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Private collectors for tax debt: When can they be used?

Turning the calendar into a new year invariably means tax changes. In today's post, we will update you on one of the new features in US tax law this year: the use of debt collectors from private industry to go after certain types of tax debt.

This is not the first time Congress has required the IRS to enlist private collectors to collect unpaid taxes. Critics such as the National Taxpayer Advocate contend that two previous attempts to raise revenue this way not only failed to do that, but also opened up taxpayers to abusive collection tactics.

Despite these concerns, Congress passed a bill that brought back private collectors for tax debt and it became law. But what types of tax debt does this apply to?

The law does not require the IRS use private debt collectors for all types of tax debt. Indeed, there are certain types of tax debt that the law prohibits from going to a private collector. These include cases where there is an offer in compromise (OIC) or installment in agreement that is either active or pending.

Private collectors are also prohibited from becoming involved in innocent spouse cases. The same is true where there is an audit, criminal investigation, tax litigation, IRS appeal or a tax levy. In other words, there are significant exceptions.

This does not mean, however, that the exceptions completely swallow the new rule that the IRS must use private debt collectors in certain cases.

What are those cases? Very briefly, they are those in which three conditions are met.

One of the conditions concerns the statute of limitations for collecting the tax debt. No more than 1/3 of the limitations period must have passed without the assignment of an IRS employee to make collection efforts.

The IRS must also have failed to initiate collection action due to resource constraints or inability to find the taxpayer. And if the tax debt is in collections, more than a year must have elapsed without any IRS interaction with the taxpayer.

How this will all play out is unclear. We will try to update you later in the year on how the new private debt collector program is working in practice.

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