The answer to this question really depends upon the company you use for your tax debt relief service. Yes, there are legit tax relief companies that can help you reduce your tax debt or get on an affordable payment plan. However, there are many scam companies as well. Do some research before deciding on a tax debt relief company to represent you.
What is tax debt relief and why might you need it?
If you can’t afford to pay your taxes on time, you may qualify for some form of tax debt relief. Typically, this relief comes in the form of a payment plan or debt settlement with the IRS.
If you think you need tax debt relief, act fast to resolve your problems. The IRS charges a failure-to-pay fine of 0.5% of your unpaid taxes each month or part of a month, plus interest. Interest starts accumulating on the day your taxes are due (Tax Day, which is usually April 15), and continues until you pay your bill in full.
Why you should be wary of tax relief companies
You’ve perhaps heard or seen ads from tax relief services offering to help distressed taxpayers by reducing or even eliminating their tax debt. And technically, it is possible to resolve your tax debt for less than the total amount you owe through an IRS offer in compromise, called an OIC.
Even though many of these companies charge nonrefundable fees– which can be thousands of dollars– they might not be able to deliver on their promises. It’s difficult to qualify for an offer in compromise. The criteria are strict– you can’t be in the middle of a bankruptcy, must be up to date with all filing and payment requirements, and meet other criteria.
Some of these companies even venture into scam territory by taking your money and then neglecting to send the IRS the required documentation to apply for a payment plan or OIC.
The Federal Trade Commission has also gotten complaints that some tax relief companies have made unapproved charges on top of the upfront fees.
Some also offer to advocate on your behalf with the IRS to get you on a payment plan. But in this case, you’ll likely overpay the company to do something that you can do on your own by getting in touch with the IRS or your state directly.
Indicators of a tax-debt-relief scam
Scammers understand that owing money to the IRS can make people desperate and that they can take advantage of your fear. While there might be legitimate tax-debt-relief companies, there are also many scammers.
The Federal Trade Commission says that a company demanding payment prior to doing anything for you is a sign of a fraud. Here are some other indications to watch out for:
- Guaranteeing debt forgiveness
- Promising to significantly lower and even eliminate your tax debt
- Pledging to get penalties and interest waived
- Soliciting your business directly through letters or emails
- Neglecting to evaluate your financial history (the IRS looks closely at your financial situation when considering an offer in compromise, any company that really has the power to help you should also).
- Utilizing strategies that delay your case, such as continuously asking for the same documents.
- Telling you– after you’ve prepaid and waited a long time– that you no longer qualify for debt relief or that the IRS rejected your offer in compromise.
If you’re having difficulty paying your taxes, think twice before soliciting assistance from a tax relief company. Best case? You can end up paying a lot for something you can do for much less (or perhaps for free) by working directly with the IRS. Worst case? You could wind up being scammed.