Introduction to Tax Debt Relief Services
Tax debt can lead to serious and costly penalties that include liens, wage garnishment, and even the seizure of your personal assets. As people struggle to cope with a repayment process that can be baffling and financially unmanageable, more and more services are sprouting up claiming to help reduce and resolve this particular type of debt.
Through commercials and advertisements, tax debt relief services promise a variety of incentives such as:
- Tax settlements for as little as "pennies on the dollar"
- Guaranteed results up front
- Quick, hassle-free process
Many companies in this category monitor tax lien notices and target individuals with a range of different marketing tactics to promote services that fall well short of the outcome promised. In some cases, criminals have even used tax scams to collect payments and disappear with an individual's entire life savings.
Unscrupulous at best and outright fraudulent at worst, these individuals over promise on what they are capable of or intend to deliver. So to save time and money (both in wasted fees and accrued interest on existing tax debt), it's critical to vet the tax relief services you're considering before paying a single dime.
When comparing services, be wary of:
- Substantial upfront fees and high-pressure tactics: Consumers have filed complaints reporting fees that range from $3,000 to $9,000 and as much as $25,000 up front. Free "consultations" often quickly turn into aggressive, high-pressure sales pitches.
- Business conducted exclusively by phone: Companies that do not offer a face-to-face consultation often provider lower levels of service overall. In these instances, the representatives that contact you or answer an 800-number are employed by a marketing company or sales department whose primary goal is registering a large number of consumers.
- Guarantees: Debt reduction, commonly known as an "Offer in Compromise", has the potential to reduce the total debt you owe. But whether or not you qualify for this option is solely at the discretion of the IRS. A reputable tax debt relief service will not guarantee this type of arrangement up front. It's worth noting that, according to recent estimates, only 25% of the Offer in Compromise petitions recently submitted to the IRS were accepted.
Resolve tax debt immediately
If you have tax debt, the worst thing you can do is avoid it. Open all correspondence you receive in the mail and find a reliable tax debt relief service provider. Note: the IRS will never send emails or call demanding payment.
Even if you only set up a payment plan, it's always in your best interest to take care of the debt quickly. The repercussions, many of which are detailed below, are serious and can lead to even costlier outcomes.
Tax Debt Problems
It's estimated that nearly 17% of federal taxes go unpaid every year. While this obviously results from those who simply neglect to file, it can also be the result of a range of other issues, from simple misunderstandings to mitigating circumstances. Maybe you accidentally claimed too many exemptions. Maybe you forgot to list unreported income. Maybe you or a loved-one suffered a severe illness. Whatever the case may be, there are any number of legitimate reasons that can lead to the following examples of tax debt.
A lien is a debt leveraged by a government body against your personal assets when all other collection options have failed. Often used to force the payment of delinquent federal and state taxes, personal income, and property taxes, tax liens can prevent the sale or refinancing of a home or other property until the lien is resolved.
There are a number of ways to settle a tax lien, including paying the debt, declaring bankruptcy, or reaching an Offer in Compromise with the IRS or local tax authority. In extreme cases, failure to resolve this type of debt can allow government entities to seize a variety of personal property and assets including bank accounts and investment portfolios, automobiles, and real estate.
Unpaid taxes are any federal, state, or local taxes that go unpaid in the year they're due. Unpaid taxes become back taxes immediately after the due date unless a payment arrangement or extension has been filed in advance.
Under the American Jobs Creation Act, the process of collecting unpaid taxes is now outsourced to a variety of private collection agencies. But this is one area where you should be wary of scams. If the IRS turns over unpaid taxes for third-party collection, you as the taxpayer will always receive a letter (usually via certified mail) from the IRS, listing the amount of the unresolved debt and the name of the agency assigned to collect it. In some cases, you may still petition to deal with the IRS directly at this point.
One of the primary causes of tax debt, unfiled taxes can be something of a misnomer. Though you may forget or neglect to file an annual tax return, the IRS will automatically file one for you after a certain point. Known as a "Substitute for Return" or SFR for short, this type of filing gives you only one deduction, regardless of your personal situation, thereby often assigning the highest possible amount of tax owed.
An unfiled tax return is one of the riskiest actions you can take (or not take, as the case may be). You can end up responsible for the total amount filed in the SFR - a rate of tax often substantially higher than you would have owed otherwise. With this filing in place, the tax authority attempts to collect the amount owed. If unpaid, unfiled taxes can lead to legal action and tax liens on personal property and assets.
Federal and local tax authorities asses a variety of interest and penalties to enforce the prompt payment of your tax responsibility. The current APR for unpaid federal taxes is the federal short term rate (.54%) plus 3%. Additional penalties may also include a $5 late fee for every month the payment is late.
Tax penalties can take the form of criminal, civil, or a variety of other related penalties. Among the most common, civil tax penalties typically receive a monetary fine and are used to pursue an individual for underpayment, delinquency, and/or avoidance of tax responsibility. Criminal tax penalties are often only used in the most extreme cases and can result in various fines and even prison time.
Tax levies give a tax authority the legal right to seize personal property to satisfy a tax debt. This can include your home and real estate, car or boat, and even an investment portfolio, bank accounts, retirement savings, and your personal wages. Unlike a tax lien, which is offered up as collateral for a tax debt, a tax levy is the process of actually seizing that asset.
A number of steps happen before the levy is enforced. The IRS or state tax authority provides a written notice of the outstanding debt and a demand for payment. Upon continued neglect or refusal to pay, a final warning is sent 30 days prior to the levy, notifying the individual of their right to a hearing. After that point, the levy is enforced and the assets are seized to settle the tax debt.
A form of tax levy, wage garnishment is an extreme measure taken by federal or state tax authorities to settle a tax debt. It is the outcome of a lawsuit wherein wage garnishment is enforced by a court order. The employer is instructed to withhold a specific percentage of an individual's wages for the repayment of a tax debt.
According to the United States Department of Labor, federal law has established that an employer may garnish only up to 25% "of the employee's disposable earnings, or the amount by which an employee's disposable earnings are greater than 30 times the federal minimum wage." It's worth noting that four states currently prohibit the garnishing of wages for the purpose of debt collection: North Carolina, Pennsylvania, South Carolina, and Texas.
As it relates to an individual, a bank levy is the result of the IRS instructing a financial institution to freeze a particular bank account for the purpose of debt collection. Often the result of unpaid taxes, bank levies can be assessed repeatedly until the debt is settled. In addition to the fees enforced by the federal or state tax authority, many banks also assess fines to the individual account for processing the levy.
Commonly resulting from a tax levy, an asset seizure, or "Notice of Seizure," is a letter sent to a recipient by the IRS or local tax authority that informs that individual of the seizure and liquidation of a specific asset. This can include large physical and financial holdings such as real estate or bank accounts.
Used to settle a tax debt, you can often appeal the decision by responding to the Notice of Seizure within a certain time frame.
How to avoid tax penalties
Many of the above examples represent the end of a lengthy process through which the IRS or local tax authority has repeatedly tried to collect a tax debt. It's worth noting that, even though many written notices are sent via registered U.S. Mail, they don't necessarily have to be signed for by the individual they're addressed to. For example, they can be sent to a previous address or the last known place of employment.
Whether resulting from neglect or just a simple mix-up, you are still responsible for tax debt. But there are ways in which it can be resolved easily and without stress or financial ruin.
Tax Debt Services
Tax debt services use a variety of techniques to advocate for you as the taxpayer. Leading providers specialize in helping you avoid many of the more serious penalties listed above through tax relief services that often include many of the following.
Tax debt settlement
Settling your tax debt includes negotiating with the IRS to explain your personal circumstance and reduce the total amount of back taxes owed. This process, known officially as an "Offer in Compromise," is used to reduce unpaid taxes that often factor in hefty interest and other penalties.
Most tax debt relief services help negotiate on your behalf by presenting financial data related to your current income, ability to pay, expenses, and asset equity.
Tax analysis and consultation
Whether you're dealing with unpaid or unfiled taxes or have already been assessed tax penalties, a thorough tax analysis is usually the first step with most tax debt relief providers. Many begin by requesting account transcripts from the appropriate tax authority as well as a range of financial data from you.
To determine the best possible outcome, this service should be performed by a qualified tax consultant or similar professional. After completing this analysis, the provider offers the best possible option for repayment which often includes an Installment Agreement. It's worth noting that, in many cases, you may still be responsible for accruing interest. Again, based on your current financial standing, a tax debt relief specialist will determine the best type of agreement for your budget.
Tax investigation and review
Often part of a tax analysis, tax investigation and review includes a thorough study of your notices, tax transcripts, and personal financial data. The purpose is to determine which types of relief you qualify for - from installment agreements or an Offer in Compromise to Innocent Spouse Relief, an approach that can relieve an individual of the responsibility of the erroneous or omitted reporting of taxes by a spouse (or former spouse).
It's worth noting that a tax investigation should be one of the first steps offered by a qualified tax debt relief service. Only with a comprehensive review of all qualifying factors can a provider tell you with certainty what types of relief you quality for.
Tax levy or garnishment release
One of the more extreme solutions taken by a tax authority, tax levies are often the end of a long legal process (and the outcome of a lawsuit). Taking form in two different types, tax levies can seize personal assets such as land, automobiles, and boats, or freeze bank accounts. While any levy in this scenario is extremely serious, the freezing of personal funds can be ruinous and is often treated by tax debt relief services as an emergency.
Depending on the provider, some can negotiate with the IRS or local tax authority and restore the availability of funds in 24 to 48 hours. This is often the result of successfully negotiating an Installment Agreement or presenting information that establishes the debt as "Currently not Collectible" (CNC). In either scenario, the levy is released and actions related to collection and enforcement are suspended. But CNC status is most common in cases where more than $10,000 is owed and typically only extends for 30 days. As a result, the debt itself is still not resolved. So a tax debt relief service works with you and the tax authority to negotiate an installment plan or Offer in Compromise when applicable.
Amending and filing returns
Erroneously or unfiled taxes require the filing of an amended tax return. In these cases, tax debt relief specialists may be able to achieve a more beneficial outcome by gathering the data necessary to make a compelling case in your favor.
This aspect of service is often most useful for those who neglected to file and have a Substitute for Return (SFR) on their account, automatically filed by the IRS. Quick resolution ensures the lowest possible interest and penalties.
Tax lien removal
Tax liens end up on your credit report, impacting your qualification on future loans and lines of credit. The faster this is resolved, the better. Tax debt relief providers can employ a range of different solutions if you meet the necessary financial requirements. These include establishing an Installment Agreement or an Offer in Compromise, or getting the account listed as Currently not Collectible (a temporary fix that buys an additional 30 days).
In addition, the IRS raised the threshold for tax liens in 2011 from $5,000 to $10,000 and is reportedly more willing to release a lien faster and even expunge the tax record of an individual if it is demonstrated that a tax lien will impact the repayment of debt. For this reason, tax debt relief providers factor in your current employment, housing, and transportation when negotiating with tax authorities - all of which can be affected by a negative credit report.
Payment plan help
This is one of the most beneficial aspects of service when using a tax debt relief provider. After conducting a thorough analysis of your current standing, tax debt relief specialists can negotiate a workable payment plan that allows you to repay back taxes while remaining in good standing with the IRS or your local tax authority.
By filing an amended or original return (in the case of an existing Substitute for Return), or by qualifying you for Penalty Abatement or Innocent Spouse / Injured Spouse Relief, attorneys and tax professionals can often come to one of two outcomes:
- Partial payment installment: allowing you to pay less than the full amount of back taxes and resulting fees owed until expiration (a statute of limitation of 10 years after which the IRS is unable to collect on the back taxes in question)
- Full payment installment: allowing you to pay the full amount in monthly increments until the debt is settled
Costly penalties are imposed upon those who neglect or misreport their federal and state taxes, as detailed in Tax Penalties above. Tax debt relief specialists work to establish reasonable cause for the filing error. In doing so, they are able to demonstrate to the tax authority why you were not in compliance with the tax code, whether you submitted the taxes yourself or had them prepared by a CPA.
And in fact, advice from a tax professional is one of the many reasons that may qualify you for a reduction in penalties. Among some of the others are bankruptcy, misunderstanding of the law, natural disaster, undue hardship, and a death or serious illness in the family.
Tax audit defense
Another beneficial service, attorneys and tax specialists help you navigate an audit by not only explaining the audit notice, but also analyzing the tax return in question to determine if any errors were made.
With a solid understanding of tax law, tax debt relief providers can offer the necessary documentation to ensure the audit goes as smoothly as possible. They also frequently audit the revised return to ensure you've taken every possible deduction you qualify for and help establish a payment plan if back taxes are owed and cannot be paid in full.
The above services often demonstrate the quality of the provider, especially when offered without large upfront fees or grandiose promises before conducting a thorough analysis of your financial situation. In addition, there are a number of contributing factors that can help you avoid scams while ensuring you find the best tax debt relief provider suited to your needs.
- Online reputation
- Online presence
Professional affiliations often indicate adherence to an established set of professional standards and rules of conduct. With tax debt relief, this ranges from licensing and educational verification to adherence with local state regulations and marketing practices.
Notable organizations in the industry include:
- ASTPS: American Society of Tax Problem Solvers, a non-profit organization that specializes in representing individual taxpayers when negotiating with the IRS
- NATRC: National Association of Tax Resolution Companies, an organization that protects consumers from deceptive advertising by tax resolution providers
- AICPA: American Institute of CPAs, establishes ethical best practices and standards used for the audit of private companies by CPAs while advocating for standards in front of legislative bodies and private organizations
- NATP: National Association of Tax Professionals, a non-profit organization that provides education and resources to professional tax representatives, including CPAs, accountants, attorneys, and financial planners
- NAEA: National Association of Enrolled Agents, certifies that members have met annual requirements for continuing education related to the application and administration of federal tax laws
The support provided by a tax debt relief professional can take many forms. In general, the one that provides the quickest answer may not always be the best. Look for those that conduct a thorough analysis of your situation then provide an informed repayment strategy that is affordable and keeps you in good standing with the tax authority.
One of the easiest ways to find this type of provider is by reviewing their billing practices. Firms that require payment upfront, with exception to nominal fees, should almost always be avoided. These nominal fees are often referred to as "discovery fees," covering the expenses involved in conducting your initial tax analysis. Any provider that requires payment in full up front should always be avoided.
In many cases, leading providers often charge a discovery fee then provide the estimated fees to negotiate settlement with the tax authority, providing you both the total cost of their services as well as your list of options.
Finally, give preference to firms that offer some or all of your money back if they are unable to deliver on the outcome promised in their initial analysis. With some providers, this will be offered within a specific time window (15 days for example), while others may offer a refund up until you accept the solution they've negotiated and move forward with the tax authority.
One of the quickest ways to weed out scams and providers that may not meet one of more of your expectations is to conduct online research. In addition to a general Google search, there are a number of reliable sources that track everything from overall service provided to outright scams.
- Better Business Bureau (BBB)
- Federal Trade Commission (FTC)
- Internal Revenue Service (IRS)
- Rip Off Report
- And the website for your local Attorney General
Though it's not always fair to judge a book by its cover, sometimes it's necessary. Use a provider's online presence to gauge their level of professionalism. Is the website informative and well designed, or does it look cheap and scream "fly by night"?
A strong online presence that includes a blog and social media presence is one indicator of a company that operates transparently. Feedback and participation posted to content and on social media channels can provide excellent insight into the experience others have had with the tax debt relief provider you're considering.