Taxation and Regulatory Compliance

Does the IRS Use Collection Agencies?

Get clarity on IRS debt collection practices. Learn to distinguish genuine communication from fraudulent attempts and navigate your financial responsibilities.

The Internal Revenue Service (IRS) utilizes private collection agencies for specific overdue federal tax debts. This practice, authorized by the Fixing America’s Surface Transportation (FAST) Act of 2015, began in 2017 to enhance the collection of inactive tax receivables. Understanding this program is important for taxpayers to differentiate legitimate contact from fraudulent schemes and to know how to respond appropriately.

Private Debt Collection and the IRS

The IRS assigns certain overdue federal tax debts to private collection agencies. These are typically older, inactive accounts where the IRS has exhausted direct collection efforts. However, some accounts are excluded from this program, including:

Deceased individuals
Taxpayers under 18
Those in combat zones
Victims of tax-related identity theft
Those with very low adjusted gross incomes
Accounts under examination, litigation, criminal investigation, or levy
Accounts with existing payment agreements

The IRS contracts with authorized private collection agencies, including CBE Group, Coast Professional, Inc., and ConServe. Before any private agency contacts a taxpayer, the IRS sends an official notification letter, such as Notice CP40 or LT16, informing the taxpayer that their account has been assigned. The private agency then sends its own initial letter confirming the assignment. Both letters include a unique Taxpayer Authentication Number to verify identities during subsequent communications.

Private collection agencies have specific limitations. They can discuss payment options and establish payment arrangements, which may extend up to seven years. They are also authorized to monitor these payment plans. However, these agencies cannot directly accept payments, demand payment via gift cards or wire transfers, or collect sensitive financial information.

They also lack authority to take enforcement actions, such as levying bank accounts, seizing property, or filing tax liens. Furthermore, they cannot approve or reject proposals for an Offer in Compromise, set up Currently Not Collectible status, or grant innocent spouse relief; these actions remain solely with the IRS.

Distinguishing Legitimate Contact from Scams

It is important to distinguish between legitimate contact from authorized private collection agencies and fraudulent scam attempts. A primary indicator of legitimate contact is the initial written notification from the IRS, such as Notice CP40 or LT16, sent before a private collection agency makes contact.

When a private agency legitimately contacts a taxpayer, they will clearly identify themselves as a contractor collecting on behalf of the IRS. During phone conversations, they will exchange portions of a Taxpayer Authentication Number found in the IRS and agency letters to verify each other’s identity. They will direct taxpayers to IRS.gov for payment options and verification of their legitimacy.

Scammers often demand immediate payment using untraceable methods like gift cards, wire transfers, or cryptocurrency. They may threaten immediate arrest, deportation, or property seizure, which legitimate private agencies cannot do. Any phone call from someone claiming to be from the IRS or a collection agency without prior written notice from the IRS is highly suspicious. Taxpayers should also be wary of requests for personal financial information that the IRS would already possess. To verify the legitimacy of any contact, individuals can visit the official IRS website for the list of authorized private collection agencies or call the main IRS taxpayer assistance line at 800-829-1040.

Taxpayer Rights and Resolution Options

Taxpayers dealing with overdue federal tax debts have specific rights and various resolution options available to them. A fundamental right is the ability to always pay the tax debt directly to the U.S. Treasury through official IRS channels, such as IRS.gov, rather than paying the private collection agency. This ensures payments are correctly applied and helps prevent fraud. Taxpayers also have the right to challenge the accuracy of a debt if they believe it is incorrect.

Taxpayers are protected under the Fair Debt Collection Practices Act (FDCPA), which governs the conduct of third-party debt collectors, including those working for the IRS. This act prohibits abusive, deceptive, and unfair collection practices, such as contacting taxpayers at inconvenient times (before 8:00 AM or after 9:00 PM local time) or engaging in harassment. Private agencies are also prohibited from discussing a taxpayer’s debt with unauthorized third parties.

Several resolution options exist for taxpayers facing legitimate tax debts. An Installment Agreement allows taxpayers to make monthly payments over a period, up to 72 months, to pay off their tax liability. Eligibility generally requires all tax returns to be filed, and there are limits on the amount of debt that can be included. Another option is an Offer in Compromise (OIC), which allows certain taxpayers to settle their tax debt for a lower amount than what is owed if they demonstrate an inability to pay the full amount or if there is doubt about the tax liability. This process involves a detailed financial review by the IRS.

For taxpayers experiencing severe financial hardship, the IRS may grant Currently Not Collectible (CNC) status. This temporarily pauses collection efforts, though interest and penalties may continue to accrue, and future tax refunds may be applied to the debt. CNC status requires a thorough review of the taxpayer’s income, expenses, and assets. Finally, taxpayers may be eligible for Penalty Abatement, which can reduce or remove certain penalties, such as those for failure-to-file or failure-to-pay. This relief can be granted for “reasonable cause,” like serious illness or natural disasters, or under a “first-time abatement” policy for taxpayers with a good compliance history. Open communication with the IRS or the assigned agency is advisable to explore these options and find a suitable resolution.

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