Tax defense companies, you’ve heard their ads, deep baritone voice booming over the radio that if you need help you can call them and they will let you sit back with martini and all your tax problems will vanish. All of this because they know how to get the IRS to settle “often” for “pennies on the dollar.”
This is not to disparage all tax defense companies, I myself practice in tax defense (AKA “tax controversy” to the legal eagles) but what is true, what is possible and what I get requested to do on the other end of the phone line due to these advertisements needs to be settled.
1. “Pennies on the Dollar”: First things first, as I have explained in previous posts the IRS (and other taxing authorities) act like a business, they are out for money and have no real interest in settlement unless a cost benefit analysis should dictate its appropriateness. What the ads are referring to is an “Offer in Compromise” which is a settlement agreement with the IRS that they will agree to when your ability to pay and pay timely is very limited, your assets are nonexistent, and your living expenses are that of a squirrel, a teeny tiny squirrel. As stated, the IRS wants your money so, they want to calculate:
(what you can pay vs. what they want)+ (the man hours it would take to collect without settlement-what they believe you will ever be able to pay)=a settlement option that THEY think is to THEIR benefit.
So you fill out a form, a very long form called a 433-OIC providing answers to a laundry list of questions and financial statements to show that you deserve such a settlement (think of it like a tax return only the scope goes WAY farther where the sun does not go) and here’s the best part, IT NEEDS TO BE BACKED UP. You need to provide months of bills, bank statements, lease contracts…the list goes on and on.
So can they settle? Yes. Will they? It depends how destitute you are and this is no easy feat. It won’t really be “pennies” because if you can afford a car, afford a house, and afford groceries, the IRS will want its invite to your backyard BBQ too.
2. The Fresh Start Initiative: As the ad goes “The IRS has new rules to get you out of debt fast.” But what have we learned so far? Say it with me… THE IRS WANTS YOUR MONEY. So what is the Fresh Start? Generally it is a Streamlined process for taxpayers that owe $50,000 or less, and want to get into an Installment Agreement. Installment agreement? What is that? It is exactly what is sounds like, you pay down your liabilities in installments, monthly installments, like any payment plan spread over up to 72 months. Now these installments require a similar form, some financial analysis and abracadabra presto, the IRS will negotiate with you on a beneficial (for them) payment plan. With the Fresh Start, the form is smaller, and the acceptance is easier. Meaning, if you owe less than 50K in taxes, you can file for an agreement online, agree to an instant monthly installment, connect them to your bank and it will be accepted in moments, no negotiation, just a computer on the other end that will increase your amount to what it’s comfortable with. It similar for a lien release, in that if you have a lien filed against you and owe less than $10,000 and are in an installment agreement the IRS will nearly always release the lien(or up to $50,000 granting the IRS direct access to your bank account).
So the IRS’s new rules? Yes it can get you out of debt fast-ER, but it is by no means easy or really fast. Furthermore, you’re not “getting out of it” you are PAYING out of it, just slightly faster than you would if you owed more than $50,000. (Practitioner tip: most practitioners charge a flat fee to take care of a Fresh Start because it requires a small amount of analysis and some abilities in understanding the IRS’s calculable needs. If someone is getting you into an installment agreement under Fresh Start and it’s getting expensive, find out why.)
3. “We can stop levies, liens and those harassing phone calls”: Yes and no. You CAN stop levies (legal seizure of your property to actually pay the tax debt ,i.e. your bank account) and liens(a claim used as security for the tax debt, i.e. your house), by paying, or getting into an installment agreement as mentioned, but there is no magic to it, money talks and an adept practitioner can negotiate on your behalf but if you owe it you will have to pay something to get out from under a levy or lien. If you come to a practitioner in time before they have a levy or lien THEN we head the IRS off at the pass and negotiate that they hold off on drastic measures for a time. The harassing phone calls CAN be stopped, once there is a Power of Attorney in place (for a practitioner registered to practice in front of the IRS) then the IRS must only contact that Power of Attorney going forward.
4. “Get rid of penalties, interest and even stop you from having to pay a cent!”: This is interesting, yes you can get rid of penalties, there is a process called Penalty Abatement. It’s an arduous process and really does require legal counsel to get through it. You must argue that you had “reasonable cause” to not file or pay your taxes, backed up with legal precedent and proper code sections. It often requires legal protest and appeals, and continued negotiation with the IRS. It can be done, but it’s really not simple. As an example of reasonable cause: If one had a debilitating disease that truly destroyed one’s life for a long period of time, and can back it up explaining why they could not focus on anything but the disease.Sometimes the IRS will relent. Interest abatement is more limited and rarely granted. There are circumstances but I would wager that the average taxpayer does not have a shot at it.
“Not having to pay a cent” is dangerous language. There are ways however. The one they are referring to in the ad is called “Currently Non Collectible Status”, which effectively is a process that one shows the IRS that they are so destitute that basic living requirements are nearly unattainable, no job, no prospects etc. The IRS will then classify the case as CNC and you will not hear from them again. True. Here is the rub though, interest and penalties are being quietly added to your account, any tax refunds you might will be taken, and should your finances improve the IRS will immediately restart the game. So be very careful about entering this program, it is a last resort.
A better way to not pay (I’m a poet) is by hiring an adept tax practitioner, one who can analyze your case, find the holes, mistakes and other shenanigans that might have gone down and actually repair the damage. I can tell you that many cases we see are simply due to bad accounting and/or tax planning, and once repaired the taxpayer gets off with real “pennies on the dollar.” (more shameless self-servitudes). This isn’t a guarantee but it does happen, often.
I leave you with a 2 caveats and a warning. Firstly, this is not a complete list of the troubles you can get into, so contact a tax practitioner at the first sign of the IRS(or other taxing authorities). Secondly, most of the above programs can only be entered into when you have filed ALL of your previous tax returns, a convenient hole in the advertisement. If you are delinquent in filing, the IRS will not talk to you. Lastly, the red flags to watch for: Large upfront fees, sales tactics, guaranteed results, guaranteed protection, insistence on no face to face consultation and a general “can do attitude” that this will be easy. The IRS is never easy. That is why we are all afraid of them. Except me of course (shameless self-service).
Benjamin Goldburd is an Associate at Goldburd McCone LLP a boutique tax law firm in New York City and Long Island.