Tax debt can be stressful. In addition to the pressure to pay back whatever you owe, you may face IRS penalties and the seizure of future refunds. It’s no wonder that many people are willing to spend money on assistance from a tax settlement firm or debt relief company.
According to Investopedia’s research, tax relief companies charge an average of $3,000 to $6,000, depending on the size of your tax debt. However, they have less than a 10% success rate. In reality, many of these companies are nothing more than fronts for scam artists who seek to profit from your loss. If you don’t do your due diligence, you could end up worse off.
What is a tax debt assistance or tax settlement company?
Whether they are called a tax resolution company, tax debt assistance company, or tax settlement company, these firms promise to provide tax relief through customized tax reduction strategies designed to resolve your tax debt.
They can negotiate with the IRS on your behalf and suggest installment plans that fit your budget.
However, deciding to get help from one of these companies is a risky proposition that can leave you with a bigger problem than the tax debt you already face.
Why should you be wary of these companies?
Unfortunately, many promise more than they can deliver. A number of these companies may also be focused on scamming people out of money by playing off their financial stress and fears.
Look out for red flags when you consider working with one of these companies.
Red Flag #1: Guaranteeing debt forgiveness
No company can guarantee that it will get part or all of your tax debt forgiven. The only organization that can do that is the IRS, and it rarely forgives tax debt.
The IRS notes that it may forgive some tax debt through an Offer in Compromise but there are rigid qualifications for this settlement.
Red Flag #2: Promising to drastically reduce or even eliminate your tax debt and get penalties and interest waived
Likewise, no company can guarantee that it will be able to do anything that decreases your tax obligation. All such a firm can do is present the information and request on your behalf.
Ultimately, it is up to the IRS. In most cases, you will still be obligated to pay the penalties and interest.
Red Flag #3: Soliciting your business directly with offers to clear tax debt
Many tax debt relief companies advertise on the radio, television, and the internet. Some of these firms go well beyond simply marketing themselves by actively pursuing people who are vulnerable and living in fear.
These scammers rely on false claims, including being able to help you settle your IRS tax debt for pennies on the dollar. In reality, very few people can have their tax debt reduced at all, let alone down to a fraction of what they owe.
Red Flag #4: Asking for money upfront
Under no circumstances should you pay a tax settlement company upfront before it takes action on your behalf. The reason these scammers require the money first is that they know the outcome will not be satisfactory for you.
The tax relief firm knows that if it waited until after it had to break the bad news, you would refuse to pay. Don’t pay any tax debt assistance company until it achieves a positive result for you.
Red Flag #5: Not assessing your financial background first
If a tax debt assistance company doesn’t first thoroughly analyze your financial background, then it cannot possibly help you. Any firm or individual acting on your behalf would first need detailed information about your debts, assets, and income.
This is especially true when a company promises to solve your financial problem when it doesn’t even know the scope of that problem or any details about it. A company’s failure to ask for additional information is a red flag.
Red Flag #6: Having numerous bad reviews and online complaints
Don’t dismiss bad reviews and consumer complaints about a tax relief company. Carefully read all available reviews to get a better understanding of what the company promises and what it actually delivers. If the overall theme of each review starts to sound the same, it is a red flag that you shouldn’t ignore.
There are legitimate companies out there
There are legitimate tax debt relief companies with qualified, licensed, and experienced professionals who want to assist you. They will meet with you, review your financial data, and then provide a realistic assessment of what they can do. These legitimate companies will charge a reasonable fixed fee for their services.
Do your due diligence on any firm by checking that it has been in business for several years with a reputable presence in your community. Look it up with the Better Business Bureau and check review sites for an idea of how it operates.
What you can do to get tax relief directly from the IRS
You shouldn’t be afraid to go directly to the IRS and respond to its requests for payment on back taxes owed. It’s important to be proactive and respond promptly.
The IRS offers numerous options to help make paying down that tax debt easier. It can offer both short-term and long-term payment plans, depending on how much you owe. An Offer in Compromise is another option it may be able to provide.