It sure can be intimidating to have to deal with Uncle Sam if you have significant tax debts. Few people feel equipped to take on the IRS alone. But be careful who you ask for help. You might just make your situation worse. Tax-resolution scams are on the rise as unethical companies peddling tax-relief services prey on people who owe back taxes.
"With tax-relief firms getting sued by state authorities and making headlines for cheating distressed taxpayers out of thousands of dollars in up-front retainer fees, it's more important than ever for people to know how to protect themselves from firms who misrepresent their ability to solve IRS problems," says Michael Rozbruch, a certified public accountant, certified tax-resolution specialist and founder of Tax Resolution Services.
At the request of the Federal Trade Commission, a federal judge recently halted a national operation, American Tax Relief, that allegedly bilked consumers out of $60 million by falsely claiming it can reduce a person's tax debt. The company's California business license was suspended last year because the firm didn't pay its own taxes, the FTC alleges. The FTC wants the company to pay restitution to victims.
A 99% Success Rate -- or 90% Failure Rate?
American Tax Relief charges up-front fees of $3,200 to $25,000 for its services. The company's ads on TV, radio and the Internet include a toll-free number to call for a "free consultation." After speaking briefly with a commission-based salesperson, who is supposedly a "tax consultant," virtually all consumers are told that they qualify for a tax-relief program and that American Tax Relief can help them significantly reduce their tax debts, the FTC complaint alleges. Meanwhile, the company's owners were living large with goodies like a Ferrari and $3.4 million house.
Earlier this year the California attorney general sued "tax lady" Roni Deutch for more than $34 million, alleging that her law firm regularly violates state law by making false promises that it will help people resolve disputes with the IRS. She advertises a success rate of up to 99%, yet successfully reduces the amount of money her clients owe in just 10% of cases, the lawsuit says.
The Texas attorney general charged Houston-based TaxMasters and its CEO Patrick Cox with multiple violations of the Texas Deceptive Trade Practices Act and Texas Debt Collection Act. Allegedly, TaxMasters unlawfully misled customers about its service contract terms, failed to disclose its no-refunds policy and falsely claimed that the firm's employees would immediately begin work on a case, despite the fact that TaxMasters didn't start work until customers paid in full for services, even if that delayed response meant taxpayers missed significant IRS deadlines, according to the state's enforcement action.
Such practices matter when one out of six Americans has a tax problem. "More than 26 million people need to know how to get legitimate help with their tax debt," says Rozbruch.
What You Need to Know Ahead of Time
"If something sounds to good to be true, it probably is. Many tax-relief agencies make claims similar to what drew the FTC's attention to the debt settlement industry -- settling debt for 'pennies on the dollar,'" says Christopher Viale, president and CEO of the nonprofit Cambridge Credit Counseling. One way to protect yourself from an unethical tax-resolution firm is to be leery of any company that's likely overstating its success rate or misrepresenting their staff's professional skills. Look for a Certified Tax Resolution Specialist firm that puts potential clients through a rigorous, in-depth interview process to find out if they qualify for an IRS tax settlement, advises Rozbruch.
Second, beware of firms that guarantee results without even seeing your information. A hallmark of a tax-resolution scam is someone who promises you a specific outcome without an in-depth review of your specific tax matter.
Know exactly what you're signing before releasing your money. Never give a credit card number over the phone. Have the tax-relief company send you the documentation and the forms it wants you to sign, prior to putting up your cash. "This gives you a chance to stop and think about additional questions you may have, and certainly you need to read what you are signing," advises Karla Dennis, CEO of Cohesive, a tax-preparation, consulting and representation firm.
Questions to Ask
Determine who you're dealing with. Jeff Staley, managing partner of Freedom Tax Relief, highlights a few questions you should ask. How long has the company been in business? How many customers has it served? Find out if the company and its own employees are those who'll actually provide service through the life of the program, or will they contract out to others once you're enrolled. Will they let you speak to the tax professional who'll be handling your matter?
What's the background of the company's management team? Do a Web search of the company, check with the Better Business Bureau and do a little digging on the Ripoff Report and complaintsboard.com to see if the firm you're considering has a less-than-stellar past.
Ask about fees, which should never be a percentage of savings. "A fee should be a reasonable flat or hourly rate based on the work that needs to be done," says Dennis. Those fees should be clear and in writing. You should not have to pay the entire tab up-front.
Pay the IRS a Visit
It's important that you get it right with Uncle Sam. "Unpaid taxes can lead to wage garnishment, incarceration, civil penalties and a host of other unpleasant outcomes. If you don't think you can be your own best advocate, stick with professionals like tax attorneys, enrolled agents and CPAs when trying to figure out the best way to repay taxes," says Viale.
If you don't want to hire someone, you can speak with the Taxpayer Advocate Service (TAS), an independent organization within the IRS that will work with you for free to resolve your issue. They stay with you until the problem is resolved.
It's important to call and visit the local IRS office to discuss tax issues. There, the IRS may ask you to complete a financial statement, and based upon their review of it, may grant some form of relief. That can be an "Offer in Compromise" to establish a reasonable payment agreement with you, says Steven Hoffman, an enrolled agent, who worked for the IRS for 15 years.
An installment agreement is generally available to people who owe less than $10,000 and can't pay their tax debt in full at one time. You pay an agreed-upon monthly amount until you polish off the debt. An Offer in Compromise (OIC) lets you permanently settle your tax debt for less than the amount you owe. However, you're eligible for this only after other payment options have been exhausted and your ability to pay has been reviewed by the IRS. This process can take six to 10 months.
It's Best to Be Nice
On occasion, the IRS may offer a penalty abatement to people who haven't paid their taxes because of a special hardship. If you meet very narrow criteria, the IRS may agree to forgive the penalties. An interest abatement is even more limited and is rarely provided.
What you don't want to do is misrepresent your situation in any way. The IRS has the power, and the means, to investigate your finances and could certainly choose to do that, says Viale. Don't get angry at your least favorite offspring of Uncle Sam. "Be as polite and cooperative as you can in any request for a reduced payment. Being nice can go a long way," says Viale. If your only reason for going it alone is to save a few dollars, don't cheat yourself by being cheap. "Invest in advice from the right person to get you to the right result," says Viale.
Adds Viale: "While we don't want to say that no tax-relief firms are legitimate, tax attorneys, a certified public accountant or an enrolled agent should help you seek settlement with the IRS." Still, for his "best advice," Viale says bluntly: "Don't engage with a tax-settlement company."