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A controversial Internal Revenue Service tax debt collection program faces another challenge after the House Financial Services and General Government Appropriations Subcommittee on Tuesday approved a bill to stop paying private collection agencies to chase delinquent tax debt.

The private debt collection effort has repeatedly come under fire from Democrats and unions representing IRS employees, and on April 15, the House passed a bill that would prohibit the agency's using private debt collectors. The Senate has not taken up that bill, however.

Started in 2005, the IRS initially hired three private firms to go after taxpayers who owe small amounts in delinquent taxes. Linebarger, Goggan Blair & Sampson dropped out of the program in February 2007. The CBE Group of Iowa and New York-based Pioneer Credit Recovery are the two collection agencies currently involved. Pioneer is a subsidiary of SLM Corp., better known as student lender Sallie Mae.

Tom Penaluna, president and CEO of The CBE Group, told Collections & Credit Risk (CCR) that his company considers their involvement in the program to be a success, although the bulk of the agencies profits from the venture have been spent on lobbying politicians to keep the effort going.

He argues that his workers are more efficient, better trained and less expensive than IRS collectors. A recent study found that an IRS collection officer costs $154,000 a year in salary, benefits and expenses. By comparison, staffing firm Robert Half International found that the salary of a credit/collections analyst topped out at $47,750 in 2007 - although that study did not include ancillary benefits.

IRS National Taxpayer Advocate Nina Olson told CCR that the use of private collection agencies could cost $81 million more in foregone tax revenue in 2008 than if the IRS staff handled the cases. The advocate's office is an independent entity within the IRS charged with representing the public in disputes with the agency.

The National Treasury Employees Union, which represent IRS employees, issued a statement Tuesday expressing support for the provision.

"Turning over increasing amounts of federal work to unaccountable private contractors is a costly disaster for taxpayers," NTEU Colleen M. Kelley said in a statement. "Steps to rein it in are both welcome and long-overdue."

House Financial Services and General Government Appropriations Subcommittee chairman Jose Serrano, D-N.Y., called the program "misguided and wasteful."

Rep. Ralph Regula, R-Ohio, the subcommittee's ranking member, named the private debt collection ban as a provision with which he had concerns, but in remarks after the subcommittee meeting Tuesday, said he also had concerns about the private debt collection program. "They (collection agencies) are not always the most friendly people in the world in the way they approach things, and to have them speaking on behalf of the federal government is not necessarily a positive thing."

Penaluna has said an independent survey conducted for the IRS found that CBE and Pioneer received customer satisfaction ratings of 95% and higher and that there are "virtually no validated complaints for either of the private collectors in the program. That shows harassment is not an issue," he says.

As for collections being strictly a government function, Penaluna objects to that argument, saying 34 states do some outsourcing of their tax collections. Despite the complaints, Penaluna continues to promote the program with members of Congress, believing it should be expanded.

Meanwhile, Regula - who is not running for re-election to Congress this year - said that he would not offer any amendments to the bill when the full House Appropriations Committee takes it up next week. Serrano said he expects the full committee to consider the bill next Tuesday.

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