Former IRS Attorney Discusses Private Debt Collection

Per Hearing Advisory FC-12 (dated 23 May 2007, advised per e-mail dated 16 May 2007), Ways and Means Committee Chairman Rangel announced a hearing on the Internal Revenue Service's Use of Private Debt Collection Companies to Collect Federal Income Taxes. Said announcement solicited additional germane written comments from the public. This Commentary is accordingly submitted.

II. COMMENTATOR'S BACKGROUND & CONTACT INFORMATION:

Background: The Commentator, Kenneth H. Ryesky, Esq., is a member of the Bars of New York, New Jersey and Pennsylvania, and is an Adjunct Assistant Professor, Department of Accounting and Information Systems, Queens College of the City University of New York. He has also taught courses in Business Law, and in Taxation, at Sy Syms School of Business, Yeshiva University. Prior to entering into the private practice of law, Mr. Ryesky served as an Attorney with the Internal Revenue Service ("IRS"), Manhattan District. In addition to his law degree, Mr. Ryesky holds BBA and MBA degrees in Management. He has authored several scholarly articles on taxation.

Contact information: Kenneth H. Ryesky, Esq., Department of Accounting & Information Systems, 215 Powdermaker Hall, Queens College CUNY, 65-30 Kissena Boulevard, Flushing, NY 11367. Telephone 718/997-5070 (vox), 718/997-5079 (fax). E-mail: khresq@sprintmail.com.

Disclaimer: This Commentary reflects the Commentator's personal views, is not written or submitted on behalf of any other person or entity, and does not necessarily represent the official position of any person, entity, organization or institution with which the Commentator is or has been associated, employed or retained.

III. COMMENTS ON THE ISSUES:

A. THE AMERICAN SYSTEM OF VOLUNTARY TAX COMPLIANCE:

The American system of voluntary tax compliance is based upon self-assessment in the initial filing of the return and calculation of the tax, and the payment of the proper amount of the tax. "[V]oluntary compliance is the least restrictive means by which the IRS furthers the compelling governmental interest in uniform, mandatory participation in the federal income tax system." Browne v. United States, 176 F.3d 25, 26 (2d Cir. 1999). For all of its displeasures, the American system of voluntary compliance has long proven to be a far, far preferable alternative to the more coercive taxation systems employed in other societies of now and yore. Nothing less than American freedom is at stake when Congress legislates its policies for tax administration.

"The United States is a unique country in the context of tax administration because of the extent to which people willingly pay the taxes they owe to federal, state and local governments." United States v. Kloda, 133 F. Supp. 2d 345, 347 (S.D.N.Y. 2001). The American system of voluntary compliance facilitates the wide degree of personal, and therefore, economic, freedom which has made America a great and prosperous nation.

But the functioning of America's special and unique system carries with it some special and unique issues.

1. Universal Voluntary Compliance Standard: Compliance with any tax law is not and cannot be a pleasurable experience, and indeed, there is "[no] requirement that taxpayers must enjoy or look forward to paying their taxes," Belli v. Commissioner, T.C. Memo 1989-403. "Taxpayers' willingness to voluntarily comply with the tax laws depends in part on their confidence that their friends, neighbors, and business competitors are paying their fair share of taxes." MICHAEL BROSTEK, GAO DIRECTOR OF STRATEGIC ISSUES, TESTIMONY BEFORE THE SUBCOMMITTEE ON TRANSPORTATION, TREASURY, AND INDEPENDENT AGENCIES, COMMITTEE ON APPROPRIATIONS, HOUSE OF REPRESENTATIVES, GAO Testimony GAO-03-732T (7 May 2003), at page 3. Though the ideal of 100% voluntary compliance is obviously not achievable in practice, it is the standard by which the public and Congress implicitly grade the IRS, and the standard by which the IRS should evaluate its own achievement level and to which it should strive.

2. Confidentiality of Taxpayer Personal Information: As this Commentator recently observed,

The vast majority of IRS personnel are honest, faithful, competent and diligent public servants. Due to the nature of taxation, however, the misdeeds of even one IRS employee can inflict significant damage the IRS's assiduously earned public image, particularly where the wrongdoing involves the illegal misappropriation of personal information which the American public expects will be held by the IRS in secure confidence, see, e.g. U.S. Attorney's Office, Northern District of Georgia, Press Release, "Former IRS Employee Sentenced for Identity Theft Scheme" (29 August 2005), available on the Internet at (http://www.usdoj.gov/usao/gan/press/2005/08-29-2005b.html) (accessed 25 May 2007).

There are, to be sure, compelling interests warranting disclosure, including but not limited to tax enforcement, general law enforcement, immigration control and homeland security. Any such disclosures, however must be made very cautiously, upon good cause clearly articulated, in a manner which protects, to the greatest extent practicable under the circumstances, the taxpaying public's expectations of confidentiality.

3. Public Confidence in the System and its Personnel: Public image is very vital to the sound functioning of the tax system, and the public must be assured that even the low ranking clerks who perform the menial tasks for the IRS or other taxation authority are held to compliance with the tax laws. Rotolo v. Merit Systems Protection Bd., 636 F.2d 6, 8 (1st Cir. 1980) and cases cited therein; Kooi v. Chu, 129 A.D.2d 393, 395 -- 396, 517 N.Y.S.2d 601, 603 (N.Y. App.Div., 3d Dept. 1987). New employees coming aboard at the IRS are themselves required to undergo an audit of their own tax returns, I.R.M. ¶ 4.2.6.3 (02/01/2005); see also Dyess v. Commissioner, T.C. Memo 1993-219; Jules v. Commissioner, T.C. Memo 1982-290. Indeed, this Commentator has previously expounded upon the tendencies of the courts to effectively hold current and former employees of the IRS and of the state taxation authorities to a more stringent standard in their own personal tax affairs, Kenneth H. Ryesky, Of Taxes and Duties: Taxing the System with Public Employees' Tax Obligations, 31 AKRON L. REV. 349, 357-364 (1998); see also Bennett v. Department of the Treasury, 2006 U.S. App. LEXIS 25162 (Fed. Cir. 2006); Nwachukwu v. Commissioner, T.C. Memo 2000-27; Trimble-Gee v. Commissioner, T.C. Summary Opinion 2007-68; Anthony Ledbetter v. Department of the Treasury, 2006 MSPB 218 (18 July 2006). The IRS can and does terminate employees even for tax law noncompliances of even relatively minor dollar value, see, e.g. Jenkins v. Dept. of the Treasury, 2007 MSPB 4 (10 January 2007).

Relieving individuals of personal accountability merely because they are on the payroll of an independent contractor instead of being IRS employees will not enhance the public confidence in the system, and would ultimately wreak deleterious effects upon the voluntary compliance ethic. Indeed, the confidence and positive collective attitude of the very IRS workforce that runs the system is imperiled when one of their number evades the tax laws with impunity, see, e.g. Giles v. United States, 213 Ct. Cl. 602, 607, 553 F.2d 647, 650 (Ct.Cl. 1977). Toleration of such lapses among those employed by private collection agencies would similarly detract from the general morale and effectiveness of the IRS's workforce.

Ms. Olson's testimony discusses at length the fact that taxation is an inherently governmental function. This has implications that impact the public confidence in the system and its personnel. Dysfunctions in an outsourced tax collection activity are far more deleterious to the public confidence in the system than are more serious blunders in other outsourced commercial activities. For example, a case where a sergeant of a private security firm contracted to secure an IRS facility refuses to call in the police to handle a gunpoint abduction, see Gantt v. Security, USA, Inc., 356 F.3d 547 (4th Cir. 2004), cert. denied 543 U.S. 814 (2004), does not imperil the public confidence in the taxation system nearly as much as a private collector who reneges on his or her word and causes the taxpayer's property to be sold at a public sale, see, e.g. Gonzalez v. Heard, Goggan, Blair & Williams, 923 S.W.2d 764, appeal dism'd 1999 Tex. App. LEXIS 3658 (1999).

B. ENFORCING COMPLIANCE:

Voluntary tax compliance means "that taxpayers are expected to comply with the law without being compelled to do so by action of a federal agent; it does not mean that the taxpayer is free to decide whether or not to comply with the law." IRS, Pub. 1273, GUIDE TO THE INTERNAL REVENUE SERVICE FOR CONGRESSIONAL STAFF at 4 (January 1996) (SuDoc No. T22.44/2: 1273/996). It has long been recognized that taxation, at the bottom line, requires some means of force to compel compliance by the more recalcitrant elements of the citizenry:

C. CONTRACTING OUT THE TAXATION FUNCTION:

Tax debts owed to the governmental authorities differ from other types of obligations. They do not arise out of a consentual economic relationship as do debts arising ex contractu, nor, at least in the first instance, do tax debts necessarily arise from some negligence or wrongdoing in the same sense as obligations arising from the commission of a tort. The manner in which the tax laws are or are not enforced carries significant side effects in diverse areas of society, and in the lives of the taxpayers.

There is a delicate balance to be struck. Though a strong and effective enforcement mechanism is certainly necessary, such enforcement must be accomplished with due regard for the rights and sensibilities of the taxpayer who makes a good faith attempt to comply with the tax laws. Courtesy to the taxpayer who attempts to comply with the tax laws is a vital attribute which, unfortunately, IRS's has not always achieved 100% perfect, see Weiner v. IRS, 986 F.2d 12, 13 (3d Cir. 1993).

IRS agents must "exercise prudent judgment in wielding the extensive powers granted to them by the Internal Revenue Code," United States v. Powell, 379 US 48, 56 (1964). They must not abuse, or even threaten to abuse, their powers, see, e.g. United States v. Temple, 447 F.3d 130 (2d Cir. 2006), cert. denied ___ U.S. ___, 127 S. Ct. 495, 166 L. Ed. 2d 373 (2006).

In 1911, the New York State Civil Service Commission contended, successfully on appeal, that the job qualifications for a stock transfer tax examiner included "qualities of mature judgment, courtesy, temperate habits, self-control and integrity far beyond those which might be expected of the ordinary employee." Merritt v. Kraft, 71 Misc. 492, 501, 129 N.Y.S. 636 (Sup. Ct. Albany Co. 1911), rev'd on other grounds 145 A.D. 662, 130 N.Y.S. 363 (3d Dept. 1911), aff'd 204 N.Y. 626, 97 N.E. 1103 (1912). These qualities apply no less today to those who enforce the Income Tax. Indeed, as previously mentioned, enforcement of the Income Tax redounds to all areas of the taxpayer's personal life.

An administrative law judge has noted one example of how a New York State tax auditor balanced the tax enforcement imperative with the taxpayer's privacy rights and the need for courtesy and professionalism in dealing with the taxpayer:

Engaging private collection agencies or individuals to aid the government's tax collection efforts has been practiced in various forms for thousands of years, and in fact continues today in America. Billy Hamilton, The New Tax Farmers, 44 STATE TAX NOTES 349 (30 April 2007); see also Gonzalez v. Heard, Goggan, Blair & Williams, supra. The IRS's award of contracts to do some of its collection work is just one form of the practice.

But there are limits to contracting out the governmental taxation function. Each measure by which the taxation function departs from the hands of the sovereign occurs at the cost of the sovereign government's control and legitimacy. There comes a point where social order is severely compromised. Such limits were exceeded in France in 1789, when King Louis, too preoccupied with partying at Versailles to properly attend to the governmental business of taxation, contracted out the taxation function to an entity known as the Ferme Générale (or Tax Farm), which proved to be even more oppressive than the governmental revenue agents. The social discord sparked in no small measure by the Ferme Générale culminated in the reign of terror of the French Revolution. The experience with the French Revolution is in many respects an even more egregious failure of the process than the "History of Failure" described in Ms. Kelley's testimony.

Moreover, outsourcing the collection function necessarily entails the disclosure outside of the IRS of a taxpayer's personal information, and perhaps, information relating to individuals and entities other than the targeted taxpayer. As observed by another commentator, such disclosure sends the signal to the public, and to the IRS and other governmental agencies, "that the government no longer considers tax information to be highly sensitive or confidential." Christina N. Smith, The Limits of Privatization: Privacy in the Context of Tax Collection, 47 CASE W. RES. L. REV. 627, 650 (1997). As mentioned above, such public impressions are inimical to both the American system of voluntary compliance and public order.

IV. CONCLUSION:

There may well be a need for the IRS to engage private collection agencies to collect some tax debts. Such a decision, however, must be made on a case-by-case basis by an IRS official of significant rank, responsibility and authority, after due deliberation, and with due regard for the broad collateral impacts such a measure would have upon society. It must be remembered that outsourcing the tax function attenuates the government's control over the process.

In the event and to the extent that privateer tax collectors are warranted, such individuals must be tethered on a short and sturdy leash which is held in a strong and steady hand, and must be held accountable, both in fact and in the public view, not only for the taxes they collect, but also for their own personal compliance with the tax laws, and their safeguarding of personal taxpayer information. Specifically:

A. In addition to the training, FBI background checks and fingerprinting mentioned in Mr. Penaluna's statement, those individuals who are entrusted with the task of collecting the taxes ought undergo an audit by the IRS of their personal tax returns, and the public must be aware that such a tax audit is a requisite for the position.

B. While the provisions of the Taxpayer Browsing Protection Act of 1997 ("TBPA"), P.L. 105-35, § 2(a), 111 Stat. 1104 et seq. (Aug. 5, 1997), codified at I.R.C. §§ 7213(a)(2), 7213A and 7431, would seem to apply to privateer collectors, the enforcement mechanism provided by the TBPA must be utilized. A responsible official of the privateer entity must have the affirmative obligation to promptly report to the IRS any violations of TBPA, inadvertent or otherwise; the IRS, in turn, must promptly apprise the affected taxpayer.

C. Those individuals to whom the tax collection functions is outsourced ought be subject to the same criminal sanctions specifically imposed by I.R.C. § 7214 upon the IRS's own revenue officers or agents for similar unlawful acts.

D. Annual reports to Congress should include, in addition to the quantitative dollars and cents statistics, some sort of description and evaluation of the privateer collectors' performance and compliance with the foregoing particulars.

As Mr. Lewis reminded everyone in his Opening Statement at the Hearing, "[t]he collection of federal income taxes is a core government function. It is the mission and purpose of the Internal Revenue Service." Regardless of whatever decision is made regarding the engagement of private collection firms to collect the taxes, this basic maxim must not be ignored. The privateer tax collector has implications and costs that stretch well beyond the dollars and cents of the tax gap, and bear heavily upon the very mission and purpose of the IRS. These broader issues must be taken into account in any decision to engage or not engage private collection agencies to collect the taxes.