We warned lawmakers about this renewed plunge into law enforcement for profit, but did they listen? “Congress Orders IRS To Use Private Debt Collection Companies” [Kelly Phillips Erb, Robert Wood, both Forbes] Earlier here, here, etc.
Yet again — we covered this issue last year — lawmakers on Capitol Hill are considering sending private debt collectors on contingency fee after those who owe money to the Internal Revenue Service. Here’s an issue where I can agree with Washington Post columnist Catherine Rampell: contingency fees and tax collection don’t make for a good mix. Will we ever learn our lesson on law enforcement for profit?
Law enforcement for profit to take another big leap forward? [Washington Post]:
The Internal Revenue Service would be required to turn over millions of unpaid tax bills to private debt collectors under a measure before the Senate, reviving a program that has previously led to complaints of harassment and has not saved taxpayers money.
The provision was tucked into a larger bill, aimed at renewing an array of expired tax breaks, at the request of Sen. Charles E. Schumer (D-N.Y.), whose state is home to two of the four private collection agencies that stand to benefit from the proposal.
It requires all “inactive tax receivables” to be assigned to private debt collectors if the IRS cannot locate the person who owes the money or if IRS agents are unable to make contact within a year.
The idea has been tried twice before, but was discontinued both times after poor results including net losses on the program. Nina Olson, who holds the position of Taxpayer Advocate in the U.S. government (and is no relation), strongly opposes the program, noting that some of the money would be recouped by the Treasury anyway through means such as future withheld refunds without the need for paying 25 percent contingency fees to the middlemen. Bounty-hunting freelancers are more likely to resort to tactics such as day-and-night harassing calls, and have less flexibility to work out payment plans for those getting back on their feet after reverses or, in the case of estate taxes, heirs who may have not yet received the inheritances from which they need to pay the tax due.
Compare many state governments’ practice of putting out plaintiff’s-side litigation opportunities to private lawyers at contingency fee, which has created a durable lobby for hardball extractive lawsuits of dubious social benefit as well as showering large sums on law firms that already are or soon become influential political players in their states.
A St. Louis lawyer has won big in contingency-fee tax collection by teaming up with class action firm Korein Tillery to challenge cellphone companies’ claims not to be subject to municipal taxes on landline telephone providers. At the same time he’s been town attorney for the suburban community of University City, which now finds itself in the position (with many other Missouri municipalities) of paying its share of $65 million in proposed fees. [Paul Hampel and Margaret Gillerman, “U.City lawyer wins big in class-action case”, St. Louis Post-Dispatch, Jul. 23]
We’ve posted several times about federal tax authorities’ on-again, off-again use of private tax collectors on contingency fees to collect back taxes. As with other varieties of law enforcement for profit in which the middleman is enabled to keep residual dollars, the practice seems to encourage the taking of a hard line against taxpayers, especially when the private collectors can use tactics and methods forbidden to government agents. Now, after a hiatus, the IRS is returning to the use of private collectors, a change in law for which Sens. Charles Schumer (D-N.Y.) and Chuck Grassley (R-Iowa) apparently deserve much of the credit, if credit is the right word [Alex Richards and Brad Wolverton, NerdWallet, earlier]
I’ve got a new post at Cato at Liberty noting that Justices Samuel Alito and Clarence Thomas, in a concurrence this spring, appear to be inviting a constitutional challenge to states’ administration of escheat (unclaimed property) law on due process grounds. [More on Taylor et al. v. Yee from Daniel Fisher at Forbes] While the immediate questions posed would likely be whether states are doing too little to notify owners and using too short a period of idleness (three years is becoming common), the fact patterns might conceivably implicate some of the other problems noted by businesses on the receiving end of these laws, which we discussed back in 2013 (more): creative redefinitions of unclaimed property and outside “auditors” incentivized by contingency fees to overreach in assessments.
Reflecting widespread business discontent, the U.S. Chamber has addressed the issue in a series of papers and its publications have covered problems in states like Illinois, as well as in California as well as profiling the firms that specialize in these collections, which in some cases have filed qui tam (bounty-hunting) suits for a share of the proceeds.
On Delaware in particular see the Wall Street Journal (more), Forbes, and Delaware State News. And the Wilmington News-Journal has published an extensive investigation of the escheat contractors’ ties to the Delaware political class.
They knew, because their own allies had told them: “As you know, deception/disinformation isn’t itself a basis for criminal prosecution under RICO.” — an official of the Union of Concerned Scientists, writing to the organizers of a campaign to enlist scientists behind a call for a RICO investigation of the fossil fuel industry for its statements about climate change. The letter added, explaining UCS’s unwillingness to back the letter, “We don’t think that Sen. [Sheldon] Whitehouse’s call gives enough of a basis for scientists to sign on to this as a solid approach at this point.” [Reason]
Despite cautions like these, calls for a RICO investigation soon caught on among the political class and an investigation launched by Democratic state attorneys general has now aimed dragnet climate subpoenas at the Competitive Enterprise Institute and, thus far less directly, at nearly 100 advocacy, free-market, and university-based groups. “These include the U.S. Chamber of Commerce Foundation, the George Mason University Law and Economics Center, the American Enterprise Institute, the National Taxpayers Union Foundation, the Cato Institute [which publishes Overlawyered], the National Black Chamber of Commerce, the Federalist Society for Law and Public Policy Studies, the Heritage Foundation, and on and on,” writes Ronald Bailey. CEI responded to the subpoena here (in a brief written by Andrew Grossman) and here, and on May 13 Cohen Milstein, the private contingency-fee law firm representing the attorney general of the Virgin Islands, responded, reserving the right to compel compliance with the subpoena, which demands the production of ten years’ worth of documents.
Presidential candidates Hillary Clinton and Bernie Sanders are among public figures who have backed calls for a racketeering investigation of fossil fuel companies’ participation in climate debates. I have found no evidence that either has expressed concern about the direction in which such investigations are headed.
- Authorities arrest woman they say obtained $480,000 by falsely claiming injury from Boston Marathon bombing [CNN]
- More on the buddy system by which Louisiana officials pick private-practice pals for contingency contracts [WWL, The Hayride, Melissa Landry/La. Record; earlier on levee district’s new megasuit against oil industry]
- “Why would the President meet with the IRS chief counsel rather than his own counsel at OLC, and without the IRS commissioner present?” [Paul Caron, TaxProf] “The IRS as microcosm”: government lawyers lean left politically [Anderson, Witnesseth]
- California county lead paint recoupment case finally reaches trial, judge jawbones defendants to settle [Mercury-News, Chamber-backed Legal NewsLine]
- The insanity of film production local incentives, Georgia edition [Coyote]
- Questioning NYT’s underexplained “Goldman aluminum warehouse scam” tale [Yglesias, Stoll, Biz Insider]
- Yes, government in the U.S. does do some things to accommodate Islam, now don’t get bent out of shape about it [Volokh]
All 50 states have escheat laws awarding to state governments ownership of unclaimed property in business hands, which can range from bank, insurance, and stock holdings whose proper owners cannot be found to retail gift cards never cashed in. The revenue looms peculiarly large for the state of Delaware, because it is the state of incorporation for so many businesses. In recent years friction has been growing between the state and its corporate citizens as the state government has taken an increasingly aggressive stance in auditing corporations for unreported escheatable property. [WSJ] So far, perhaps, so routine (except for the parties to the dispute), but some accounts omit one of the most salient angles, summed up by one critic [Douglas Lindholm, IBD via Volokh] as follows:
Last year alone, Delaware seized $319.5 million from liquidated property while returning only $18.9 million of unclaimed property to its rightful owners.
Delaware does this through an unfair, onerous and expensive audit system that “looks back” to 1981, and contrives unclaimed property if the company doesn’t have records for all those years. This process often costs companies millions of dollars, mires them in years of audits, and forces them to deal with third-party auditors who are motivated by contingent fees to invent unclaimed property where none exists.
Kelmar, which conducts most of the audits for the Delaware Department of Finance and works on a contingent fee, was paid more than $30 million in the second half of 2012 alone.
Again and again — whether in forfeiture laws entitling law enforcers to a share of the booty seized, or percentage awards for informants under whistleblower laws, or traffic camera systems in which the operators of the cameras get a share of ticket revenue, contingency fees for participants in law enforcement prove deeply problematic. In my chapter on contingency fees in The Litigation Explosion, I summed things up this way:
Contingency fees tend to be disfavored in professions to whom the interests of others are helplessly entrusted, where misconduct is hard to monitor…. Giving traffic cops contingency fees by hinging their bonuses on whether they make a ticket quota arouses widespread anger because it so obviously tempts the officer running under quota to be unfair to the motorist. The same is true of giving tax collectors contingency fees by hinging their bonuses on how many deductions they disallow or how many assets they seize. (“Tax farming,” the old system where private parties were deputized to collect taxes and keep some of the haul for themselves, was abolished long ago in well-run countries, not because it was the least bit inefficient — it was a favorite way for Roman emperors to extract revenue from conquered provinces — but because it encouraged brutality and trampling of due process in tax collection.)
Delaware seems to have gotten its image in trouble through a variant on tax farming. Let’s hope a lesson is being learned.
- “Man cited for littering after cash to panhandler hits ground” [USA Today]
- AIG and sunshine: “Spitzer’s Loose Public Talk and Private Emails” [Lawrence Cunningham, Concurring Opinions]
- Mississippi attorney took 45 percent contingency fee, but “all the contracts came up missing from [his] office” [Insurance Journal] When it comes to billing disputes, California state bar seems keen on protecting lawyers against clients [Lawrence Schonbrun, Recorder]
- Philip K. Howard on NPR [TED Radio Hour]
- About that “Constitution in Exile” bogeyman [Barnett, Bernstein]
- Come the revolution, comrade, you will gladly pay your Connecticut taxes: Gov. Dannel Malloy approves $300K for ultra-left New Haven People’s Center [CT News Junkie via Zachary Janowski, Raising Hale] Update: Governor reverses stance.
- New law keeps many homemakers from qualifying for credit cards [Sheryl Nance-Nash, Diane Katz/Heritage]