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Ralph Nader > In the Public Interest > Privatization of Government

Local, state and federal governments, faced with complex problems in the delivery of services, increasingly are falling for schemes to let private corporations take over public duties. Behind the privatization of government functions is an ongoing propaganda campaign centered around the theme that corporations can manage and deliver services more efficiently at less cost than democratically-controlled governments.

In many areas corporations have been allowed to take over prisons, schools and community hospitals among other services on a for-profit basis. Many of the rosy scenarios predicted for this “corporations know best” management are fading in the real world of public services at a heavy cost to citizens.

As part of the privatization craze, the federal government lets investor-owned commercial banks collect various payments for the Internal Revenue Service and the Treasury Department’s Financial Management Service.

IRS contracts with four banks which maintain so-called lock boxes for tax returns and collections in 10 locations. The banks are Mellon in Pittsburgh, Bank of America in Charlotte, N. C., Bank One in Chicago and U. S. Bancorp in Minneapolis. The federal government pays the lockbox banks about $10 million annually for handling income tax returns. The amount varies from year to year based on a formula tied to the Consumer Price Index.

The corporate lockbox scheme was largely unknown by the American public until last month when thousands of taxpayers in New England and New York State started getting notices from IRS charging them with failing to file returns and pay income taxes due for Year 2000. IRS started levying heavy penalties and interest when the returns failed to show up with payments. Taxpayers insisted they had mailed returns and payments in a timely fashion, some weeks ahead of the April 16 deadline.

Finally the mystery began to unravel when security personnel at Mellon Bank found a box of discarded returns with checks attached. Initially, reports from the bank suggested only 1,800 returns had been “misplaced.” Further investigation revealed that the at least 40,000 tax returns and payments totaling $810 million may have been lost, hidden or destroyed by Mellon’s downtown processing center operating under contract with IRS.

The Pittsburgh Post-Gazette said workers at the bank felt that they were “under siege” and expected to process 80,000 checks and vouchers daily to meet an April 29 deadline. If the bank failed to meet the
deadline, the bank would be hit with a penalty and supervisory personnel would not receive bonuses.

In an e-mail sent to employees last month, Mellon Chairman Martin McGuinn was quoted as saying that an “internal probe found that returns were hidden and in some cases destroyed.” The Washington Post said sources told it that the contract apparently penalized Mellon for unprocessed returns and checks rather than
rewarding it for those it did process. “The system was flawed,” the Post quoted a source as saying. “It gave them incentive to stick the payments in a drawer. It was almost cost-effective for them to do that.”

In a letter to the Senate Finance Committee, IRS Commissioner Charles Rossotti said “… whatever (tax) forms the guilty parties could remove for the staging with ease were taken, hidden and some destroyed.” The
Pittsburgh case occurred after the General Accounting Office (GAO) had issued reports in previous years identifying weaknesses in the Federal Management Service’s monitoring of federal funds in lockbox banks.

But even if additional safeguards are installed and closely monitored, should taxpayers’ tax returns be handed over to commercial banks for processing? What happens to the intimate financial and other personal details that all tax returns contain? Clearly this information cannot be successfully protected when tax returns are so carelessly treated as by the Mellon Bank in Pittsburgh.

Are the executives and employees of Mellon Bank concerned first and foremost about the timely, efficient operation of the federal tax system and the privacy of individual taxpayers? Or, is it profit that has first call on the performance and obligations of the operators of the corporation?

The same question can be asked of the corporations which are in the forefront of efforts to turn our schools, prisons and community health facilities into adjuncts of the profit-making world where accountability to the public is secondary, at best.