These private debt collectors do not have access to the IRS's arsenal of collection powers, and, as discussed below, taxpayers can easily avoid the private debt collectors. However, this new program can cause confusion and may be exploited by fraudsters posing as legitimate private debt collectors.

The fund community should be wary of this new program, as a typical fund deals with a myriad of tax payment and withholding obligations (e.g., income and employment taxes), a ripe target for any would-be fraudster. We have prepared this brief overview of the private debt collection program, so you can know what to expect, and how to distinguish legitimate private debt collectors from the fraudsters.

The new private debt collection program is a consequence of statutory changes made by the 2015 FAST Act that require the IRS to enter into contracts with private debt collectors to collect "inactive tax receivables." An inactive tax receivable is defined as a tax receivable (1) that has been removed from the IRS's active inventory because of a lack of resources or an inability to find the taxpayer; (2) for which more than one-third of the applicable limitation period has passed and no IRS employee has been assigned to collect the receivable; or (3) that has been assigned but more than 365 days have passed without interaction between the IRS and the taxpayer or a third party.

Certain taxpayer accounts are not subject to being assigned to a private debt collector. This includes tax receivables classified as "currently not collectible" (i.e., the IRS has recognized that the taxpayer cannot afford to pay) or as a pending or active offer in compromise or installment agreement cases, innocent spouse cases, or accounts belonging to a deceased, minor, deployed service members, and ID theft victims.

A taxpayer whose accounts have been assigned to a private debt collector can expect a contact letter from the IRS notifying the taxpayer and the taxpayer's representative that the taxpayer's account has been transferred to a private debt collector. The contact letter will contain a special, 10-digit Taxpayer Identification Number (TAN). Ten days later, the private debt collector will send a contact letter to the taxpayer and the taxpayer's representative. The letter from the private debt collector will contain the TAN previously provided to the taxpayer in the IRS contact letter. The TAN will also be used for authentication purposes in subsequent telephone contact from the private debt collector. Five days after sending the contact letter, the private debt collector can begin contacting the taxpayer by telephone.

For those wishing to avoid harassing calls from private debt collectors, there is good news: a taxpayer's account will be returned to the IRS if the taxpayer or the taxpayer's representative notifies the private debt collector in writing that it should cease contacting the taxpayer. Consequently, this new program is designed to facilitate collection of tax receivables that currently fall through the cracks but is not designed to significantly enhance the IRS's ability to collect those taxes. Thus, beware of supposed private debt collectors that claim to possess brand new enforcement powers, such as seizing your bank account in the next 5 minutes.

On the other hand, all may not be bad in the private collector land. A private collector may be more open to negotiating the amount and payment method than an IRS agent, which could be a huge relief to you, as many who deal with IRS will agree. So you may want to keep an open mind and determine whether a private collector is right for you.

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This alert was prepared for marketing purposes and does not constitute tax opinion or advice to any taxpayer. Each taxpayer should consult its own tax advisor for the application of the tax laws to its own facts. In addition, this alert is based on current U.S. federal income tax law, and the author will not update any reader on any future changes, including those with retroactive effect, in U.S. federal income tax law.