For most people, filing taxes is supposed to be free and easy. Instead, the vast majority of Americans pay a fee to a private tax preparer each year. We owe this annual ripoff to one of the most celebrated and misunderstood practices in American politics: bipartisanship.
Despite all the talk about widening political divides, Congress has approved thousands and thousands of pages of bipartisan legislation over the past decade ― everything from patent reform to Pentagon budgets to bank deregulation. We don’t remember these bipartisan bills as significant achievements for a simple reason. Most of them are terrible legislation, throwing money at corporate interests, often to subvert a genuine public interest.
Last month, in a fit of bipartisan comity, the House of Representatives passed a bill that would solidify corporate America’s control over online tax filing ― an arrangement already rated by an independent watchdog as one of the IRS’s “most serious problems.” But the handout didn’t just materialize out of nowhere. Lawmakers were trying to undo a different bipartisan giveaway from the Obama years ― a government-backed bonanza for debt collection agencies that targeted the poor. With their recent legislative push, Democrats and Republicans were setting aside their differences, screwing the poor in order to stop screwing the poor.
While you can’t tell from the official record ― nobody voted against the IRS bill ― the unexpected furor surrounding the legislation has left several Democrats on Capitol Hill privately fuming, setting off an intraparty spat that tells us a lot about how the new House Democratic majority plans to govern ― or misgovern ― with their Republican colleagues.
How Private Tax Collection Became A Thing
The drama began all the way back in 2015, when everyone from President Barack Obama to the U.S. Chamber of Commerce wanted Congress to approve more infrastructure funding for roads and bridges.
Highway construction doesn’t have much to do with the private debt collection industry. Debt collectors contract with creditors to bring in bills that aren’t getting paid, deploying a variety of tricks and high-pressure tactics to get people to pay up.
As the highway bill moved through Congress, lawmakers searched for a set of “pay-fors” ― items that could be used to offset the $300 billion or so that would be spent on infrastructure. Republicans were averse to raising taxes; Democrats were reluctant to cut spending. Together, they settled on a third option: gimmicks.
For much of 2015, debt collectors had been trying to talk Congress into passing a law letting them go after delinquent federal tax bills. They could already badger people about medical bills and credit card debt ― why not taxes? After a few months of wrangling, debt collectors hit the jackpot. Their bill would make it into the highway law, with Congress officially estimating that private contracting would ultimately save the government $2 billion over 10 years by collecting older tax debts the IRS had stopped working on.
Everybody knew this was a bad idea. Congress first tried letting private companies collect unpaid taxes under a pilot program approved in 1995. The debt collectors on contract managed to recoup about $3 million for the government ― but at a cost of $21 million. The initiative was scrapped, but in 2004, Congress told the IRS to try private contracting again, and once again, the agency found debt collectors were less effective than the IRS itself, and the pilot project was dropped.
Debt collectors are almost universally recognized as some of the lowest of lowlifes in American finance. They trick families into paying off the debts of dead relatives and threaten people with all kinds of nasty consequences if they don’t pay their own debts. But when people don’t pay their tax bills, it’s usually not because they haven’t been yelled at enough ― often they just don’t have much money. An accident, a job loss or other personal financial disaster has left them in tough shape, and they put off paying the few thousand dollars they owe to Uncle Sam while they meet other expenses.
There are exceptions, of course. Rich people use fancy accounting tricks and borderline-illegal strategies to avoid paying taxes all the time. But under the highway bill plan, the IRS wouldn’t be asking debt collectors to focus on these complex cases, which can require years of litigation just to establish that taxes have not, in fact, been paid. Instead, debt collectors would go after people with uncontested tax bills ― mostly folks with modest incomes and modest tax bills.
The Two Chucks
This plan infuriated Rep. John Lewis (D-Ga.). A civil rights icon, Lewis takes poverty seriously and didn’t want to see poor people harassed by professional bottom-feeders. When he caught wind of the debt collection giveaway, he prepared an amendment to strip it out of the highway bill.
But debt collectors have some powerful friends in Congress ― particularly Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Senate Minority Leader Chuck Schumer (D-N.Y.).
These friendships are based on two arrangements. First, debt collectors employ a lot of people in Iowa and New York. Second, debt collectors give a lot of money to Grassley and Schumer.
Pioneer Credit Recovery is headquartered in New York, with offices in the cities of Arcade, Perry and Horseheads. It’s a division of the student loan giant Navient, and since the 2014 cycle, Navient’s corporate PAC has been very friendly to Schumer, funneling $5,000 to his campaign, plus $25,000 to a Schumer-affiliated fundraising vehicle called Impact and an additional $90,000 to the Democratic Senatorial Campaign Committee, according to data from the Center for Responsive Politics.
Another debt collector, CBE Group, is headquartered in Cedar Falls, Iowa, with an office in the town of Waterloo. Over the years, CBE Group Chairman and CEO Thomas Penaluna has contributed $11,000 to Grassley’s campaigns.
Grassley laid the groundwork for a private tax collector comeback by asking the Government Accountability Office to find flaws with the earlier IRS reports that had indicated the program didn’t work. And in 2015, the two Chucks worked together to fight off Lewis and make sure that the handout for debt collectors made its way into the highway bill.
At the time, Schumer’s office told HuffPost he was not involved in debt collector efforts on the highway bill and pointed to the fact that Schumer voted against the final bill as evidence of his pure intentions.
Ten months later, when Pioneer announced plans to hire 300 New Yorkers, Schumer attended the ceremony in Horsehead and issued a press release blaring: “SCHUMER SUCCESSFULLY PUSHED NEW LAW THAT CREATED FED CONTRACT.” The new jobs, his office now insisted, were “made possible by Schumer’s push to include a provision in the federal transportation bill that passed Congress last December.”
A Grassley spokesman told HuffPost that his boss supported the debt collection policy before the government chose its contractors. “The selection process was open to applicants from any state and followed a competitive process that allowed for qualified companies to bid for the contract,” Grassley spokesman Michael Zona said. “The program makes the system fairer to law-abiding citizens who follow the law and fulfill their civic responsibility by paying their taxes.”
Two of the four debt collectors who received contracts with the IRS under the highway bill, however, just happened to be CBE and Pioneer. And those two companies had, coincidentally, received contracts under the old, failed pilot program established by the 2004 bill.
Grassley has also defended the performance of the new debt collection program, noting that the IRS now reports that private debt collectors currently bring the government more money than they cost.
But his rosy portrait is the product of some creative accounting. In a report issued earlier this year, the Government Accountability Office found that the official IRS numbers overstate the success of private debt collectors. The figures obscure the fact that a chunk of the overdue tax funds that debt collectors obtain doesn’t go to the U.S. Treasury, but rather to two special accounts devoted to paying debt collectors themselves. The formal IRS reports filed to Congress, moreover, omit the costs incurred by dealing with taxpayer complaints about debt collectors, who are notorious for mistreating consumers. “Congress is not informed of full [private debt collection] program costs,” the GAO concluded.
(In its response to the GAO report, the IRS denied it gave incomplete information to Congress, saying it provided the data required by law.)
But it turns out that the IRS is still better than debt collectors at collecting taxes, which, of course, is a core government function. Even taking the agency’s numbers at face value, the $75 million haul from debt collectors in 2018 amounted to only 16 percent of the $470 million Congress originally expected the program to generate when it approved the measure back in 2015.
According to the National Taxpayer Advocate, an independent watchdog organization within the IRS, private debt collection is one of the most serious problems at the agency. Private collectors have managed to recover about 1 percent of the debt assigned to them, whereas the IRS typically gets 7 percent back through its own automated system. Of taxpayers who entered into payment plans with private collectors, 40 percent had incomes beneath what the IRS considers an allowable living standard, meaning they were paying tax debts while they couldn’t afford things like food, shelter and health care. More than a third defaulted on their payment plans.
Lewis had been right. Grassley, Schumer and Congress had helped debt collectors feed on the poor.
Lewis found a vehicle to remedy the problem in a bill called the Taxpayer First Act, which he co-authored with Rep. Mike Kelly (R-Pa.). Republicans love the bill because it would modernize the IRS, an agency they have pilloried for years. It’s full of small-bore, pleasant-sounding reforms, like requiring the IRS to come up with a customer service strategy.
The part Lewis championed would prohibit the IRS from referring poor or disabled people to private debt collectors. Specifically, the bill prohibits private collection for anyone whose income is less than 200 percent of the poverty line, or $50,000 a year for a family of four. That restriction would put a major dent in the private collection program, given how much of the operation is aimed at people living in or near poverty.
After months of negotiations, the Lewis-Kelly bill passed the House under Republican leadership, only to die in the Senate. But this year, with Democrats in control of the House, Lewis secured a new set of Senate champions ― Grassley and Schumer. Their support was a tacit acknowledgment that the program the two men fought for back in 2015 had backfired. By 2019, they were willing to accept reforms.
Lewis and leaders in both parties expected smooth sailing ― until one of the bill’s seemingly uncontroversial, bipartisan provisions blew up in their faces.
The Free Service That Somehow, Nobody Uses
For 17 years, the IRS has partnered with companies like H&R Block and Intuit (the maker of TurboTax) to run its “Free File” program, which is supposed to enable 70 percent of Americans to file their taxes online, free of charge. Instead, less than 3 percent of eligible taxpayers use the service because companies like Intuit and H&RBlock have buried the program on their websites and deliberately hidden it from Google search results ― directing taxpayers to their own proprietary tax filing services, like TurboTax, which are not free. All told, the tax prep industry takes in about $12 billion every year.
As with privatized tax collection, everybody on Capitol Hill knows the TurboTax situation is a boondoggle. The IRS has the power to revise its contract with the tax prep companies, but it hasn’t, and Congress hasn’t forced the agency to act ― in part because H&R Block and Intuit spend a lot of money on campaign contributions. In the 2018 cycle, the corporate PACs for the two companies gave over $173,683 to members of the tax-writing committees alone.
Under Lewis-Kelly, the existing contract between the IRS and the tax prep companies would essentially be fixed into law, entrenching the status quo for years to come.
Congress was swapping one corrupt giveaway for another, ending the debt collector hustle and do TurboTax a favor in one fell swoop. Members of Congress, of course, use gentler language to describe the arrangement. “There’s no doubt that some compromises were made there,” Rep. Lloyd Doggett (D-Texas) acknowledged to HuffPost.
But when Justin Elliott at ProPublica published a story detailing the TurboTax giveaway, a pack of progressive Democrats were incensed to learn they were being asked to vote for a corporate handout, including Rep. Alexandria Ocasio-Cortez (D-N.Y.). After a meeting with Lewis and a discussion within the Congressional Progressive Caucus, however, the disgruntled House lefties decided to stand down. Nobody wanted to challenge Lewis’ progressive bona fides on short notice, and the bill passed via voice vote, meaning not a single member was upset enough to demand the yeas and nays, which any member can do.
“This was something Mr. Lewis and a lot of other members have been fighting for a very long time to get,” Rep. Alexandria Ocasio-Cortez (D-N.Y.) told HuffPost. “So I think it’s really exciting that we’ve been able to get this more predatory aspect of tax collection out of the way.”
But the bad press for TurboTax has complicated the bill’s path in the Senate. Both Grassley and Sen. Ron Wyden (D-Ore.), the top Democrat on the Finance Committee, began having second thoughts about the Lewis-Kelly bill during the House flare-up. Schumer’s office, meanwhile, says he supports “the substance” of that bill, but not the TurboTax provisions.
Last week, Wyden and Grassley sent a letter to IRS Commissioner Charles Retting saying the scammy tactics reported by ProPublica “appear to violate the spirit” of the agency’s contract with TurboTax and H&R Block. The two lawmakers urged the agency to “take any necessary actions to ensure the integrity and purpose of the Free File program,” including revising its contract with the tax prep firms.
This week, Wyden and Grassley said they’re still huddling over what to do. If the TurboTax handout is stripped from the bill, the House would have to approve the changes before the legislation could reach Trump’s desk. It’s not clear whether Senate Majority Leader Mitch McConnell (R-Ky.) is interested in devoting floor time to legislation that still needs work.
It’s not obvious that Lewis made a bad call by cutting a deal on TurboTax. He was, in effect, ending a present problem ― debt collectors harassing the poor ― in exchange for not ending another one ― the TurboTax boondoggle.
“That was a trade-off!” an exasperated House Ways and Means Committee Chairman Richard Neal (D-Mass.) told HuffPost, referring to the TurboTax material. And the trade may well have been worth it, particularly when Democrats were in the minority.
But it’s pretty obvious that the new kids on Capitol Hill think this kind of legislating is, in fact, controversial ― even if it’s bipartisan. Privately, they say they wish they had been consulted about the arrangement instead of having their support taken for granted. And they worry they’ll be asked to vote on future bipartisan bills that include similar ugly concessions without being given time for a thorough review, just as leadership did with the IRS bill.
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That’s the ultimate lesson from the IRS reform saga, whether or not some version of the bill eventually makes it to the president’s desk. After campaigning against the flagrant, unparalleled corruption of the Trump administration in 2018, the new House Democratic majority started 2019 by offering up a dose of milder, bipartisan corruption. It might be progress, but it isn’t pretty.