Beware Tax Debt Relief Scams
The Truth About “Tax Resolution Companies.”
If you’ve decided to hire a tax professional to help with your tax debt, your first thing that might come to mind is one of those tax debt relief advertisements you’ve heard on TV or the radio. These ads usually make one or more of the following claims:
- “We’ve helped thousands of people settle their tax debt for a fraction of the amount owed.”
- “We stop wage garnishments, levies, property seizures, and unbearable monthly payments.”
- “We can significantly reduce your tax debt. Call for a free consultation.”
To the unsuspecting taxpayer, these claims sound very attractive. However, you should be very wary of these claims and the tax debt relief companies that use them. More often than not, these companies are looking to scam people like you out of their money with false promises and dishonest practices.
Many of these companies shut down after thousands of complaints are filed against them, only to reopen six months later under a new name. Several of these companies were so egregious that the US Department of Justice stepped in and closed them down, and even filed criminal charges in some cases against the owners. Some you might of heard of in the news include:
- J.K. Harris: At one time the nation’s largest tax resolution company, J.K. Harris was sued by more than 20 state attorney generals for charging clients unethical fees and promising clients they qualified for debt relief programs when in fact they did not.
- American Tax Relief: Shut down in 2010, American Tax Relief used deceptive trade practices and charged clients up to $25,000 each for tax relief services they never provided.
- Tax Masters: Tax Masters became a publicly traded company in 2010, but was later sued by the Texas Attorney General on behalf of over 1,000 clients who the company had defrauded with deceptive advertising and billing practices.
- Roni Deutch: Known in California as the “Tax Lady,” Roni Deutch was disbarred for deceptive trade practices and sued for $39 million by 4,000 former clients.
To help you avoid these kinds of tax debt relief scams, here are four red flags that a tax debt relief service is a scam.
Red Flag #1: Pennies on the Dollar
“NEW IRS PROGRAM LETS TAXPAYERS SETTLE THEIR TAX DEBT FOR PENNIES ON THE DOLLAR.” Sound familiar? It’s virtually guaranteed that you’ve heard this message advertised by tax resolution companies on TV, the radio, or in a direct mailer sent to your house. But is it true? Can you really settle your tax debt for less than you owe?
The answer is maybe. It’s true that the IRS allows taxpayers to settle their tax debt for less. Sometimes even less than a penny on the dollar (we have settled tax debts for less than a half penny on the dollar, in fact). However, most people will not qualify for this program. The IRS is very selective about accepting settlement offers (known as an “offer in compromise“) and they reject far more than that they accept.
But do you think the tax resolution companies would ever tell you that? The answer is no. Many of these companies charge outrageous fees, sometimes as much as $10,000 or more (that’s several times what we charge, by the way), to prepare and submit an offer in compromise they know will never get accepted. That’s if they submit one at all. It’s common for these companies to never actually submit the offer or do any meaningful work at all.
How to Avoid this scam:
If you want to settle your tax debt, but don’t want to get scammed in the process, our first tip is to do your homework. Using the resources on this website and other information that you can find online, you can learn everything you need to know about the criteria the IRS uses to accept or reject an Offer in Compromise. Use this information to get an idea of whether or not you’re a good candidate for the program.
If the signs point to the IRS rejecting your Offer, don’t ignore them. Be honest with yourself and don’t let your hopes cloud your judgment.
If you decide that you might be a good candidate and want to hire someone to help with your offer, follow these tips:
- Don’t use any of the large tax resolution companies that advertise on radio or TV. To be fair, not all of them are bad, but many of them are. So the best way to avoid a scam is to avoid these companies all together.
- Find a local tax professional to help you. We prefer tax attorneys for selfish reasons, but CPAs are also very trustworthy.
- Set up an initial consultation where you can meet face to face. Come prepared with information on all of your finances, assets, and debts.
- Turn around and leave if they start telling you that you’ll qualify for the IRS offer-in-compromise program without having reviewed all of your financial information that you brought with you.
Red Flag #2: Outrageous Claims
“WE’VE NEVER HAD A SETTLEMENT GET DENIED.” You’ll hear this in almost every tax resolution sales pitch. Remember this: the IRS is very picky about accepting settlement offers. Statistically, not even half of all offers get accepted so this is almost certainly a deceptive claim.
But not always. There is actually one tax resolution company in California where this promise is true, even though they submit bad offers all the time. How? They withdraw the offer as soon as the IRS hints at rejection, this way the rejection never becomes official.
But do you think the taxpayer gets a refund of their fees? Absolutely not. At companies like this, the fees are always non-refundable regardless of the outcome.
How to avoid this scam:
If you’re looking for the best tax professional to prepare your offer in compromise, don’t believe anyone that makes these kinds of claims. They simply aren’t true.
Instead, look for other indicators of quality service. Online reviews, office location, level of experience, and professional credentials are all good places to start. Check out our article on six questions to ask before hiring a tax professional, which will give you a great way to test someone out before trusting them with your offer in compromise.
Red Flag #3: Bait and Switch Qualifications
“OUR TEAM OF TAX ATTORNEYS AND CPAs…” This is a favorite tag line of almost every scammy tax resolution company. Why? Because it adds instant credibility to their business. If you didn’t know any better, you’d think that you’d be in good hands with a tax resolution company that uses tax attorneys and CPAs.
But you’d be wrong. Even if one of these companies actually has attorneys or CPAs on their payroll, they’re not going to be doing any work on your case. The business model for almost every single tax resolution company in existence is to lure you in with their “team of tax attorneys and CPAs,” and then dump your case on a much less qualified person who costs half as much for the company to employ. It’s the classic bait and switch. Suddenly, you’re paying thousands of dollars for someone no more qualified than yourself.
How to avoid this scam:
If you want a tax attorney or CPA to handle your case, then you should hire a tax attorney or CPA, not one of those national tax resolution companies claiming to have them on staff. Every decent sized town or city has plenty of qualified and respectable tax attorneys and CPAs who can handle your case.
Red Flag #4: Dishonest Pricing and Billing
Last but not least is dishonest billing practices. The unfortunate fact is that many tax resolution companies prey upon the desperation that tax debt creates and use it to squeeze every last penny they can out of you.
One of the most common billing scams looks like this: First, they start with a large up front fee, usually at least $3,000 but more often it’s closer to $10,000. They encourage you to borrow this money from your family, friends, or even your IRA or 401(k). After all, what’s $7,500 if it saves you $30,000 in taxes?
Once this amount is paid, they give you a stack of forms to fill out and request numerous pieces of documentation. After you submit these forms, you don’t hear from them for weeks or even months. Finally they come back and say that your case is more complicated than they originally anticipated, and they need an additional $3,000 to $5,000 to continue working. If you can’t pay, they’ll just close your file with no refund. Instead of losing the money you already paid, you decide to come up with the extra money even though you’re now financially bankrupt.
A few more weeks goes by and they give you call to ask for additional information due to some kind of mistake or omission in the form you filled out. And here’s where the scam happens. Unbeknownst to you, the service contract you signed provides that you must respond with 24 hours, otherwise they will terminate your case and keep all of your fees. And it’s strictly enforced.
So, they terminate your case, keep all of your money, and you’re now worse off than you were before.
How to Avoid this Scam
To protect yourself from getting taken advantage of by dishonest billing practices, follow these tips:
- Don’t hire disreputable companies in the first place. The information and scams discussed above should help you weed them out.
- Don’t pay large up-front fees. Insist on paying only a portion up front, with the rest paid as the work is done and progress is made on your case. Learn more about tax attorney fees.
- Read the service contract carefully and look out for anything that’s “non-refundable.”
Bottom Line: Warning Signs of a Scam
The more of these signs you see, the more likely it is a tax debt relief scam:
- Advertises heavily on radio or TV
- Does not have a local office in your town or city
- Promises that you’ll qualify for the IRS offer-in-compromise program before they’ve done a full review of your finances (including your income level, assets, and monthly expenses)
- Claims to have a team of tax attorneys and CPAs, but is not a law firm or accounting firm
- Claims they’ve never had an offer denied
- Requires payment up front of many thousands of dollars and/or has a non-refundable policy
The best things you can do to avoid getting scammed are:
- Deal only with local tax professionals, preferably a CPA or tax attorney
- Be wary of promises that are too good to be true
- Don’t pay the entire fee upfront