Individuals and corporations that owe the Internal Revenue Service (IRS) money may suffer harsh penalties, including the confiscation of personal or company assets in certain situations. To address this quandary, which has the potential to cause a severe financial disaster, a new kind of company has emerged to assist delinquent taxpayers in dealing with their tax bills.
These businesses, known as tax settlement firms, claim to be able to dramatically decrease or remove whatever the customer owes the IRS. But, can these companies actually deliver on their promises, or is it a case of buyer beware?
- Tax settlement businesses claim to have a slew of specialists on their side, including former IRS workers.
- Tax settlement agencies’ promises are very hard to keep since the IRS seldom accepts any plan to lessen the amount of tax owing.
- Qualifying for offers-in-compromise is complex, and the process usually takes many months.
- The majority of tax settlement firms impose exorbitant costs.
What Are Tax Settlement Firms?
You’ve undoubtedly seen the commercials on television. Desperate folks who owe the IRS tens of thousands of dollars and have no one to aid them. The tax settlement company comes in and leaves the frightened customer with miracle texts claiming that their tax burden has been miraculously lowered by hundreds or thousands of dollars. Clients are overjoyed and more than delighted. But that’s television (or radio, or social media), and things don’t always function like that in real life.
Consider the debt settlement industry if you’re puzzled by the tax settlement industry and what it does. To some extent, the two function in the same manner. Most tax settlement services claim to have a plethora of tax specialists at their disposal who are former IRS workers who can go to bat for their customers. In truth, this may be a significant deception in certain circumstances.
Although a few attorneys and a few workers may have worked for the IRS at some time, the vast majority of employees are unlikely to have. In reality, most workers are likely to be low-wage customer service reps.
What Tax Settlement Firms Offer
Most tax settlement companies claim to send their specialists to the IRS to negotiate on their client’s behalf, where they can purportedly convince the agency to accept a considerably lower amount—often pennies on the dollar. In practice, this is very hard to do, and the IRS rarely acknowledges any genuine decrease in the amount of tax payable. Of fact, there are certain highly mitigating conditions in which Uncle Sam may accept a bargain for past taxes payback, including:
- If the taxpayer is in an unusual circumstances and the amount owing would cause economic hardship or be unfair (this would have to be an extraordinary situation)
- If the debtor is unable to find meaningful job with a sufficient income to repay the loan, such as due to a long-term sickness or disability,
- If the individual owing taxes has no assets that may be utilized to meet the statutory tax burden in a meaningful manner (through asset seizure),
Everyone else may only hope for an extension of time to pay down their tax bills, which often entail extra interest and penalties.
Offer in Compromise
To minimize their customers’ tax payments, tax settlement businesses employ an established IRS technique called as an offer in compromise. This is a unique arrangement that certain taxpayers may get into with the IRS in order to settle their tax bills for less than what is due. The person must provide the IRS with detailed information about their existing assets and obligations, as well as predicted future income.
Offers in compromise are also often completed over a period of many months, and qualifying for one of these offers may be more challenging than qualifying for Medicaid. There is no spend-down plan for this route.
In general, the number of offer-in-compromise petitions that are granted is relatively low. To have such a reduction granted, taxpayers must demonstrate that the entire amount owing is inaccurate, that the likelihood of being able to pay back the whole amount is extremely low, or that paying back the full amount would result in severe financial hardship.
The auditor’s report is not necessarily the last word. Many audited taxpayers may successfully appeal their audits and save thousands of dollars.
According to IRS Form 656, the unusual condition causing financial difficulty must be “unplanned occurrences or unique circumstances, such as significant sickness, when paying the full or minimum offer amount could affect your capacity to support for yourself and your family.”
Tax Settlement Firm Price Tag
Most tax settlement firms charge their customers an upfront fee, which may range from $3,000 to $6,000 depending on the amount of the tax debt and proposed settlement. The charge is usually non-refundable and oddly reflects the quantity of free cash the customer has accessible. In most cases, this is the amount of money the firm claims it would save the customer in tax payments.
Clients have complained to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC) that some of these businesses failed to deliver on their promises and were, in reality, a fraud. Many businesses also substantially mislead their prices to customers, charging them a smaller charge at first and then charging them more after they are fully engaged in the process.
Tax Settlement Firm Success Rates
As previously indicated, the IRS rejects the majority of the offers in compromise it gets each year. The number of customers who are satisfied with tax settlement firms is minimal, and the majority are financially impoverished. The overwhelming majority of prospective settlement customers must negotiate payment arrangements with the IRS in order to clear their tax obligations over time while retaining their assets—and dignity.
The IRS website has further information regarding payment options.
Finding a Legitimate Tax Relief Firm
There are many warning signs that should alert any potential clients who are thinking about using a tax settlement service. Any company that claims a significant decrease in a customer’s taxes without first obtaining a full financial history on that individual is likely to be a fraud. Any tax agent who does not question a customer why the client owes the IRS money is not carrying out the whole due diligence procedure necessary for a valid appeal.
Any professional tax relief service will first collect critical financial information from its clients before providing a realistic appraisal of what they can achieve for a fair set cost. Prospective customers should seek for a local company that has been in operation for some years and has a strong presence in the neighborhood.
Tax Settlement Warnings From the IRS
The IRS is most likely the most demanding creditor with whom many taxpayers must deal. It has the legal authority to confiscate assets and pursue harsh collection procedures. As a result, many delinquent taxpayers perceive the IRS to be much more scary than private debt collectors or credit card firms.
Tax preparation services capitalize on this concern by providing a lifeline of expert assistance that would solve their difficulties. Don’t be misled by these firms’ deceptive promises that demand large upfront fees. The IRS has already issued public warnings about bogus businesses, noting many of the issues highlighted above. If you are unable to pay your taxes, be aware that the IRS has many options for collecting what you owe.
Publication 594: The IRS Collection Processdescribes the Offer in Compromise procedure in detail as well as the collections process. Compare that information to whatever a tax settlement service tells you to guarantee you’ve been provided accurate information before deciding whether or not to hire them.
The Bottom Line
The tax settlement industry is riddled with danger at every step. Those seeking help with outstanding tax bills should normally have their tax or financial adviser refer them to an experienced tax attorney with years of expertise dealing with this situation. They should also be prepared to go through rigorous financial research as well as a regulatory procedure that may take months. Above all, they should expect to hear “no” from the IRS in the end.
Do Tax Relief Companies Really Work?
It depends. Unfortunately, the sector is riddled with fraud and unethical business methods. Disreputable businesses entice clients with false promises while demanding exorbitant costs. Nonetheless, respectable tax settlement businesses exist. These businesses are transparent about whether you can profit from their services and offer fair costs.
Are Tax Settlement Companies Worth It?
Again, it is dependent. Disreputable firms may charge hundreds or thousands of dollars in fees without delivering the desired result. Good firms, on the other hand, charge fair, transparent rates and have a track record of success. Some firms charge a set percentage of the IRS debt, such as 10%. Others may charge an hourly cost ranging from $275 to $1,000. Some businesses may not accept customers who owe less than $10,000 in taxes.
What Does Tax Settlement or Tax Relief Include?
A free consultation is usually the first step in the tax settlement procedure. A case manager will assess your present tax debt and other financial information before providing an estimate for their services. If you continue, the case manager will do a thorough investigation into your taxes, devise a strategy, and negotiate with the IRS.
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