How do Tax Relief companies work?

I’ve seen or heard numerous ads from companies that claim that they can help someone settle taxes owed to the IRS for a fraction of the total amount due. If so, what’s the incentive to pay taxes at all? Can’t people just not pay and then wait for the IRS to come calling? Once they do, hire one of these firms to negotiate a settlement for you and walk away richer. I’m sure there’s more to this, right?

<bated breathing>

The first link on Google says they’re just a scam, plain and simple.

http://www.foxbusiness.com/personal-finance/2013/07/30/dont-become-victim-tax-relief-scam/

It’s just a Offer in Compromise. Or at least the legit ones are, and they just do the forms for you.

An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. We consider your unique set of facts and circumstances:
Ability to pay;
Income;
Expenses; and
Asset equity.
We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time. Explore all other payment options before submitting an offer in compromise. The Offer in Compromise program is not for everyone. If you hire a tax professional to help you file an offer, be sure to check his or her qualifications.

My sources say if it’s pretty clear you wont be able to pay, a good faith offer of 25% or so of what you owe- plus a check for 20% of that 25% will get you a decent chance.

What tears me up about these commercials is they often have what sounds like an average person say something like “I owed the IRS over $200,000! WonderCo helped me settle for $1000!” What I want to know is this- how does one owe the IRS that much? You must have one whale of an income to have a tax bill that high, and if so, would you not also have been getting competent tax advice all this time?

People who’ve been self-employed for a long time and didn’t realize/didn’t want to face the fact that filing taxes was their responsibility? Or people working under the table who got caught.

Interest and penalties might also be a factor.

Or self employed folks who have a variety of catastrophic shifts in business. I am still digging myself out of some tax challenges attached to my partner leaving due to medical disability and leaving me alone to run the biz. Bookeeping tasks fall behind, which turns tax time into another chore you have less time for so it ends up late…more penalties, plus interest.

What these places to, the legitimate ones anyway, is help relieve your interest, not the original debt.

You’re debt to the IRS may be $1,000 and after a number of years through interest in penalties, it may be now $5,000. These places get the IRS to settle for like $1,200. So you’re not getting relief from the original debt, just the interest and fines.

These commercials make me want to scream! Before I retired, my husband and I were both senior engineers and we had a very nice income. And since our daughter can no longer be claimed as a dependent and the only real write-off is our mortgage insurance, we have had fairly big tax bills. We’ve always paid, almost always on time (there were some years where we had to make payments because we’d screwed up our withholding.) The idea that we’re underwriting people, some of whom don’t deserve a break, really pisses me off. So it’s nice to see that often the relief is interest and fines, not taxes. It makes me less stabby.

But pay your taxes, dammit! Those highways don’t maintain themselves, among other things…

That was supposed to be mortgage interest, not insurance. I blame a defective keyboard. :wink:

If the people in question had significant income, the IRS does not give them a pass. Things like people with minimal witholding becoming permanently disabled.