The IRS: The Biggest Growth Client in 2016?

Mike Ginsberg

On Friday, President Obama signed a law requiring the Internal Revenue Service to use private debt collection agencies to recover unpaid tax debt.  Could this become the biggest growth client for collection agencies in 2016 and beyond? Or will it mirror the debacle that the Department of Education has become?

According to the ACA Government Affairs division, the IRS will work with private collection agencies to recover more than $300 billion in consumer tax debt.  This is not the first time the IRS has attempted to do so to recover past-due tax debts; nearly 10 years ago, the IRS launched a tax collection program with collection agencies that recovered nearly $100 million in past dues.  Congress stopped the program in 2009, claiming that it was losing money.

This contract has greater potential than the Department of Education’s possessed, and could become the single largest source of new business to collection agencies for years to come.  However, it won’t be easy for agencies.

First, obtaining this contract will be costly.  According to ACA International’s Government Affairs unit, “The IRS would be in charge of negotiating any contracts with private collection agencies, determining an acceptable fee structure, and developing requirements for how the debt is collected. Any debt collector involved in the IRS program will be thoroughly vetted by the IRS and continually monitored by IRS employees.”  This contract will take a considerable amount of time and substantial financial resources for collection agencies to obtain.

Second, private collection agencies will undoubtedly have to compete for this contract with other service providers and business process outsourcing companies.  As evidenced by the Department of Education’s procurement process, dozens of the largest service companies in America are lined up for their share of the contract. I am sure the same players will position themselves now for their share of this one as well.

Third, the new IRS contract runs the same risk as the Department of Education’s contract: client concentration risk.  For many agencies, ED represents a significant percentage of their company’s revenue and profits.  As is the case when a large client generates the bulk of a company’s revenue, the company doesn’t have that client; that client has the agency. As evidenced over the past year, businesses with client concentration run the risk of market share loss, rate reductions and unexpected terminations.

Overall, the IRS announcement is very good news for the collection industry. Just don’t go into it with rose-colored glasses on.