Does the IRS Hire Collection Agencies?

The Internal Revenue Service is authorized by federal law to use private collection agencies (PCAs) to collect certain overdue tax debts. This initiative, outlined in the Fixing America’s Surface Transportation (FAST) Act, allows the IRS to assign specific accounts to a select group of private companies. Understanding which tax debts are eligible, how the notification process works, and what to expect when interacting with a PCA is important for navigating the situation correctly.

Accounts Assigned to Private Collection

The IRS does not assign all delinquent accounts to private firms. The agency focuses on what it terms “inactive tax receivables,” which are accounts where the IRS is no longer actively pursuing collection and more than two years have passed since the tax was assessed. Certain situations automatically exclude a tax debt from being assigned to a PCA.

An account will not be sent to a private collector if:

• The taxpayer’s income consists primarily of Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).
• The taxpayer’s adjusted gross income is at or below 200% of the federal poverty level.
• The case involves a pending or active installment agreement or an offer in compromise has been submitted.
• The taxpayer is deceased.
• The taxpayer is involved in litigation, a criminal investigation, or is a victim of tax-related identity theft.
• The taxpayer has requested innocent spouse relief.
• The taxpayer is a military member serving in a designated combat zone.

The Official Notification and Verification Process

Before a private collection agency can contact a taxpayer, the IRS must first issue an official notice. This initial communication is a CP40 Notice sent directly from the IRS. This document formally notifies the taxpayer and their representative that their account has been transferred to a specific, named private collection agency.

Following the IRS’s CP40 notice, the assigned private collection agency will send its own letter. This second letter confirms the transfer, must clearly state the agency is a contractor for the IRS, and provide information on rights under the Fair Debt Collection Practices Act (FDCPA).

To protect taxpayers from scams, a verification process is used. Both the CP40 notice and the PCA’s letter will contain a unique taxpayer authentication number. If the PCA calls, the agent will ask you to provide the first five digits of this number. To confirm their legitimacy, the agent must then provide you with the final five digits. You should also independently verify the agency is authorized by checking the current list on the official IRS website, IRS.gov.

Working with a Private Collection Agency

A primary rule is how payments are handled, as PCAs are strictly prohibited from accepting payments directly. Any payment, whether by check or electronic transfer, must be made directly to the IRS. Checks should always be made payable to the “U.S. Treasury” and sent to the IRS, not the collection agency. The PCA can help guide taxpayers to official IRS payment portals, such as IRS Direct Pay.

The role of the PCA is to help taxpayers find a way to resolve their debt. They can help establish payment arrangements, including setting up an installment agreement for full payment over a period of up to seven years. If a taxpayer’s financial situation prevents payment within that timeframe, the PCA will collect financial information and return the case to the IRS for further action. The private agency cannot make final determinations on programs like an Offer in Compromise.

PCAs are forbidden from taking certain actions. They cannot initiate enforcement actions like filing a Notice of Federal Tax Lien or issuing a levy against wages or bank accounts; only the IRS has that authority. They are also prohibited from demanding payment via specific methods like a prepaid debit card or gift cards. All communication must adhere to the FDCPA, which means collectors cannot use threatening language or call at unreasonable hours, generally before 8 a.m. or after 9 p.m. local time.