If you’re struggling to pay back taxes, you are probably considering whether hiring a tax relief company will help. Although it’s important to exercise caution and avoid scammers, there are legitimate tax relief companies that provide real value. However, there is little a tax relief company can do that you can’t do by yourself if you have the time and resources to invest in studying tax relief programs and negotiating with the IRS.
How can I lower what I owe the IRS? Is there a way I can reduce my tax bill? These are questions many Americans ask every year, and often they struggle to find reliable answers.
The good news is that there are tax relief programs available.
What is tax debt relief?
Tax debt relief includes any program or method that helps taxpayers pay off their tax debt. Some programs, such as installment agreements, give you more time to pay. Other programs reduce your debt, such as offers in compromise or the penalty abatement program.
When done correctly, tax debt relief programs are a win-win for the IRS and taxpayers. The IRS knows the longer taxpayers are behind on their taxes, the less likely they are to pay. According to a study carried out by the Taxpayers Advocate Service, the IRS collects twice as much on delinquent accounts in the first year than in the second year; and three times as much in the first year as in the third year.
These tax hardship programs give taxpayers a way to settle delinquent tax debt and avoid the tax liens, levies, and wage garnishments the IRS can impose. At the same time, tax relief programs help the IRS increase revenue.
Unfortunately for taxpayers, tax debt relief programs are typically hard to apply for and even more challenging to qualify for. Negotiating with the IRS is a complex and lengthy process that many taxpayers can’t manage without help. Just getting in touch with an IRS agent can be a challenge. A 2015 survey by the Taxpayer Advocate Service reported that the IRS answered only 37% of taxpayers’ calls routed to customer service representatives.
Complexity and a lack of resources have helped create a niche for tax debt relief companies that provide representation to taxpayers applying for tax debt relief programs before the IRS.
In a perfect world, you would always pay off all your tax debt on time and you wouldn’t need tax relief. However, things don’t always work like that in the real world. If you are struggling to pay your tax debts, it may be worth seeking the help of experts. But do tax relief companies really work?
Do tax relief companies really work?
Yes, legitimate tax professionals can help you lower your tax debt or get on an affordable payment plan. However, there are companies that will just take your money without providing much value. Do some research before choosing a tax debt relief company to represent you.
How do tax debt relief companies work?
The tax relief sector is made up of companies that provide advice and representation to taxpayers who want to settle their tax debt with the IRS and state tax agencies. Many taxpayers struggle to understand the eligibility criteria and complete the necessary application forms of such programs.
Legitimate company will employ trained tax experts who know the tax code’s ins and outs and can help walk you through various financial options with sound tax advice. They can help you reduce your debt, reduce or waive penalties, or make an offer to the government for a payment plan option.
The key is to be able to identify a legitimate company from the fraudsters that are constantly on the prowl. Probably the best way to ensure you are dealing with a legitimate tax professional is to not deal with people who contacted you out of the blue. It is important to keep in mind that a real tax debt relief company does not cold-call or send unsolicited emails to potential customers. They are often accredited and can be easily found online or in any local business directory.
In some cases, having a tax professional act on your behalf can reduce the likelihood of the IRS taking even harsher measures such as seizing your property. Fees for such services can run anywhere from $2,000 to $10,000. The way they lower your debt is by negotiating with the IRS and helping you qualify for the best program for your circumstances. However, it’s up to the IRS to decide whether you qualify for a program. No matter how skilled a tax professional is, she can’t change the facts of your situation or guarantee the IRS will approve your qualification.
How to find the best tax relief firms
Finding a tax relief company that fits your needs can be a challenge. This is our list of the best tax relief companies available based on our algorithms and consumer reviews.
One way to filter tax relief companies is to know the right questions to ask when compaing firms. If you aren’t sure which company to hire, click here to get a free consultation with a tax relief expert. You can also check out SuperMoney’s tax relief reviews page to compare all the top companies.
The State of Tax Debt in America
Each year Americans fail to pay $441 billion in taxes owed to the IRS. In 2019, the federal deficit stood at $984 billion, meaning the entire federal deficit could have been cut in half had everyone paid what they owed. It is this reality that has prompted the IRS to make collecting back taxes a priority.
The bulk of uncollected tax debt generally falls in one of two categories: underreporting and underpayment. The largest of the two is easily underreporting, which accounts for a whopping 84% of tax debt. This is often difficult to quantify to a certainty as the majority of underreporting comes from businesses and people who are self-employed.
Underpayment is much easier to quantify and has been pegged at approximately 39 billion a year. Underpayment is generally found in individual income taxes ($29 billion), employment taxes ($6 billion), and corporate income taxes ($3 billion).
According to IRS figures for the 2015 fiscal year, the three biggest states for unpaid taxes are North Dakota, South Dakota, and New Jersey.
With so many people who are negligent about filing a proper tax refund, it is no surprise the IRS has turned to tax debt relief companies to find a way to recoup a portion of this revenue.
Before diving into the potential benefits of a tax relief company, it’s important to note that not all tax debt relief companies are trustworthy. Some companies try to scam taxpayers by promising they can make tax debt disappear while misrepresenting how long the process takes to reduce or get rid of tax debts.
In 2019, the Department of Justice charged 56 people and five call centers in a sophisticated fraudulent tax relief operation. This particular scam defrauded more than $300 million from 15,000 taxpayers, including one California man who paid $136,000 to settle a tax bill that did not exist.
The Federal Trade Commission, which receives complaints from scammed taxpayers, says that “in many cases, [the companies] don’t settle the tax debt, and don’t even send the necessary paperwork to the IRS requesting participation in the programs that were mentioned.” (Source)
Making things worse, sometimes the companies will ask for even more money or refuse refunds to taxpayers who thought they were getting a good deal. Thousands of dollars are extorted from unsuspecting citizens every year from scams like this.
When it comes to tax debt relief companies, you can avoid a scam by making sure to ask if the company has licensed tax attorneys on staff and if it has a money-back guarantee. If a company says they can guarantee to solve all your tax problems — run away. Nobody can guarantee that. Also, be aware if they demand payment upfront before they deliver any services. This is a direct violation of the Mortgage Assistance Relief Services (MARS) rules put in place by the federal government in 2010.
What tax relief programs can you apply for?
Tax relief programs offered by the IRS include installment agreements, Currently not Collectible status, offers in compromise, and tax lien releases, to mention a few. You don’t need a tax relief company to apply to any of these programs, but it can certainly help to have a tax professional on your side when deciding which one is the best choice for you. Here is a brief discussion of the main tax relief programs available.
Installment agreements will not actually reduce the amount owed in taxes, but they will create a payment plan that makes tacking that tax debt easier. It allows people to pay it off gradually over time, in much the same way they would pay off their credit card. To be eligible for an installment agreement, you must owe less than $50,000 in taxes and be up to date on your tax submissions. If you qualify, this payment plan approach stands as one of your best tax debt relief options. It will protect your credit score and send a message that you are willing to be good-faith partners with the IRS in settling your debt.
Currently not collectible status
Much like with installment agreements, currently not collectible (CNC) status will not reduce any of your tax bills, but it will serve as a temporary restraint on the IRS. Essentially, CNC status recognizes that someone is in a dire financial position and is unable to pay owed taxes. With CNC status, the IRS will not try to impose levies against your personal property. If your financial status improves significantly, CNC status will be removed, and you will be expected to repay owed taxes or face penalties and interest.
Offer in compromise
An offer in compromise is an agreement with the IRS where you pay less than the full amount of what is owed in taxes. An offer in compromise is generally seen as a win-win as the taxpayers pay less and the IRS collects money it might not have otherwise. In 2017, 40.32% of offers in compromise were accepted by the IRS.
Bank levy release
A bank levy release is when the IRS makes a withdrawal out of your bank account to recoup a share of what is owed. This can come in the form of a one-time levy or as continuous deductions over time.
Tax lien release
A tax lien is a hold or claim the government has on your property, which restricts your ability to sell the property at will. Often when it can be demonstrated that by selling the property affected by the lien, there is a greater likelihood that the IRS will accept the offer and remove the lien.
Penalties for late payments can quickly add up and make a heavy tax burden even worse. The penalties for a late or unfiled tax return can be as much as 5% of the unpaid taxes a month.
Innocent spouse relief
This is where the IRS grants relief to one spouse when the other did something shady when filing a joint tax return. In 2015, 42,400 requests for innocent spouse relief were filed with the IRS.
Tax relief companies can help taxpayers determine what programs they qualify for and assist with the application and negotiating process. Some have tax lawyers, enrolled agents and certified public accountants on staff. Certain law and accounting firms also have tax relief departments that help clients facing audits and tax debt problems.
Every year the IRS writes off billions of dollars in bad tax debt. However, that tax forgiveness is not spread evenly. Tax relief programs can help the IRS collect more revenue and reduce the tax debt burden on taxpayers. The problem is that not all taxpayers know how tax relief works or what programs are available. Tax relief companies can help you navigate the IRS’ tax relief programs.
Optima Tax Relief is strongly recommended by SuperMoney users with a score of +81, equating to 4.6 on a 5 point rating scale.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.