Tax Resolution Financing: The Truth About IRS Tax Settlement Firms

Individuals and corporations with unpaid tax arrears may face harsh penalties from the Internal Revenue Service (IRS), which may include the confiscation of personal or commercial assets. In addressing this predicament, this has the potential to spark a severe financial crisis, but now, a new type of business has emerged to assist delinquent taxpayers in repaying their tax arrears and that is through Tax Resolution Financing. 

Known as tax settlement firms, these businesses assert that they can significantly decrease or erase a client’s IRS debt. However, can these organizations truly deliver on their promises, or is it a case of buyer beware?

What Are Tax Dispute Resolution Firms?

You’ve certainly seen the television commercials. Destitute individuals who owe the IRS tens of thousands of dollars and have no one to assist them. Enter the tax settlement firm, which comes in and suddenly reduces the frightened client’s tax burden by hundreds or thousands of dollars. Clients are overjoyed and leave completely happy. However, it is television,  radio, or social media, and reality does not always work that way.

If you’re unsure of what the tax settlement sector does, consider the debt settlement industry. Both operate in a similar manner to a certain extent. Most businesses that focus on tax settlements assert that they have a multitude of tax specialists on staff who are former IRS workers and can advocate on their customers’ behalf. In actuality, this might be a significant misrepresentation—at the very least in certain instances.

Although a few lawyers and a few other workers may have worked for the IRS at one point, the bulk of employees is unlikely to have. Indeed, the majority of employees may be low-wage customer service representatives.

What Tax Resolution Firms Have to Offer

The majority of tax settlement businesses pledge to send their specialists to the IRS to negotiate on the client’s behalf, in the hope of convincing the agency to accept a significantly lesser amount which is often pennies on the dollar. In practice, this is very impossible, and the IRS seldom agrees to a genuine decrease in the amount of tax payable. Of course, there are other extremely compelling reasons for Uncle Sam to accept a settlement for the payback of back taxes, including the following:

• If the taxpayer is in unique circumstances and the amount owed would impose an economic burden or be unreasonable and this would have to be an extraordinary situation.
• If the debtor is unable to seek a productive job that provides an adequate income to repay the obligation, for example, due to long-term sickness or incapacity.
• If the tax debtor possesses no assets that may be utilized meaningfully (through asset seizure) to satisfy the statutory tax liability.

The most that the rest of us can hope for is an extension of time to repay our tax arrears, which generally entail additional interest and penalties.

Compromise Offer

Tax settlement businesses minimize their clients’ tax liabilities using an IRS-accepted technique called an offer in compromise. This is a unique arrangement that certain taxpayers can establish with the IRS in order to resolve their tax arrears for less than the full amount owing. The taxpayer is required to provide the IRS with detailed information about their existing assets and obligations, as well as predicted future income.

Additionally, offers in compromise often take many months to accomplish, and qualifying for one may be more challenging than qualifying for Medicaid. This avenue does not have a spend-down plan.

In general, the percentage of offer-in-compromise petitions that are granted is rather low. To get approval for such a decrease, taxpayers must demonstrate that the entire amount owing is inaccurate, the chance of repaying the whole amount is extremely remote, or repaying the full amount would result in extreme financial hardship.

According to IRS Form 656, an unusual condition necessitating financial hardship must include “unplanned occurrences or unique circumstances, such as significant sickness, in which paying the entire amount or the minimum offer amount would harm your capacity to support for yourself and your family.”

Price Tag for Tax Settlement Firm

The majority of tax settlement firms charge an initial cost of between $3,000 and $6,000, based on the amount of the tax debt and proposed settlement. In most circumstances, the cost is non-refundable and frequently oddly reflects the client’s available funds, and the amount the business claims is often what will save the client in tax payments.

Clients have filed complaints with the Better Business Bureau (BBB) and the Federal Trade Commission (FTC) alleging that some of these businesses failed to deliver on their promises and were, in reality, a scam. Numerous organizations also substantially mislead their prices to clients, offering them a smaller fee initially but then increasing it as they become fully involved in the process. 

Success Rates of Tax Resolution Firms

As previously noted, the IRS rejects the vast majority of proposals in compromise it gets each year. The number of consumers who receive pleasure from tax settlement firms is minuscule, and the majority are financially impoverished. The great majority of potential settlement clients must negotiate payment arrangements with the IRS that will allow them to pay down their tax debts over time while maintaining their assets—and dignity.

The IRS website has further information on payment arrangements.

Locating a Reputable Tax Relief Firm

Numerous red flags should serve as a warning to prospective clients considering engaging a tax settlement agency. Any organization that promises a significant decrease in a customer’s taxes without first doing a thorough financial background check on that individual is almost always a fraud. Any tax agent who does not inquire as to why a client owes the IRS money is not undertaking the necessary due diligence for a legitimate appeal.

Any professional tax relief service will first collect critical financial information from its clients before providing an honest appraisal of what they can do for a fair set charge. Clients would be advised to seek out a locally based firm that has been in operation for some years and has a presence in the neighborhood.