Getting tax relief from your IRS debt is a difficult endeavor for an individual.
Because of that, tax relief companies market their services as a way for you to hire an experienced intermediary to step in and fight on your behalf to stop the IRS from garnishing your wages, badgering you and creating incredible levels of stress.
According to the IRS’ website, individuals can take on the task of negotiating themselves via multiple forms and phone conversations.
However, working through this process can be difficult for an individual and, in some cases, you may not have the time, energy or know-how to complete the paperwork. Others may not agree with the amount the IRS says they owe but don’t know how to argue their case.
For these taxpayers, tax relief companies are a savior because they provide professionals like enrolled agents and CPA’s who know how the tax system works. They can analyze your tax returns, review the IRS’ demand for money and argue on your behalf to lower your tax debt.
The trick is finding the right tax relief company. Some are more reputable than others. Red flags abound. The last thing you want to do when you’re mired in a tax battle is to hire a company that will end up adding another headache to an already taxing process.
In this guide, we help you understand what a tax relief company is, what they do and how to spot red flags that should steer you away from certain companies.
As part of our research for this article, we conducted email interviews with the following people:
- David King, CEO, Optima Tax Relief
- Two CPA’s from the Massachusetts Society of CPA’s
- New Jersey certified tax attorney Parag Patel
Editor’s note: We’ve included King’s insight because we’ve done an independent, in-depth review of Optima and found that the company is widely regarded as a respected tax relief agency.
What a Tax Relief Company Does and How They Work
A tax relief company serves one basic purpose: to go to the IRS on your behalf to accomplish whatever it is you want them to do.
Optima’s King told us that their clients ask for help with something as basic as tax returns all the way up to representing them in front of the IRS against fraud allegations, wage garnishments, tax levies and more.
As it pertains to tax debt relief, these companies can use their team of CPA’s, enrolled agents and tax attorneys to correspond with the IRS to reduce your tax liability.
Exactly how they help you depends on your particular situation. However, most companies will follow one of two payment and resolution schedules:
- Big up-front payment followed by investigation and resolution
- Nominal fee for a preliminary investigation, subsequent fee based on your situation, resolution
Reputable tax relief companies, King told us, will follow the second model, which is something that we’ll cover in our “Red Flags” section.
Take Optima, for example. Their investigation fee is $495. Once they contact the IRS and get a solid sense of your situation, then, based on our research, they’ll charge clients anywhere from $4,000 to $23,000 (this is a rough estimate) to resolve situations.
Community Tax Relief, another reputable and highly-rated tax relief company, charges a $500 investigation fee and, like Optima, they do their research on your case to decide which resolution is best for you.
Those numbers might sound high but remember that tax relief companies may have to use attorneys to plead your case and, as is the case with Optima, it can take anywhere from six to nine months to resolve your case.
If you owe tens of thousands of dollars and the IRS is taking a cut of your paycheck (wage garnishment), then those fees may be worth it to remove the stress you feel and to settle your debt for a fraction of what you owed.
As for resolutions for tax debt, tax relief firms usually present a variety of outcomes relating to repayments. Community Tax’s website is a good example of what’s offered:
- Offers in Compromise
- Installment agreement
- Stair-step agreement
- Streamline installment agreement
- Partial payment agreement
- Currently-not-collectible status
- Penalty abatement
Each one of these situations is unique and nuanced to the taxpayer. Based on our research, installment agreements are relatively easy to do yourself.
» For Further Reading: Guide to IRS Payment Plans & Installment Agreements
In fact, the Federal Trade Commission’s Tax Relief Company page offers this same advice:
"If you owe back taxes and don’t know how you’re going to pay the debt, the FTC, the nation’s consumer protection agency, says don’t panic, take a deep breath, and consider your options. If you are having trouble paying bills, it’s often better to try to work out a payment plan with the creditor yourself than to pay someone else to negotiate a plan for you."
We also confirmed this fact with Parag Patel, a certified tax attorney with offices in New York, New Jersey, and Florida. Patel said the IRS has streamlined the way they process installment agreements for certain tax debts.
“One area where taxpayers can easily represent themselves is for small installment payment plans with the IRS,” Parag said. “For example, the IRS currently has a pilot program which allows for streamlined installment agreements for tax amounts under $100,000 payable over 84 months, which is very generous.”
However, if the installment agreement is intertwined in a bigger tax picture that includes wage garnishment, penalties, and other serious situations, then DIYing your resolution is much harder.
Offers in Compromise (OIC) are another option for settling a tax debt that you owe. This program is set up for those who need to negotiate a lower tax bill for one of several different reasons.
However, the FTC page we mentioned earlier seems to recommend that you hire a tax professional to help you, as it’s relatively difficult to successfully negotiate a lower tax bill on your own via the OIC option.
Why Do People Hire Tax Relief Companies?
There are many different types of situations in which an individual can use a tax relief company. In general, though, there are certain needs that taxpayers have that tax relief companies can fulfill.
For example, King said, you might be worried that you can’t be truthful with an IRS agent if, for example, an in-person audit takes place and you have to sit down and talk with an agent.
“It is a crime to lie to a federal agent (IRS) and some taxpayers prefer to have an intermediary communicate to the IRS on their behalf so as to not to risk exposure to a criminal charge,” King said.
Another common scenario that leads people to hire a tax debt relief firm is that the tax code is too complicated for them and they don’t feel like they have the understanding they need to represent themselves.
“The average taxpayer does not know all of the rights they are entitled to … Taxpayers have a right to hire qualified representation when they prefer that they interpret the IRS code and negotiate a resolution for them,” King said. “Hopefully, a taxpayer is hiring an experienced intermediary ... that understands taxpayer rights and can contact the correct department/personnel of the IRS instead of getting caught up in the IRS maze – which we hear often.”
We also like to point out that time is a big reason why a taxpayer chooses to hire a tax relief company. It can take hours of research and phone calls every week to properly handle your case and, for those who work full-time and have families, that time may not be worth sacrificing.
“Many of our clients hire us because they don’t have time to deal with the IRS directly and are confused by the communication they receive from the IRS,” King said. “So, time is a major advantage an individual or business receives by hiring a professional who knows how to navigate the IRS system.”
Red Flags You Should Watch for When Hiring a Tax Relief Company
While there are solid companies out there like Optima Tax Relief and Tax Community, there are plenty of other firms out there who aren’t quite as reputable. Weeding out these companies is a matter of knowing what to look for.
1. Beware of Big Up-Front Payments
As we mentioned earlier, there are basically two types of tax relief companies. Those who want you to pay a ton of money up-front before they investigate your case and those who don’t.
Because tax issues are so complex and so nuanced to the individual taxpayers, says Massachusetts CPA Michael Sacco, paying an up-front or flat fee for services before any investigation is done is dangerous.
“Fixed or flat fee quotes on pricing are a red flag,” Sacco told us. “Each case is unique and specific. Those with extensive experience will have a greater understanding on the length of time a case or issue will take to resolve.”
One of the issues you could encounter, King noted, is that, after you make your payment, the company could come back later in the process and ask you for more money to complete the case.
2. Beware of Guarantees
Two of the lawyers with whom we emailed noted that, given the complexities of tax law, any company who guarantees you results before they look at your case is most likely making promises they have no idea if they can back up.
Ronald C. Zullo, another Massachusetts CPA, told us he’s always wary of a tax relief company who likes to make big claims up front.
“I would advise taxpayers to watch out for unrealistic guarantees,” Zullo said.
A classic example would be a tax relief company that promises you they’ll reduce your tax debt by a certain percentage or guarantees you they can win your case against the IRS. None of these things can be known for certain if the company hasn’t done a thorough investigation of your situation.
Watch out for timeline guarantees, too. Zullo pointed to a recent case he worked in which the IRS notified him of processing delays because they’d received an influx of Offers-in-Compromise and were wading through the paperwork. Situations like this show that you and your tax relief company are at the mercy of the IRS’ ability to process your case.
3. Beware of Credential Claims
In some cases, Sacco told us, a tax relief company will claim that all of their employees are former IRS employees. For a firm of three or four people this could be true, but, for a big company, it’s probably a lie.
Along with this, King pointed out, it helps to know how many CPA’s, enrolled agents and tax attorneys a company has. If they’ve got one or two per thousand customers, they may be overworked and your case may not get the attention or timely resolution it deserves.
4. Beware of Bad Reviews
Every tax relief company is going to get bad reviews from customers who felt like prices were too high or their case wasn’t resolved the way they wanted it to.
These reviews become a problem when they start to outweigh the positive reviews and when they all tend to focus on specific aspects of the company’s dealings. A significant amount of commentary on a lack of professionalism or hidden fees could signal weaknesses that you may not want to deal with.
Take a look at the company’s Better Business Bureau page and read through reviews and complaints. Take note of how the company responds to complaints; prompt, professional and courteous replies are a good sign.
Some Final Thoughts About Tax Relief Companies
Hiring a tax relief firm can be a confusing process, particularly because the IRS is aggressive in collecting taxes when you don’t respond to them and because there are so many different tax relief services out there.
It helps for you to understand what you can do on your own – filing taxes and signing up for an installment agreement – and when, according to the experts, you should seek professional assistance.
As we mentioned earlier, cases that involve wage garnishment, tax levies, and fraud allegations are complex situations in which you’d have to devote a lot of time to understand them without help.
In these situations, the experts say, you should turn to a tax relief service or a tax professional to represent you so that you don’t have to face the IRS yourself.
Should you endeavor to DIY your case, Zullo said it’s going to be a long process.
“Consumers can definitely do this themselves but, in my opinion, should not. For a person of average intelligence, the learning curve could be 10 to 12 hours (minimum) just to get the process moving,” he said. “Since their submission will likely be less than perfect, there will be a lot of unnecessary back and forth with the IRS causing frustration on the part of both the taxpayer and probably the IRS.”
With that in mind, be wary of who you choose to help you fight the IRS. Companies who push big guarantees and ask for a sizeable payment up front before they research your case are most likely making promises they may not be able to back up.
» For Further Reading:
- IRS Debt Collection Scam: A Complete Guide to What Legitimate Debt Collectors Will and Won’t Do
- IRS Audits Explained: What They Are, Who Gets Them and What You Need to Do