How Do Debt Settlement Firms Actually Operate?
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 borne 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 – in order to make money, the firm has to convert as many leads as possible into paying customers. So they will try very hard to get money from you!
What’s more, once you have given your contact information, you will be contacted by someone who may or may not be authorized to give you advice. Here’s a real example for you. Head over to www.irs-tax-settlement-hq.com. Scroll down to the bottom of the page, and you will see this statement: “The IRS-Tax-Settlement-HQ.com website is used as an advertising and marketing tool to connect taxpayers for tax resolution services.” Did you get that? They will connect you with some unknown third party for tax resolutions services. Is this really what you want?
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).
We’ll deal more extensively with OICs in a later chapter, but for now, here’s what you need to know:
- 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.
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 taxpayer agreed to pay less than the full amount owed to the IRS.
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!
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 have a very good chance of the IRS leaving 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”
- Choose a local firm where you can meet face to face.
- Make sure you deal with both your IRS and Maryland tax issues.