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IRS Debts Tax Procedure

Federal Trade Commission Warnings About Tax Relief Companies

There have been a number of bad actors in the tax resolution industry. One only has to do a cursory search of the internet to find consumer complaints about tax relief companies that do this work. The Federal Trade Commission (FTC) has an article on its website that warns consumers about these bad actors. The FTC’s article serves as a stark warning to taxpayers. But there are several points in the article that go too far.

Tax Relief Companies & Their Fraudsters Ways  

This post provides excerpts from the FTC’s article with commentary.

FTC: Tax relief companies use the radio, television and the internet to advertise help for taxpayers in distress. If you pay them an upfront fee, which can be thousands of dollars, these companies claim they can reduce or even eliminate your IRS tax debts and stop back-tax collection by applying for legitimate IRS hardship programs. Adding insult to injury, some of these companies don’t provide refunds, and leave people even further in debt. The truth is that most taxpayers don’t qualify for the programs these fraudsters hawk, their 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.

There are a number of tax resolution companies that are not “fraudsters.”

There are tax resolution and marketing companies that advertise on TV and radio. We have all heard these advertisements. These companies are not representative of all tax attorneys that do this type of work. There are tax resolution companies that do not advertise on the radio and TV. In fact, there are quite a few tax relief companies that make it a point not to advertise on the radio and TV.

The FTC’s comments about false claims made by tax relief companies is relevant. Tax relief companies should be very careful not to make promises or to set client expectations unreasonably high. The federal and state governments have been pretty active in shutting down companies that make these types of claims. Tax Masters, JK Harris, and the Law Office of Ronnie Deutch come to mind.

In fact, the claims companies make about their services should be tempered by the reality that Congress and the IRS are largely responsible for whether taxpayers are treated fairly and consistently according to the laws and policies they create. Congress and the IRS create and set the rules and decide who qualifies for tax relief. Tax relief companies do not make this determination, they merely advise clients on their options and try to help them pursue those options. The tax relief company and tax attorney should ensure that taxpayers understand this.

The FTC’s comment about refunding fees in the event that the tax dispute is not resolved in the taxpayer’s favor is also problematic.

Tax relief companies and tax representatives are generally prohibited from entering into fee arrangements whereby the fees can be refunded based on the outcome of the matter. This would most likely be considered a prohibited contingent fee. This is proscribed by various rules, including the AICPA’s Code of Professional Conduct. It is also proscribed by Circular 230, which governs the practice of attorneys, CPAs, and enrolled agents before the IRS.

Moreover, this type of fee arrangement may be a reportable transaction under Section 6011 (it may be a transaction with contractual protection). This would trigger a requirement that the taxpayer file a reportable transaction form with the IRS in the year it hires the tax relief company, which almost guarantees an IRS audit for that years tax return. If the taxpayer does not file this form, then the taxpayer may be subject to significant penalty under Section 6707A for failing to file the form.

The FTC’s comment about refunds also presumes that the work performed and effort expended by the tax relief company or tax attorney has no value if the IRS does not accept the work. With all due respect to the FTC, we do not agree that this is always the case. Taxpayers benefit from knowing their rights, that the IRS has (or has not) complied with the law, and that all options were considered to resolve their case. This peace of mind has value. Moreover, if a taxpayer hires someone to perform a service, they are asking the other person to invest their time to carry out the work. The other person should be compensated for this time–particularly if they let the client know up front that the results are uncertain–even if the outcome is not favorable. This is no different for any other service provider.

This also assumes that the IRS’s rejection of the tax relief companies or tax attorney work is correct. This is often not a correct assumption. The IRS often acts arbitrarily and unreasonably–particularly in collection cases. One only has to read a few of the court cases to see that the courts often find that the IRS abused its discretion in processing and reviewing tax collection matters.

FTC: Some taxpayers who filed complaints with the Federal Trade Commission (FTC) reported that, after signing up with some of these companies and paying thousands of dollars in upfront fees, the companies took even more of their money by making unauthorized charges to their credit cards or withdrawals from their bank accounts.

There are quite a few tax relief companies and tax attorneys that do not charge up front fees. Many tax relief companies and tax attorneys do not charge “thousands of dollars” for their services. There are quite a few that simply charge an hourly rate for their services.

Owe Back Taxes ? Don’t Panic! You Have Options

FTC: 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. The same is true when you owe money to the IRS or your state comptroller.

Can’t Pay Your Tax Debt In Full? 

If you owe taxes, but can’t pay the IRS in full, consider submitting an Installment Agreement Request (Form 9465) with your return. In certain situations, the IRS can’t deny a request for an installment agreement if you owe less than $10,000. That said, you should still pay as much as you can with the return. You will be charged interest and possibly a late payment penalty on any tax not paid by its due date, even if your request for an installment agreement is approved. You can avoid IRS collection notices and actions, like a Notice of Federal Tax Lien or an IRS levy, by establishing an installment agreement upfront and making your installment payments.

The FTC’s statements do not capture the true work that tax attorneys perform or that taxpayers need. Tax advisors go back and try to figure out whether the underlying tax liability can be reduced. A second review of tax returns and tax positions in those returns may show that the taxpayer does not actually owe the underlying tax. This may be due to missed deductions, credits, etc. or by getting penalties abated pursuant to the IRS’s first time abate policy or reasonable case. From there they weigh various options, which can include payments, offers in compromise, currently not collectible status, and discharging the tax debts in bankruptcy. The FTC’s statement that taxpayers are to simply pay the tax debt rather than consider these options misses the mark.

Moreover, while there are set rules for determining whether taxpayers qualify for tax relief options, there is also a considerable amount of discretion in how the rules are applied. The IRS and state employees who administer these programs often do so by interpreting or skewing the rules in the government’s favor. Most taxpayers would not even realize that this is the case, as they do not have the experience of working a number of cases with the IRS and states to see how this plays out. For example, it is very common for the IRS to grossly overstate income and minimize expenses in computing the amount of an installment agreement that the IRS would accept. Based on the FTC’s advice, taxpayers are to blindly accept this rather than hire a tax attorney to push back to ensure that they are treated fairly and in a manner consistent with other taxpayers.

The FTC is right that taxpayers should consider their options if they have a tax debt that they cannot pay. There are a number of options that are available. This makes it difficult, as taxpayers do not know all of their options. The FTC should be recommending that taxpayers seek advice from a competent tax attorney to go over their options, rather than recommending taxpayers go it alone.

FTC: In very limited circumstances, the IRS may offer penalty abatement to people who haven’t paid their taxes because of a special hardship. If the taxpayer meets very narrow criteria, the IRS may agree to forgive the penalties.

It is commonplace for penalties to be abated. The IRS abates failure to pay penalties based on its first time abate policy and where there is reasonable cause. This does not necessarily have anything to do with “special hardship” as the FTC asserts. Also, while there are rules involved, generally, taxpayers do not need to meet “very narrow criteria” for the IRS to abate penalties given these rules and policies. This is particularly true for the IRS’s first time abate policy. Most taxpayers with a clean compliance history other than the year in question can qualify.

FTC: Interest abatement is even more limited and rarely provided. While these programs may eliminate penalties or interest, you still owe the taxes. If a tax relief company promises it can eliminate interest and/or penalties for you, be wary: there is limited relief available, no matter who represents you before IRS Collections.

Interest is reduced automatically as a matter of law if the underlying tax assessment is reduced. So if the tax attorney finds a missed deduction or credit and has the error corrected, interest will be reduced as a matter of law. Most penalties are generally the same. So statements made by the tax attorney in this regard are not suspect. Also, it should be noted that interest and penalty abatement claims are generally not worked by IRS collections as stated in the FTC’s article….

FTC: According to the IRS, you can apply for an Installment Agreement, OIC, or penalty or interest abatement without the help of a third party. If you prefer third-party assistance in negotiating with the IRS, only certain tax professionals — Enrolled Agents (federally-authorized tax practitioners who can represent taxpayers before all administrative levels of the IRS), Certified Public Accountants (CPAs), and attorneys — have the authority to represent you . Their services should involve a face to face meeting where they explain your options and their fee structure.

That a taxpayer should submit an offer in compromise without the advice of a competent tax attorney is probably bad advice for most taxpayers. The reasons for this were discussed above.

There is no need to have a face-to-face meeting with a tax relief company or advisor to discuss their fee structure. Taxpayers should not rely on what the tax attorney says about their fees; they should rely on what the tax attorney has in their written fee agreements.

FTC: Contact the Taxpayer Advocate Service, an independent organization within the IRS, for free help if you are having tax problems that you haven’t been able to resolve yourself, if your problems are causing financial difficulties for you or your business, or you face an immediate threat of adverse collection action by the IRS. Call 1-877-777-4778 or visit irs.gov/advocate.

The Taxpayer Advocate Service can be helpful in some situations. They do not work all matters, however. There are requirements. This is especially true given the recent IRS budget cuts.

Even when they can help, their services should be used strategically in conjunction with a competent tax attorney. For example, an open taxpayer assistance order with the Taxpayer Advocate Service suspends the statute for assessing and collecting taxes. This increases the time period the IRS has to assess additional tax and penalties and to collect the tax debt. This can have a devastating impact for some taxpayers–such as those whose taxes may be getting close to the time to qualify for discharge in bankruptcy or where the collection statute is about to expire. These types of factors have to be considered before contacting the Taxpayer Advocate Service as the FTC suggests.

You can read the full version of the FTC’s article here.

The Takeaway

We generally agree with the warnings that the FTC provides, but strongly disagree with the message that taxpayers are better off not hiring a tax attorney. The states are too high and the rules are simply too complicated for the uninitiated. There are reputable tax relief companies out there. Perhaps a better message would be that consumers should be wary and be sure to shop around when hiring a tax relief company.

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