Tax Debt Relief; Are The Claims True?

I did a search and checked the first few pages but didn’t see any other threads; my apologies if there has been one and I missed it.

I was listening to the radio the other day and I heard an ad for “Tax Debt Solutions” (name made up but something similar). The advert had testimonials from customers, along the lines of, “I owed the IRS $65,000, and settled for only $1200!” or “I owed $150,000 in back taxes, and settled for $25,000!”

Now granted, I’ve never been in tax debt nor had to settle any of my debts in this fashion. But is this really true? Aside from bankruptcy, would the IRS really settle a tax debt of so much for so little? What am I missing here?

According to a friend of mine who is a bankruptcy lawyer, these organizations are often not able to get the kinds of settlements that are featured in the commercials, but you still have to pay them their fees.

Often the IRS will make deals. But you have to start the process early. If they invest a lot of time and trouble going after you, they don’t deal so well. When they get to a certain point, they become very obdurate.

If you were prime minister of Canada, and received several brown envelopes totalling $225,000 or $300,000 (depending on who you believe) just after leaving office, then you can end up paying the Canadian tax department about half what you would normally pay if your lawyers make the right deal. This also gets you off from the “unreported income” fines and you don’t have to pay back the $1M you got from the government for slander in syuggesting you took bribes.

Good old Brian Mulroney.

Of course, the cash he received in New York ($75,000) he claims to have kept in a safe deposit box in the USA so as not to violate currency export laws, and doled out to pay bills in amounts smaller than $10,000 so there’s no trail, but honestly, it was all above-board.

Those ads have always kind of annoyed me. It’s not “We found deductions you didn’t know you could take” or “We found an IRS accounting error”. In the cases they present, the debts are apparently legitimate and based on actual income. So it’s more of a “I got out of paying my share of income tax, so you and your family can pick up the slack” Now no one likes paying taxes, but there’s nothing to indicate that these debts are inaccurate or unjust.

But yeah, the commercials are not showing typical results, and the company gets paid regardless.

Like any debt collector, the IRS is willing to make settlement deals, along the lines of “You owe us a lot of money, but we’re tired of waiting and nagging you, so if you’ll pay us this smaller amount right now, we’ll forget about the rest.”

Anyone who owes money to the IRS can make such a deal. It is called an “Offer In Compromise”. Check out the Wiki article here, which has links to the official IRS site. This program is real and legitimate, but they will not accept your offer unless you can explain to them why they should give up on ever receiving the whole amount from you.

The stories featured in the ads are presumably real, but those people were probably in much more dire circumstances than most. For most people, the IRS wants the full amount owed, no matter how long it takes to collect it.

The reduction in amount due is rarely specified very clearly in the commercials. There are certainly several tactics to be used in reducing debt and I suspect they use all of them:

  1. Filing returns, since a large debt is often based on the failure to file a return. The IRS will plug in what numbers they know, assuming you have no expenses or deductions.
  2. Amending returns to provide more complete information to take advantage of missed deductions or credits
  3. Requesting waivers for penalties
  4. Offer in compromise

Keeve is right about offers in compromise - while they can theoretically be a “get out of jail free” card, the IRS looks at your total ability to pay over many years. They’re not any more eager to settle on a lower amount than your credit card or mortgage companies are (and yet, you see commercials every day promising that these companies will also magically forgive debt).

For most people, those commercials are just scams.

In fact, JK Harris is currently going through a 5-state class action lawsuit for fraudulent business practices and claims (PDF). The last time they went through this was just 3 years ago and they settled for $6 million (link)