You hear the commercials on television and radio almost daily: We can reduce your tax debt to pennies on the dollar. The charlatans claim they can help get rid of your IRS debt and state income tax debt. Who they’re really helping is themselves…. to your wallet.
Probably the most well-known tax debt reduction professional was Roni Deutch, known as “The Tax Lady.” Her firm purported to provide help to clients with Offer in Compromise needs, IRS installment agreements and Currently Not Collectible tax accounts. Unfortunately, it appears Roni took a lot of money from people and provided them little or no help in return.
Earlier this year, the Attorney General of California shut down Roni Deutch’s company, alleging she has stolen more than $34 million from her clients. Roni Deutch surrendered her law license, but not without a tearful press conference in which she said how much her clients needed her and that the state bar wasn’t going to help them. But neither did Roni!
Here’s the catch with these tax debt reduction companies: They get you in by promising they’ll settle your tax debt from much less than you currently owe. They charge you several thousand dollars up front for their help. And you end up with little to no reduction in your taxes owed.
The Internal Revenue Service has strict rules for Offers in Compromise and other settlements of tax debts. Unless you are retirement age or very low income, it is difficult to get your tax debt reduced. The IRS has a philosophy that everyone should pay what they owe, and if you need to cut back your lifestyle to pay off your tax debts, so be it.
Tax reduction firms are claiming they can reduce your tax debt, when many times they know you aren’t going to qualify for a reduction. So what should someone in tax trouble do? See a CPA or a registered tax preparer. They can look at your tax returns and correspondence from the IRS to see if your tax liabilities have been correctly calculated. The IRS makes frequent mistakes, so it is important to check their math and application of the tax laws.
The CPA or tax preparer may also identify an opportunity for you to submit documentation that will help the IRS calculate a lower tax liability. Sometimes a missing piece of paper can cost you a lot of money, and there may still be an opportunity for you to submit that documentation to the IRS. The tax professional will also be able to give you an idea of whether you would qualify for an Offer in Compromise or other tax reduction from the IRS or state taxing authorities.
If you are asked to pay a large up front fee, you should be skeptical. Here are a number of other red flags when trying to spot a tax settlement scam. And if it sounds too good to be true (“pennies on the dollar!”), it probably is.