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Tax Resolution Companies - Are They Over-Promising Solutions?

Michael S. Anderson Jan. 12, 2012

I met with a person recently who has a six figure IRS income tax debt. Many of my clients do. As is common, he had been talking to several "Tax Resolution" Companies about his options. There are hundreds if not thousands to choose from, so finding several isn't hard to do.

This person is single, no children and earns a six figure income. All of his tax returns have been filed. These facts about him are important because without knowing anything more, they probably mean that he is NOT a good candidate for an IRS Offer In Compromise, i.e. he is not likely a good candidate to reach a settlement with the IRS for less than is owed.

A quick review of the realities that exist in regards to the offer in compromise program is in order here, before I get to my point.

1. Standard Allowances are usually applied

The IRS will disagree with this person's amount of living expenses. It will review his expenses closely in order to calculate how much money he SHOULD have at the end of each month to pay toward his tax debt. I emphasized the word should on purpose.

The IRS doesn't have to pay much attention to what he actually spends each month. It can rely primarily on some "standard allowances" which have been created to tell it what the "average joe" lives on each month. Applying these standards will leave this person with fake or phantom income. That income will be the basis of the amount the IRS thinks he can afford to pay. Typically they won't allow for his payments of credit card debt, retirement investment, vacation, Christmas, birthday, eating out, etc. etc. etc. If a single person in Maricopa county earns $6500.00 per month after tax withholding, the IRS will probably see an ability to pay a few thousand per month toward the debt. These standards can be challenged to some degree, but it is not easy to do.

2. The Offer in Compromise process isn't informal

The taxpayer has to disclose his entire financial life to the IRS. Bank accounts, work history, paystubs, proof of payment of bills, asset values etc. This isn't done based on a chat over the phone. It is a formal process much like filing a lawsuit, that comes with some rights but mostly responsibilities. Often, while the taxpayer is in the process of submitting items to the IRS, things change. Income increases, someone dies and leaves money or property. The chances that the offer as submitted are accepted are reduced as a result.

3. The IRS isn't interested in settling with most

On average, the IRS agrees to settle about 20-25% of offers in compromise that are submitted. When I explain this to people though they still get the impression that this is random. It isn't. The offers that are accepted are those that meet the formal criteria. What constitutes a good offer varies as well. One person may have a $100,000.00 tax debt and be able to obtain an agreement to settle for $50,000.00, but have no way to pay it. Another with the same set of facts may have a rich uncle. Trying to reach some sort of conclusion about the IRS' willingness to settle these cases based on their average acceptance rate is almost meaningless as a result.

4. Not a quick process

Most Offers in Compromise take 6-12 months from filing. Sometimes many more months are spent on the front end getting things right and on the back end appealing a negative result. If the offer is accepted, the taxpayer either needs to pay the amount now, or spread it out typically over two years adding to the already long time frame.

5. Statute of Limitations on collection is extended

The offer in compromise filing stops the clock. It extends the timeframe the IRS has to collect the debt from you. This timeframe is called the "statute of limitations" and it lasts ten years. If you spend 15 months trying to get the offer in compromise accepted and it doesn't work, you will add 15 months to the timeframe. If there was only a relatively short period of time left on the statute of collection when the offer is filed, filing the offer may have been a big mistake.

So, the point...(finally).

This person had decided to hire a tax resolution company he had heard on the radio before speaking to me. The company promised to "solve" his problem and requested $10,000.00 + as a flat fee to do so. What he didn't understand is what I have laid out above. He is not going to "solve" the problem with an offer in compromise. In reality, he will solve the problem with some sort of IRS installment plan in combination with the statute of limitations period or bankruptcy.

Of course, the tax resolution company isn't a law firm and has no ethical duty to really explain this...and didn't. In fact, it probably uses a commissioned salesperson whose main objective is to close the "deal".

The company is hoping that it can arrange a payment plan with the IRS, and pocket the $11,000.00 for "solving" the problem. It is really a play on words. "Solving" doesn't mean reducing via an offer in compromise necessarily. The potential client doesn't fully get this until it is too late. He ends up paying 3 times or more than what he should, for the end result...a partial solution.

Tax resolution companies are not law firms. They can't practice in Bankruptcy Court, they have no duty to tell the truth, and for most taxpayers the offer in compromise just doesn't work. What these companies are left with are subtle sales pitches that leave the wrong impression. A very expensive wrong impression.

If you have serious tax debt, your situation has to be fully reviewed/analyzed, bankruptcy and the statute of limitations must be considered AND a period of planning and adjusting should probably take place as well, before an offer in compromise is filed. Don't pay a large fee to someone on the promise of a "solution" until this work is done.