By now I am sure you have heard or seen a commercial that touts the benefits of hiring a tax debt relief service to represent you in your back-tax issue and negotiate your late fees, penalties and tax debt obligation down to pennies on the dollar. These agencies have a team of negotiators just waiting for you to engage them to bring down what you owe. When these guys call, the IRS is definitely going to back down and settle for less than what you owe.
This sounds good in theory. But what is the reality? Chances are, if you are even contemplating using one of these services you are someone that has not filed a tax return, or paid taxes in several years. Or, you may be someone that does self-preparation thinking you are saving money by preparing your own tax return with an over the counter tax program. You may have engaged a tax preparer at a strip mall that has since disappeared after April 15th or utilized a “free” service offered by AARP or some other philanthropic organization. What I can pretty much guarantee is that you did not use a licensed, experienced tax preparer.
So how do these debt resolution services work? Well, get ready to pony up some money up front before these businesses will begin work on your settlement. How much? We’ve seen these companies start as low as $3,000.00 and as high as $9,000.00 in the greater Coeur d’Alene, Idaho/Spokane, WA metro area. The fee is determined by the size of the tax bill and differs depending on which of these companies you contact/engage. One thing is certain, the fee is non-refundable.
What happens next is pretty standard. The debtor will sign a power of attorney, prepared by the debt relief company, in order to represent them in front of the IRS. This form will be filed with the IRS. Because the IRS mailroom is inundated with responses to letters sent to taxpayers, they are 3 months behind on opening the mail they receive. So, while you may have responded to the initial request from the IRS, you are continuing to receive notices telling you that you are bad.
Why does the response have to mailed? Great question! The IRS is so antiquated that they only accept correspondence via US Mail and fax. Sure, you can call them and speak with a live person after sitting on hold for hours on end. However, once you do speak with a human, they are going to have you or your representative fax or mail whatever it is you need to present to defend yourself. Unlike a court of law, you are guilty until proven innocent in the eyes of the IRS.
At this point the can has been kicked down the road by the IRS and the debt relief company. The taxpayer has probably received a notice to lien their assets. This is where the rubber meets the road and the debt relief agency is going to need more money from their client to get over the last hurdle.
There are a few tools and solutions available to all those that are in the tax debt situation. The IRS may accept an installment agreement from the taxpayer. This does not change the amount owed necessarily. However, it breaks the amount the taxpayer will pay to the IRS into smaller, manageable bites. The IRS may also work with a taxpayer should they have a legitimate hardship such as losing a job or a health issue that leaves the taxpayer incapacitated.
What the tax debt agency is really trying to sell the taxpayer is an offer in compromise. In working on a compromise with the IRS they consider whether the taxpayer can actually pay the tax debt/fees owed, the income of the taxpayer, the expenses that taxpayer may have and what assets/equity the taxpayer has available. The IRS will normally accept a compromise provided the amount offered represents the most they may be able to collect within a reasonable amount of time. Keep in mind, if you are in bankruptcy, you are not eligible for this program. Approval of offers in compromise by the IRS is very low.
As only 10% of cases represented by tax debt relief agencies are settled to the satisfaction of their customers, the industry is not setup for long term success. Many taxpayers that engage these agencies often leave in worst financial conditions than when they started.
So, if you are a taxpayer that has received an IRS notice what is your best course of action? First, engage a licensed tax preparer to represent you. This person may be a Certified Public Accountant, and Enrolled Agent with the United States Treasury or a Tax Law Attorney. They will have you sign a power of attorney, just as the tax debt agency would. However, because these people actually have licensing and credentials to keep, they are incented to see the process through, unlike the free services or the strip-mall tax preparation firms. Once the power of attorney is accepted by the IRS the process starts rolling. Sometimes it is quicker than others. A lot of this depends on the information provided by the taxpayer.
The process is still going to be expensive. However, not as expensive as the tax debt agency. The process is still going to be time consuming as the taxpayer will continue to receive notices from the IRS until the power of attorney is accepted. The representative is going to have time calling and responding to the IRS until the issue is resolved, usually within 6 to 8 months once the process has started. There will likely still be money owed to the IRS whether it be taxes, fees or penalties.
How does one avoid this problem in the first place? Let’s go back to one theme that has permeated not only this paper, but every paper we have ever published. Hire an experienced, licensed tax preparer. While that alone will not save you, hiring the tax preparer and actually paying the tax you owe will go a long way to keeping you out of the cross-hairs of the IRS and from losing even more money with a tax debt relief agency.