Fred Thompson: Cooperating with the IRS to Collect Delinquent and Liquidated Debt

Another dispatch from Fred Thompson:

Yesterday we hosted a National Association of State Auditors, Controllers, and Treasurers webinar on the IRS’ Treasury Offset Program (TOP) at Willamette University for interested state officials. TOP intercepts federal tax refunds and other payments to delinquent debtors prior to their disbursement on behalf of state governments and provides access to the Treasury’s Do Not Pay program. This year TOP has recovered nearly $7 billion in delinquent child support obligations, supplemental nutrition assistance program (SNAP) debts, income tax debts, unemployment insurance compensation debts, and other federal and state debts, including penalties and fines due to the state courts.

Oregon participates in this program, although currently only to collect child-support and personal income tax (PIT) arrears. In FY 2012, Oregon recovered $43.8 million for these programs ($15 million in PIT delinquencies).

Nevertheless, there is a lot more that we could do. Currently, Oregon sits on a backlog of nearly $4 billion in delinquent and liquidated debt. Moreover, this stock is growing at a rate of about $300 million per annum. If we had done no more than collect our fair share of recoveries, we would have grabbed an additional $30 million.

In addition, the state could potentially take advantage of TOP to collect hundreds of millions of dollars in PIT and business taxes that are evaded or avoided when taxpayers file incorrectly or fail to file, especially from those who choose to file in states other than Oregon. Oregon is a big tax exporter (net). Consequently, its taxpayers pay a lot more taxes than Oregon collects, mostly to states with lower PIT and business tax rates. Much of this borderline tax evasion could be preempted if the state had the capacity to monitor and analyze income flows promptly and more accurately.

More than anything else, what’s needed here are information system upgrades at Oregon’s Department of Revenue. As noted in a recent blog, those are on their way.

Indeed, these upgrades are needed to fully participate in TOP. A case in point, where the social security number (SSN) or employer identification number (EIN) of a TOP debtor matches the SSN or EIN of a payee, but the names do not match, the state lacks the capacity verify or falsify the match. Consequently, such offsets aren’t pursued. The situation is even more fraught in the case of non-tax delinquencies.

Centralizing the state’s debt portfolio and payment streams would facilitate working with TOP, not only because TOP accepts only one or two points of connection with a state, but also because duplicating the capacities to pursue delinquencies would be very costly. Finding the funds to upgrade the Department of Revenue’s collections capacity took ten years. It make no sense to try to duplicate this capacity for the courts, DHS, etc.

At the same time, nearly everyone agrees that the legal requirements governing collections programs need a second look. Debt collection laws quite properly require that debtors be given notice prior to intercepting funds owed to them: 60 days notice before a tax refund may be offset, 30 days notice for most other debt collection actions. However, the requirement that notice be given by certified mail seems entirely obsolete. That Federal law requires the IRS to charge a fee to cover its costs of running the TOP program, but does not permit it to pay a fee to the states when the state offsets a payment to collect a federal debt, also appears to be open to question. Possibly these examples are only the tip of the iceberg.