How to Avoid Being Ripped Off by Tax Resolution Companies
How to Avoid Being Ripped Off by Tax Resolution Companies
Settlement Firms: The Truth Behind Those TV and Radio Ads
If you’re seeking help to resolve your tax debt, and you see or hear an ad from a tax settlement company pop up, think twice before reaching for your phone. By law, the only people who can give you advice on how to settle your debt to the IRS are Enrolled Agents, CPAs, or attorneys.
There’s an entire industry dedicated to helping taxpayers deal with the IRS, and it was born out of the fear that many people have of facing the IRS on their own. Companies that operate in this area are known as “tax settlement” or “tax resolution” firms. As with any industry, there are the good, the bad, and the flat out scam artists. Since you hopefully only need to deal with the IRS once, you may not be aware of what to look for to determine who can help you, and who will simply take your money and run.
The first thing to understand is that there are a lot of companies competing for this business. That is why you see and hear so many TV and radio ads. But these ads are generally not run by the companies that actually provide the help. Instead, they are “lead generation” ads. Let me explain. When you call that number on your TV screen, you are connected with a sales rep whose primary job is to get your contact information. You become the “lead”. This lead is then sold to the firm that actually provides the tax resolution service.
Because the firm pays for each lead – regardless of whether they actually get hired or not – the firm has to make money off of as many leads as possible. The person you are speaking with on the phone is probably on commission, so they don’t get paid unless they sign you up for service-any service. They don’t care what tax strategy is best for you, they just want you to pay.
What’s more, the person who contacts you may not be authorized to give you advice. By law, only Enrolled Agents, CPAs, or attorneys can give you advice on how to settle with the IRS. Many companies in the tax resolution industry use commission-based salespeople to make the initial contact and get you to sign up for their service.
You should also keep in mind that many taxpayers who owe the IRS (which is nationwide), also owe state taxes. A tax resolution company may not be able to help you with your state taxes, or may not have a representative located close by who can meet you face to face to discuss your case.
Finally, depending on your circumstances, a tax resolution company may not be putting forward your best option. You see, many tax settlement companies heavily advertise the “pennies on the dollar” option for tax relief. It makes sense, since most people just want to pay the IRS as little as possible and move on with their lives. This option is what the IRS calls an Offer in Compromise (OIC). Here’s what you need to know about the OIC:
- Before the IRS accepts an OIC, they require extensive financial documentation from you.
- If you have assets or income, you probably will not be paying pennies on the dollar.
- If you do not have assets or income, there may be better options for you that will solve your tax problem without having to pay thousands to the tax relief company.
How many people really qualify for OIC?
And here are some IRS stats you should be aware of when deciding how to resolve your tax debt:
- About 7 million returns were filed in 2015 with taxes owed.
- About 3 million people did nothing, letting their taxes, penalties, and interest pile up.
- About 4 million people worked with the IRS to resolve their tax problems. Of these 4 million:
- 3,066,550 (about 75%) resolved their tax issues with an Installment Agreement (IA), which means they agreed to pay the full amount owed in monthly payments;
- 1,073,811 people (about 25%) qualified for Currently Non Collectible (CNC) status, meaning they could not even afford one monthly payment;
- 66,000 people submitted OICs, of which the IRS accepted about 26,663 (less than 1%);
- The IRS also accepted 48,854 (slightly more than 1%) partial payment IAs, where the IRS agreed accept less than the full amount owed in taxes.
So if we add together the 26,663 accepted OICs and 48,854 accepted partial payment IAs, only 75,517 out of about 4 million people paid less that the full amount owed to the IRS!
What can a tax resolution company do for me?
As you can see from the above statistics, the most likely solution to your tax problem is going to be a payment plan with the IRS. If you have income and assets, the IRS is NOT going to just forgive your tax debt, they will want you to pay what you owe.. This is what 75% for the taxpayers who settle with the IRS end up doing. They set up an Installment Agreement and make regular payments to pay off the tax debt.
If you are struggling with income, the most likely outcome is that you end up in Currently Non Collectable status (CNC). This gets the IRS off your back for awhile you try to get back on your feet.
The least likely solution is to settle your debt for “peenies on the dollar”. Only about 1 person in a hundred (1%) of people who settle with the IRS actual get an accepted OIC.
So what do you get by hiring a tax resolution company? The main thing you are getting is someone to talk to the IRS on your behalf. Most people fear talking to the IRS, because they are afraid of saying the wrong thing or making the situation worse. Having someone to speak for you can be a great relief. As long as your representative has your best interests in mind, you should get the best result.
Unfortunately, many tax relief companies are focused solely on making the most money they can from you. They lure you in with “pennies on the dollar” and then put you in an Installment Agreement. Why? Because they know that OICs are a great deal of work and they will be successful less than half the time. It is far easier and much more lucrative to put you into payment plan and move on to the next case. Many, many companies over the years have used this “bait and switch” tactic but eventually it falls apart. Between unhappy clients and federal regulators, over 100 tax resolution companies have been forced to close in the last few years. Some of the bigger names were American Tax Relief, J.K Harris, Roni Deutsch and Tax Masters. All of these companies relief heavily on TV advertising to bring in leads which were then sold over priced tax relief services.
What do tax resolution companies charge?
A legitimate tax resolution company will charge you a reasonable fee to solve your situation. “Reasonable” depends heavily on the particular facts of your situation because some cases are relatively straight forward and some are incredibly complex. If you call and are immediately pressured into signing a contract or given a solution, it is probably a scam. A legitimate tax problem solver will need to collect as much information and documentation as they can so they can analyze your individual situation.
Most people pay between $3,000 to $10,000 to get their tax problems solved. If your tax debt is less than this, it is probably not worth it to hire someone to help you. If you do hire a company, you need to be clear about what you are getting for your money. The most common scam is to sign you up for one service and get you on a payment plan. The payment plan involves direct deductions from you bank account. As your case moves forward, “new” problems are discovered that cost extra. These additional charges are then deducted from your bank account.
THE BOTTOM LINE: You are probably not going to settle your debt with the IRS for pennies on the dollar. If you owe the IRS and you have income, you are almost certainly going to be making payments to resolve the debt. If you don’t have any income and you let the IRS know this, then you can probably get the IRS to leave you alone by requesting CNC status. Over 1 million people qualified for CNC status in 2015, which means they won’t be kicked by the IRS when they are down!
If you need help resolving your tax debt, talk to a professional who is authorized to give you advice, knows what your options are, and can help you determine the best one for your particular circumstances.
How to avoid getting scammed
Here are some guidelines to help you protect yourself:
Avoid firms that require high upfront fees.
Avoid firms that use high pressure sales tactics
Avoid firms that advertise ”Pennies on the dollar”
Avoid firms that give you a solution BEFORE they have the facts of your case.
Avoid firms that refer you to a third party. Choose a local firm where you can meet face to face if necessary.
Avoid firms that only deal with your IRS debt. Make sure you deal with both your IRS and Maryland tax issues.