What do you get when you cross a tax collector and a lawyer? At the law firm of Linebarger Goggan Blair & Sampson, you could get rich.
Once, public employees collected most taxes. But as states and localities have sought to trim costs, they've outsourced that work. Linebarger has been there to capitalize, tracking down bad debts for government agencies at all levels, mostly in Texas. The 113-lawyer Austin firm owes some of its success to skillfully deployed political largesse. Over the past four years, Linebarger has contributed roughly $1 million to Texas statewide candidates.
Now the firm, which handles only collections, has landed what could become its most important client. This month it began collecting debts for the U.S. Internal Revenue Service. Following its playbook, Linebarger had spent generously to lobby Congress to direct the IRS to hire outside bill collectors. It brings a hardball reputation to its new role. "I call them bounty hunters," says Bill Aleshire, former head of the Travis County (Tex.) governing council and a longtime critic of the firm.
Dale Linebarger started collecting bad debts right after law school. "I was a 29-year-old lawyer who needed a job," he says. "Bill-collecting was not what I thought I was going to be doing." Linebarger, now 63, started his own firm in 1976. The new chair of the firm's management committee, DeMetris A. Sampson, says governments need help gathering revenue to pay for public services. From the firm's perspective, she adds, "we expect it to be extremely profitable."
It has been. Linebarger declines to disclose its revenues, but it often pockets 15% to 20% of the bad debts it collects. The firm estimates it will track down more than $1 billion this year in back taxes and other debts. That could translate into $150 million to $200 million for the firm, an estimate Sampson doesn't dispute. In addition to its 66 partners and 47 associates, it employs about 1,500 nonlawyers around the country.
Success has come with some blemishes. In 2004, Juan Peña, then a name partner, pleaded guilty to federal bribery charges for his role in winning collections contracts in San Antonio. Also that year the firm confidentially settled a suit by a competitor that alleged fraud in obtaining municipal business in Texas. A spokesman says "the matter was settled to the mutual satisfaction of both parties." The IRS has acknowledged knowing about these and other controversies before awarding Linebarger the work.
At first, the IRS deal will be small potatoes. This year only about 12,000 taxpayers will be contacted by one of three private outfits: Linebarger and traditional collectors CBE Group in Waterloo, Iowa, and Pioneer Credit Recovery (a subsidiary of Sallie Mae) in Arcade, N.Y. Each will receive up to 24% of what they bring in. By 2008, the IRS plans to hire as many as seven more companies. Within a decade it expects private agencies to collect more than $1.4 billion from 2 million recalcitrant taxpayers.
Senate Democrats are still trying to kill the plan; they think the government could do the work better. Colleen M. Kelley, president of the National Treasury Employees Union, opposes the plan, too: "From a business perspective, this is just wrong. This work can be done at less cost by IRS employees." That's an argument even IRS Commissioner Mark W. Everson concedes is correct.
Yet Congress approved the plan in 2004, in part because it fits with the GOP belief that turning over more government responsibilities to the private sector boosts efficiency. Lawmakers also preferred to pay private outfits a percentage of what they collect rather than directly spend to hire more IRS staff.
Even if the outsourcing plan goes forward, Linebarger partner Michael T. Vallandingham says the firm will be lucky to break even at first because startup costs are high and cases are few. But, he adds, "the IRS is arguably the largest creditor in the world. The upside is a $300 billion tax gap." That's the difference between what the IRS says taxpayers owe and what it collects annually, and it represents a huge growth opportunity for the firm.
Linebarger and other debt collectors used their political muscle to build support for outsourcing. Linebarger paid Washington law firm Akin Gump Strauss Hauer & Feld nearly $500,000 from 2002 to 2005 to lobby for the law. "That's not unusual when you have an issue in Washington," Sampson says.
Spreading around money is nothing new for Linebarger. No fewer than 34 lobbyists represent it in Texas alone. And when it comes to campaign contributions, "they are very big players," says Craig McDonald, executive director of Texans for Public Justice, a campaign finance watchdog. The firm and its employees gave more than $537,000 to candidates for statewide offices in the 2004 election cycle and have already contributed more than $472,000 this season.
Firm founder Linebarger, who stepped down on Sept. 1 to senior adviser status, says the campaign money "opens the door so we can have an audience. We are competitive in everything we do, and that includes making contributions."
Over the years the practice has employed a former Texas governor, an ex-congressman, several ex-state legislators, and local officials. It also builds local connections by acquiring established debt-collection firms around the country. For Dale Linebarger, it's just good business: "We try to hire talented people who can open a door and help you get a contract. That's why you spend your money."
By Howard Gleckman