WASHINGTON -(Dow Jones)- The Internal Revenue Service could not fund a controversial tax debt collection program under a bill approved by a U.S. House panel Tuesday.

The House Financial Services and General Government Appropriations Subcommittee approved a bill by voice vote that would ban the use of funds for the Internal Revenue Service's controversial program, which pays private collection agencies to collect tax debt.

Subcommittee chairman Jose Serrano, D-N.Y., called the program "misguided and wasteful."

The private debt collection program has repeatedly come under fire from Democrats and unions representing IRS employees, and on April 15, the House passed a bill that would prohibit the agency's using private debt collectors.

The Senate has not taken up that bill, however.

Started in 2005, the program allows the IRS to hire private firms to go after taxpayers who owe small amounts in delinquent taxes. New York-based Pioneer Credit Recovery Inc., a unit of SLM Corp. (NYSE:SLM) (SLM), and CBE Group of Iowa, were hired by the IRS under the program.

But IRS National Taxpayer Advocate Nina Olson has said the use of private collection agencies could cost $81 million more in foregone tax revenue in 2008 than if the IRS staff handled the cases. The advocate's office is an independent entity within the IRS tasked with representing the public in disputes with the agency.

Rep. Ralph Regula, R-Ohio, the subcommittee's ranking member, named the private debt collection ban as a provision with which he had concerns, but in remarks after the subcommittee meeting Tuesday, Regula said he also had concerns about the private debt collection program itself.

"The Treasury thinks it's more efficient to have private collectors to go out and get it, but I'm not terribly enthused about that," Regula said. "They're not always the most friendly people in the world in the way they approach things, and to have them speaking on behalf of the federal government is not necessarily a positive thing."

Regula, who is not running for re-election to Congress this year, said that he would not offer any amendments to the bill when the full House Appropriations Committee takes it up next week. Serrano said he expects the full committee to consider the bill next Tuesday.

The National Treasury Employees Union, which represent IRS employees, issued a statement Tuesday expressing support for the provision.

"Turning over increasing amounts of federal work to unaccountable private contractors is a costly disaster for taxpayers," NTEU Colleen M. Kelley said in a statement. "Steps to rein it in are both welcome and long-overdue."

-By Patrick Yoest, Dow Jones Newswires; 202-862-3554; patrick.yoest@ dowjones.com

    (END) Dow Jones Newswires   06-17-08 1903   Copyright (c) 2008 Dow Jones & Company, Inc.