Constitutional, legal, and policy issues regarding the use of tax bounty hunters.

• Author: Kenny, Robert

Unbeknownst to many, several taxing jurisdictions have assigned the "discovery" of non-filers, and the valuation, assessment, and collection functions to private third-party contingent fee agents popularly (and derisively) called "ferrets" or "bounty hunters." This is a form of privatization now extant in at least nine states -- Con necticut, Delaware, Georgia, Kansas, Michigan, New Jersey, North Carolina, Pennsylvania and Wyoming.(1)

Tax executives may become involved with contingent fee auditors either directly on behalf of the corporation or perhaps on behalf of a group of employees caught within the bounty hunter's sometimes overreaching net. This article discusses certain constitutional, legal, and policy challenges that the tax executive can assert when confronted with a private contingene fee agent. It, however, is by no means exhaustive. For instance, although the article discusses the Due Process arguments that can generally be lodged against the use of contingent fee (or contract) auditors, it does not address the Equal Protection Clause and tax uniformity arguments that could be asserted under the applicable federal and state constitutions in the right circumstances.(2) Similarly, the article does not delve into how public policy may be violated by the unauthorized disclosure and breach of confidentiality inherent in the use of bounty hunters in some cases.(3) These arguments, however, remain potentially potent ones, and should not be overlooked if appropriate.

Potential Application of Federal Fair Debt Collection Practices Act

The Federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. [sections] 1692, et seq., provides a number of consumer/taxpayer protection measures. Section 1692e of FDCPA proscribes a number of representations as false and misleading. The statute may prove useful in dealing with some contingent fee agents in that it prohibits some of the more offensive tactics of collection agencies. It also provides enforcement powers in the Federal Trade Commission and for attorney's fees and damages for violations.

The definitions contained in FDCPA make it plain that a contingent fee agent would be covered by the Act. Although a 1980 decision by the U.S. Court of Appeals for the Third Circuit holds that capitation taxes are not a "debt"

within the meaning of FDCPA,(4) a taxpayer should be able to argue that transaction taxes and personal income taxes are distinguishable. More fundamentally, to the extent the case requires that the debt come from money owed in return for goods or services for personal purposes instead of "arising out of" a personal transaction, as the statute requires, the Third Circuit decision appears wrongly decided.

In at least one bounty hunter jurisdiction -- New Jersey -- the applicability of FDCPA to tax collection may be a moot issue, because the enabling legislation requires that any collection agent conform to the substance of the...