But here are some important highlights.
That’s why, as tax day approaches, you are hearing seemingly nonstop advertisements for companies that claim magical powers to wipe away tax debt. The ads bear a striking resemblance to those credit card debt settlement companies I’ve written about, but there’s this extra punch to their offers: While credit card firms can be intimidating, most Americans are terrified of the IRS.
That’s why promises to “end the nightmare” and erase debt for “pennies on the dollar” can be quite persuasive.
As with many unscrupulous offers, the reason this one is so pervasive is because there is a grain of truth to the claims. Yes, in extreme circumstances, the IRS will settle old debts for a tiny percentage of the outstanding balance. But in most of those cases, the consumer is either near death or completely unemployable and without any valuable assets.
Instead of describing these long odds, many tax debt settlement companies sweet talk clients. Then they take large up-front payments — prices start at $3,000 and climb fast from there – but do little or nothing to help with the tax problem, according to Illinois Attorney General Lisa Madigan.
“These companies help virtually no one,” Madigan said.
Firms that advertise tax debt settlement services are selling a legitimate IRS procedure called an “offer in compromise.” If IRS debt collectors determine that the federal government has no chance of collecting on a tax debt, the agency will consider settling for a lesser amount. But the process is long, drawn out and relatively painful. No one can quickly obtain a “pennies on the dollar” settlement with the IRS, Madigan warned.
“We are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements,” said IRS Commissioner Mark W. Everson in a statement. “We urge taxpayers not to be duped by high-priced promises.”
Larry Lawler is a tax debt expert and executive director of the nonprofit American Society of Tax Problem Solvers, which advocates for tax experts that help consumers with debt. While freely admitting some firms that aggressively advertise are trying to dupe consumers, he says a few bad apples have given his industry “a black eye that is underserved.”
Many tax debt agents offer legitimate help to consumers, he said, though that help rarely results in debt forgiveness. He said nine out of 10 of the clients he personally represents must pay their entire tax bill, but he helps them reach an affordable installment plan with the IRS.
Settlement offers are far more lucrative for tax debt solution companies, he said. Even the most complex installment arrangement earns his firm only about $1,700, while tax settlement companies frequently charge $6,000 or more for a settlement that lessens the tax debt, he said. That’s often the last few thousand dollars the debtors have.
Many firms also have poor Better Business Bureau ratings. For example, American Tax Relief – which advertises nationally, currently has an “F” rating from the Los Angeles office of the Better Business Bureau. The firm did not return a phone call requesting comment.
Jeffrey Rogyom is a tax lawyer in Maryland who recently penned a top 10 list of ways to spot a potential tax debt scam. Among the red flags on his list:
- The agent never asks why you owe the IRS money.
- Unethical companies promise results… great results.
- They advertise so much you know their name.
- They claim they’ll have your tax problem resolved quickly.
- Your first payment “strangely reflects how much cash you have.”
- The firm uses a “phantom office.” He recommends Googling the address to see if it’s a real office complex or something more suspicious.
“These companies promise you the world, that’s how they make their money,” he said. “For some people (settlement) is a great option, but many people really need to be told they should file for an installment plan.”