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How to Spot and Avoid "Tax Debt Relief" Scams

TaxAlerts Tax Article

April 2012 | Written by: Karen Reed

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One after another, the large “tax debt relief” companies are going away. In 2011, the state of California shut down the operations of Roni Deutch for preying on consumers who could not afford to pay their taxes. In January, JK Harris was forced into liquidation bankruptcy after being sued for deceptive business practices. More recently, TaxMasters filed for bankruptcy after similar charges were levied against it by the states of Texas and Minnesota. Long before their demise, the warning signs of a scam were apparent in all three of these companies.

What are the warning signs of fraud?

All three companies specialized in “tax debt relief.” They promised to settle tax debts for “pennies on the dollar.” They charged upfront fees in the thousands without ever looking at their clients’ tax documents. All of these practices were indications that the companies may not have been providing legitimate services, and their “F” ratings with the Better Business Bureau were another sign.

Why are these “pennies on the dollar” promises false and deceptive?

The advertising claims made so often on television make people believe that an Offer–in–Compromise (OIC) is available to everyone at any time. The fact is, however, that only 20 to 25% of the OIC applications submitted are ever accepted, even after negotiation. In addition, when an OIC application is submitted, a down payment must accompany the application, and it will not be returned if the application is rejected. Those who have the ability to pay through other means, such as installment agreements or even selling assets, will not be accepted for an OIC. When a company asks for money upfront without ever looking at your documents to analyze your likelihood of qualifying for an OIC, they probably have no intention of helping you.

What to do if you owe the IRS and are unable to pay?

If you owe the IRS but are unable to pay, there are many options available to you. The IRS recently increased the maximum debt amount to $50,000 for a streamlined installment agreement and lengthened the allowed payment term from sixty to seventy–two months, making it easier for more people to qualify without having to complete onerous paperwork. In addition to OIC, other possible remedies include applying for economic hardship status, innocent spouse relief or bankruptcy. If you believe you do not actually owe the money, filing a corrected return if the IRS filed one for you or requesting an Audit Reconsideration are additional possibilities.

There are many competent tax professionals who specialize in helping people with their collections issues. Be sure to choose wisely, and look for an enrolled agent, CPA or attorney. For a bankruptcy filing you would be best served by an attorney with a strong background in both taxation and bankruptcy.

What is the difference between Tax Audit Defense and Tax Resolution?

TaxResources offers Audit Defense, which is professional tax audit representation. This service happens before your case is decided and sent to IRS collections. When you have Audit Defense, a TaxResources audit representative faces the IRS examiners on your behalf, alleviating the stress involved in doing it on your own and removing the unfair advantage the IRS has over you.

Oftentimes, “tax resolution” is just another term for tax debt relief. “Tax debt relief” is not available for taxpayers who have assets, jobs or a way to pay their tax bill, yet many unscrupulous tax debt relief firms promise to lower your bill and charge exorbitant fees. They often do nothing to help you but they keep the fees.

If Audit Defense is so inexpensive, how can it be good?

TaxResources, Inc. has over three million members who pay an annual membership fee for defense of their tax returns. The membership fee is so low that any taxpayer can afford a membership. For this nominal price, each TaxResources member has the expertise of an attorney, CPA or enrolled agent available on retainer should the need for it ever arise.

Audit Defense services are available to non–members too. Those who have received a tax audit notice can send it in for a comprehensive evaluation. The low membership fee will not be available once an audit is already under way, but the fees charged will be commensurate with the valuable service TaxResources provides.