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Four Things to Look Out for When Considering Tax Relief Firms

Jim TrummFeb 13, 2018

It's scary being in debt to the IRS. The financial and legal implications of the situation are unsettling. And for some, the prospect of dealing with the IRS is unnerving. It can be hard to think calmly and rationally about your tax debts when it feels like the entire weight of the federal government is about to come crashing down on you.

Tax relief firms thrive in this psychological environment. There are many reputable firms who can help guide you through that terrain. However, there are unscrupulous firms out there too, organizations that take advantage of people's sense of being overwhelmed by their tax problems. How can you tell the difference?

Don't Believe the Hype

The Federal Trade Commission's Consumer Information page lists several dubious and deceptive claims that some tax relief firms have used in their advertising. For example, "We've helped thousands of people settle their tax debts for a fraction of the amount owed." Maybe that's true, maybe it's not. But it's certainly misleading. After all, 9/10ths is a fraction. And speaking of fractions, this claim of helping "thousands of people" doesn't disclose the number of people the firm was unable to help with their tax debts.

Another example: "We can significantly reduce your tax debt. Call for a free consultation." That sounds great, doesn't it? It sounds like a promise or a guarantee. But it's not. Though hard numbers are difficult to come by, educated estimates suggest that only about 20% of all applicants to the IRS for tax relief are granted any at all. Eighty percent of the time, attempts to reduce tax debt are unsuccessful. And of course, consumers still pay the tax relief firm whether it's successful or not.

One more: some tax relief firms advertise themselves "as seen on CNN," "as seen on FoxNews," etc. And it's probably no lie-they probably bought commercials that were shown on those networks. But even if those statements aren't actually untruthful, they're still deceptive. The impression they give is that CNN or FoxNews recommed this firm or reported on it in some flattering way. And that is almost certainly false.

Know Who's Actually Going to Handle Your Case

Some tax relief companies tout the fact that they have tax attorneys, CPAs, or retired IRS employees on their staff. That sounds good. Most people would probably want an experienced tax attorney, a CPA, or a retired IRS agent handling their case. Those people presumably know what they're doing. But given the huge volume of cases tax relief firms handle, even the firms that employ lawyers and accountants can't promise that those professionals will ever touch your case. At many firms, files are passed off immediately to low-paid "case analysts" or "tax consultants" who have minimal training in tax issues. They are essentially paid to collect and file documents.

This is not to say that paralegals, professional assistants, and "case analysts" are all uneducated or inexperienced. But if you're spending thousands of dollars on a firm that attracted you because of their lawyers and CPAs, you should actually receive those professional services.

Look for Longevity

Like many other businesses, the tax relief industry attracts its share of scoundrels and scam artists. These unscrupulous people sign up as many people as they can and then do little or no work on their behalf. This leaves already hard-up people thousands of dollars poorer and in the same predicament.

What's worse is that people who sign up with do-nothing companies may find their tax problems have grown bigger and more serious during the time the scam artists have had their case. That's because the IRS has strict filing deadlines for application for its relief programs. If your tax relief company sits on your file and does nothing while those deadlines pass, there's nothing anyone can do. You may not only be out the money you paid to hire the tax relief firm, but you may be assessed many more thousands of dollars in interest and penalties, lose your right to relief, and even put yourself in criminal jeopardy.

Behavior like this naturally leads to a raft of very angry complaints to the BBB and other consumer watchdog groups. So the fraudsters simply dissolve their old business and start a new one under a different name, perhaps in a new city. And from then on every few years it's wash, rinse, repeat.

That's why you might want to be wary of a tax relief company that's only been around for a year or two. All things being equal, going with an older-established firm is safer.

Don't Spend More than You'll Likely Save

Tax relief firms require an up-front payment of thousands of dollars. They don't offer guaranteed results and they don't generally give refunds. Even the best tax relief firms can only offer to try their best to resolve your tax situation-they can't promise relief. So it's wise to make sure you're not spending more money to hire a tax relief firm than you could ever expect to save in tax relief.

The IRS has the power to restructure tax debts so they're paid off in installments. In fact, the IRS by law has to accept reasonable installment plans submitted by taxpayers who are less than $10,000 in arrears. But merely stretching out your payments won't actually save you any money. And in many cases, hiring a tax relief firm to get you on an installment plan is spending money to get something you can get yourself for free.

For debts of more than $10,000, the IRS may reduce the total amount you owe and set up a payment plan through an Offer in Compromise (OIC). You must convince the IRS that the arrearage was caused by circumstances beyond your control and that you legitimately can't pay more. But that doesn't mean they will settle for "pennies on the dollar," as some deceptive ads claim. In a best-case scenario, it means that you will have to pay somewhat less than what you originally owed. And in the meantime, you are out the fees paid to the tax relief firm.

The Bottom Line on Tax Relief

Wise consumers understand that tax relief is never a sure thing, even if they have solid professionals representing them. To a certain extent, what people pay for when they hire a reputable tax relief firm is someone to relieve them of the anxiety of picking up the phone and calling the IRS themselves. They're paying for seasoned professionals who know the law, the lingo, and the culture of federal tax collection. They're paying for the knowledge that even if they can't get their tax obligations reduced, they did everything reasonable to try. And sometimes they're actually paying for some real savings on their tax bill. That peace of mind is surely worth something.