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Debt collection the IRS way News reporter gets an inside look at firm in Perry that collects money owed to the IRS

The trainer asks us to write a secret on a sheet of paper, "something no one knows about you."

One of the debt collectors laughs nervously as we fold up our secrets and slip them into a paper bag.

The seven trainees are training for a new job at Pioneer Credit Recovery: calling delinquent taxpayers on behalf of the IRS. The task puts them in the front lines of a national controversy over how to collect billions of dollars in overdue taxes.

Pioneer is one of three collection agencies -- in New York, Texas and Iowa -- the IRS selected last year to collect amounts it lacks the manpower to collect itself. The private-sector agencies work on accounts under $25,000 that are deemed low-priority by the IRS.

Critics say the IRS's Private Debt Collection program costs too much and puts taxpayers' confidential information at risk. Supporters argue that state governments already outsource tax collection work to the private sector -- which does no worse a job than government.

"A program like this can supplement (agency efforts) and maximize the money for taxpayers," said Joan Ludwick, chief executive of Arcade-based Pioneer.

The contract, if it survives opponents in Congress, could lead to a huge trove of work for Pioneer and other agencies, and potential jobs for Western New York. The IRS expects to collect $1.4 billion through the pilot program over 10 years. If the agency outsources more broadly, its "inventory" of uncollected taxes is $132 billion.

As the pilot program gears up, Pioneer is training collectors to handle taxpayers' data. That's the lesson behind the bag of secrets, to show how it feels to entrust others with personal information.

Trainer John Linfoot asks the group how they felt putting slips of paper into the bag. "Scared," says one collector. Relief fills the room when Linfoot tells a helper to destroy the papers unread.

The training is held in a classroom at Pioneer's hangar-like call center on a hillside in rural Wyoming County, about 50 miles east of Buffalo. The IRS project is housed nearby in former warehouse converted to a call center.

Pioneer, a unit of the student loan company Sallie Mae, allowed a Buffalo News reporter to watch a day of training this month, in order to provide a view into the controversial program. The News agreed to withhold the identities of the trainees because of the sensitivity of the work.

There are five women and two men in the training group, ranging from their 20s to their 50s. If they pass the two-week training course they'll join the group of 40 people who are performing IRS collections.

In one exercise they practice handling insults. An imaginary debtor says "I'm not paying . . . How can you be so incompetent?"

Erica, a trainee, says she felt angry about being called incompetent. The point of the exercise is to tune out her anger and stick to the task. Instead of snapping back, Erica says, "I can get that information for you, it'll take me one second."

The IRS dropped an earlier outsourcing program in 1996 because it cost more than the $3.1 million collected, according to a General Accounting Office report. Under the new program, agencies earn a fraction of what they collect, up to 25 percent, ensuring a positive return for the treasury.

The three private agencies had collected $11 million from 24,500 tax cases by the end of 2006, the IRS said.

"The performance to date has been over our planning assumption," said Deborah Wolf, IRS director of the private collection program.

Opponents, including House Ways and Means Chairman Charles Rangel, say that outsourcing tax collection is a bad idea. Private agencies could expose taxpayer information, and put taxpayers at the mercy of aggressive collectors, they argue.

What's more, the IRS Taxpayer Advocate says the job could be done cheaper in-house, if the agency hired more collectors. The IRS brings in money for far less than the 25 percent commission private agencies earn.

Wolf called that comparison flawed. First, the private collectors' take is actually 18 percent. Under the contract, agencies don't get a commission on amounts paid within 10 days after receiving an account, reducing their effective fee.

In addition, the relatively small amounts that private agencies collect aren't comparable to the IRS's overall collection efforts, she said. A cost study based on apples-to-apples accounts will be complete this summer, she said.

Among the supporters of the program is the National Taxpayers Union in Alexandria, Va. Private companies probably have a better chance of treating taxpayers fairly than the IRS, which has inferior technology and is protected from lawsuits, the group says.

"We viewed it as a positive step to be outsourcing collection to private collectors," deputy press secretary Sam Batkins said.

The stakes in the dispute are high for Western New York. Pioneer has 1,200 jobs in rural Wyoming and Genesee counties -- it is the largest private employer in Wyoming County -- and could add more if the IRS program expands. Development officials say the average income for workers is about $35,000 plus benefits.

Collecting debts was an economic step-up for the trainees. Sue, a collection manager, came to Pioneer after Champion Products closed its T-shirt factory in 1996, ending her job of 13 years. A.J. gave up a job in a bottling plant, and Mary Anne had worked in customer service at a distributor that was steadily shrinking. "I didn't want to be pushed out," she says.

Kristie, who has completed training and now works on the IRS contract, said the new job gives her more time at home with her three-year-old. Her previous job at Pioneer, collecting student loans, sometimes kept her in the office until midnight making calls to the West Coast.

She said she was surprised to be picked for the IRS job. "We all thought it was going to be the top collectors."

The workers on the IRS contract aren't necessarily the ones who bring in the most dollars, managers said. They score high in "compliance," meaning they have few complaints and a history of obeying consumer protection laws.

Pioneer handles the IRS contract differently than collecting unpaid credit cards or student loans, said Jack Frazier, senior director of operations who oversees the IRS unit.

Chalkboards at the call center show first-time events collectors have encountered, instead of how much they've brought in, he said. And the phones are dialed manually -- unheard of in most call centers with auto-dialers.

"It's not a speed game, it's an accuracy game," Frazier said. The IRS workers have to be sure they have the right person before discussing anyone's unpaid taxes.

Frazier said he started with Pioneer in the 1990s when it was based in a Victorian house in Arcade, collecting bills for Agway and local doctors.

Instead of earning a bonus based on the dollars they collect, the IRS workers get straight pay and benefits, a contract requirement. Pioneer wouldn't talk about the rate, but said it adjusts for the lack of bonuses.

The day of training, the second in the two-week course, included how to refer taxpayers to the Taxpayer Advocate office. It also stressed the penalties -- up to prosecution and jail -- that collectors face for revealing taxpayers' data.

On the other hand, the collectors seem to have few tools to urge payment. They lack authority to say what might happen if the bill goes unpaid, Frazier said. They can work out a payment plan, but can't negotiate a reduction in the debt.

If the taxpayer balks, "we tell them we will refer it back to the IRS," Frazier said. However, "people don't like to owe the IRS."


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