The Folly of IRS Privatization

This mania for privatization has reached the Internal Revenue Service and taxpayers should be worried that tax investigations might become a political prize handed out to campaign donors. that profit-oriented companies engage in controlling tax investigations instills a whole different level of fear.
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Internal Revenue Service sign with a traffic signal in the foreground indicating a red light.
Internal Revenue Service sign with a traffic signal in the foreground indicating a red light.

Washington politicians love handing out public money to big corporate contractors, especially the ones giving fat donations to their reelection committees. Replacing civil service employees with private employees working for those campaign contributors is an easy way to reward donor friends. And it promotes the fiction that private firms do the job better than government workers--even though studies repeatedly have shown that privatization consistently leads to higher costs for taxpayers.

Unfortunately, this mania for privatization has reached the Internal Revenue Service and taxpayers should be worried that tax investigations might become a political prize handed out to campaign donors. The occasional fraud and shoddy work we see with many government contractors is one thing; but the abuses that profit-oriented companies engage in controlling tax investigations instills a whole different level of fear.

Privatization Proposals Highlight Dangers of Crony Contracting

Two proposals this year highlight this danger of the IRS becoming a focus for campaign donor spoils.

First, tucked into the proposed Senate highway bill this year was a provision to allow private firms to collect tax debts owed to the IRS, a program that failed miserably in pilot projects in the past. The Republican Senate majority pushed this privatization program, but they were joined by Sen. Chuck Schumer of New York, who frankly admitted his support for the provision was strengthened by the fact that two of the four companies likely to get a chance to bid on the debt collection contracts were based in New York. This would generate jobs for his constituents and no doubt donations to his reelection campaign.

In a more unprecedented and potentially illegal move, the Obama administration in May of this year gave a $2.2 million contract to the legal firm Quinn Emanuel to assist directly in investigations of a corporate target of the IRS. Unlike the debt collection program, which involves the more mundane - if often unsavory - task of collecting debts where the IRS has already determined taxpayer liability, Quinn Emanuel will be involved in what many argue is the more core governmental function of determining whether a firm being audited followed the law, including taking testimony from witnesses. When the administration was criticized for this move, they hastily issued new regulations to allow the IRS to make such contracts, but the new regulations are being challenged in court.

Critics have noted not just the expense of substituting high-paid private lawyers for IRS staff attorneys, but that Quinn Emanuel is not even known in legal circles for tax expertise. What they are notable for, however, are being heavy donors to the Obama reelection campaign. As data from the Center for Responsive Politics details, Quinn Emanuel employees donated over $300,000 to the Obama campaign and the Democratic national Committee in the 2012 campaign, over half of the total political contributions by the firm employees in that cycle.

Avoiding Costly Privatization Mistakes

While campaign donors may benefit from such contracts, the clearest problem with privatizing the IRS is that there is a documented history of such outsourcing failing to deliver the savings promised and in fact costing more than allowing civil service employees to do the job. As the Project on Government Oversight (POGO) detailed in a comprehensive report, the government routinely pays twice the compensation paid to government employees when using contractors without any evidence of savings to justify those increased costs.

The organization attributes the massive increase in contracting over recent decades to the political posturing to "reduce the size of government," so both Democratic and Republican politicians have expanded the "shadow government" of contractors while restricting the number of civil service employees to the point that there are now four times as many government contractor employees as there are direct federal employees.

In the particular case of the IRS, there is an even clearer history of privatization disasters. A one year pilot project to use private debt collectors under the Clinton administration in 1996 actually cost the IRS $17 million, according to the Center for Effective Government, even as the firms hired repeatedly violated the Fair Debt Collection Practices law in pursuing delinquent taxpayers. In a longer recent pilot project from 2006 to 2009 under the Bush administration, a similar debt collection program that was supposed to raise a $1 billion once again lost money. Worse, the money wasted on the program meant that there were fewer funds for IRS employees to pursue tax deadbeats--and notably the IRS's own unit for collecting tax debts recovers $20 for every $1 spent.

Longtime IRS National Taxpayer Advocate Nina Olson, who actually helped develop the debt collection program in 2006-2009, told Congress that the program "undermined effective tax administration, jeopardized taxpayer rights protections, and did not accomplish its intended objective of raising revenue." Yet the Senate went forward this year with a similar program in the Transportation bill.

And then you have the contract by the Obama administration for Quinn Emanuel, which could be a precedent for privatizing a far larger swath of the IRS's day-to-day investigation work. As the following from the Statement of Work document highlights, the hourly rates paid to Quinn Emanuel employees are suitably outrageous for a top law firm.

As an analysis of the contract by the non-partisan Tax Analysts detailed, the ridiculous amounts paid per hour to top partners is not even the most obvious problem. Notably, the IRS would be billed $300 per hour for a non-lawyer paralegal. As Tax Analysts notes, the actual lawyers at the IRS are considered top notch, yet perform the work for a fraction of the cost Quinn Emanuel is billing the government. First year lawyers at the IRS cost the government $60 per hour, including benefits, while the highest paid top ranked IRS lawyers still cost the taxpayer only $150 per hour. So the IRS could be hiring five entry-level or two- top-level litigators for the price of just one Quinn Emanuel paralegal. And they could be hiring something like eighteen entry-level staff lawyers or seven top-level IRS lawyers for the same price they are paying for work by the top partners at Quinn Emanuel.

This is a ludicrous windfall for Quinn Emanuel and a complete rip-off of taxpayers.

IRS Privatization Undermines Government Accountability and Taxpayer Rights

Beyond the financial costs of privatization, such outsourcing of core government functions threatens basic democratic accountability and the protections of citizens built into our tax laws. While the supporters of current privatization efforts have been bipartisan, so have the criticisms from liberal and conservative individuals and groups who fear private firms violating the law in pursuit of profit.

Reacting to a district court ruling questioning the legality of the Quinn Emanuel contract, Illinois Republican Peter Roskam, who heads the House Oversight Subcommittee at Ways and Means, argued, "It is inappropriate for the IRS to use private law firms to perform audits and administer tax law. Federal law does not allow for contracting out these inherently governmental activities, not least of all because it threatens taxpayer privacy and confidentiality."

In 2014, when the Senate first began discussing reviving the program to allow private firms to pursue delinquent tax debts, a coalition of consumer groups, including Consumers Union and the NAACP, wrote that IRS contractors would expose taxpayers "to potential abuses that are unfortunately common with that industry. It will also disproportionately impact low-income taxpayers...Common problems include aggressive and abusive collection tactics, and failure to accurately inform borrowers of their rights" Another progressive critic of the program cited to the 2006-2009 experience of abuses, including the example of debt collectors placing 150 phone calls to the elderly parents of an adult child who hadn't paid his taxes on time.

With the Quinn Emanuel contract, the IRS is moving into the very dangerous territory of private entities being involved in determining policy on what is and is not illegal under the law. Criticizing a similar move by the City of Anaheim to contract out local tax investigations, the conservative-leaning Tax Foundation cited to IRS experience with its private debt collection program, where IRS oversight was "impressive" yet still couldn't prevent private firms' self-interest from distorting what should be government neutrality in application of the law.

Critics of the Quinn Emanuel contract, which is specifically investigating Microsoft, have highlighted the potential problem in giving the law firm access to highly confidential information, even as Quinn Emanuel is representing business rivals of Microsoft such as Google. IRS investigators are tasked with protecting the privacy of those they audit, which civil service employees have little incentive to sacrifice, but private lawyers hired by the IRS would have tremendous self-interested reasons in breaching that confidentiality.

We Shouldn't be Reviving Modern-Day Tax Farming

In the New Testament, "tax collectors" were a particular target of derision, but that reflected not just some general disdain for paying taxes but the fact that in Roman times, tax collection was outsourced in many cases to "tax farmers" who collected the maximum amount they could, while keeping any excess beyond the official levy for themselves as profit.

Tax farming survived for centuries in various forms in many countries and it was a triumph of modern government to regularize tax collection under the supervision of neutral government employees protected from most political interference or self-interest by civil service protections.

The last thing we need is to allow the outsourcing of core IRS functions, either the Senate proposal for privatized debt collection or contracts like the Quinn Emanuel that hand over core investigative functions of IRS staff to outside firms. Hopefully, both political reality and court decisions halt the current rounds of proposed privatization, but what's needed is a broader recognition of past failures of privatization and a return to the understanding that led to the founding of the civil service in the first place: that government functions are best performed by workers directly accountable to tax payers, not to profit-seeking firms that often use campaign donations to land those contracts.

We don't need a return to modern day form of tax farming.

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