How can I lower what I owe the IRS? Is there a way I can reduce my tax debt? These are questions many Americans ask every year, to which they often never receive an answer. Taxpayers having difficulty paying their tax debts may feel like they’re sinking in a deep, dark Internal Revenue Service hole.
The good news is that there tax relief options available. Tax relief companies can help taxpayers apply for these programs and lower their tax debt. They can also provide guidance on audits, apply for penalty abatements, remove wage garnishments, and help negotiate installment agreements with the IRS.
These are just a few of the ways that accredited companies can help. However, tax relief companies are not cheap and the quality of their services varies widely from company to company. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. While it is always best to pay off all your tax debts on time before the IRS comes knocking, things don’t always work like they would in a perfect world.
If you are struggling to pay your tax debts, it may be worth it to seek the help of professionals. But do tax relief companies really work?
Does debt settlement help consumers save money?
Debt settlement is not for everyone. It’s not cheap and results vary. However, it does provide savings to most consumers. According to a statistical review by the American Fair Credit Council (AFCC), 95% of clients saved money after fees (source).
The review analyzed 400,000 clients and 2.9 million accounts enrolled in debt settlement programs. As you can see in the chart above, only 5% of clients did not achieve a settlement within the first year.
For every $1 a debt settlement client pays in fees, they receive $2.64 in savings.”
Debt settlement firms are not allowed to charge for their work until they settle an account. In the vast majority of settlements, the savings for consumers exceed the fees charged by firms.
According to the AFCC’s review, on average, for every $1 a debt settlement client pays in fees, they receive $2.64 in savings. As the chart below shows, the clients analyzed in the 2011 to 2017 report incurred $1.0 billion in fees and reduced their debt balance by $2.6 billion.
Of course, these savings may have been higher for consumers if borrowers had negotiated directly with creditors. But a similar argument could be used when hiring investment advisors, tax professionals, or mechanics. It is often cheaper to do the work yourself, and there is no guarantee the results will be better if you hire a professional. However, many people are happy to pay for the service, particularly when they don’t have the time or know-how to do so themselves.
Before diving into the potential benefits of a tax relief company, know that there is peril around many corners when seeking tax relief. Some companies try to scam taxpayers by promising they can lessen or get rid of tax debts. Some require upfront payment that can be as much as thousands of dollars.
The Federal Trade Commission, which receives complaints from scammed taxpayers, says that “in many cases, [the companies] don’t settle the tax debt, and in many cases 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 relief companies, make 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.
How real tax relief companies work
Tax relief companies can be helpful for the hundreds of American sinking under tax debt who don’t know how to approach the problem.
These companies employ trained tax professionals who know the ins and outs of the tax code and can help walk you through various financial options. They can help you reduce your debt, reduce or waive penalties, or arrange for payments in installments.
In some cases, having a professional act on your behalf now may reduce the possibility 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 convincing the IRS you absolutely cannot pay your debt and don’t have assets such as property worth seizing.
The IRS instituted the Fresh Start program for struggling taxpayers. Those who qualify can form agreements in which they pay debts back in installments (for debts up to $50,000) or settling for less than they owe (called an offer in compromise) if the IRS believes it can only collect that small amount from the debtor.
However, it’s up to the IRS to decide if it will accept a situation where you pay back less than the full debt you owe. No matter how skilled a tax attorney is, he cannot change your actual conditions.
Yes, tax relief companies really can work
How to find the best tax relief company
It can be a scary choice to enlist a tax relief company. There’s a lot of information out there and diverging views on whether or not they are legitimate. This is our list of the best tax relief companies available based on our algorithms and consumer reviews.
Although there are many scams, knowing the right questions to ask can help you avoid them.
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.
Andrew is the managing editor for SuperMoney 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.