The Drawbacks of Tax-Debt Services

The IRS says there are better ways to resolve tax problems.
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Tax-resolution companies offer services that may sound promising to the millions of people who owe back taxes.

But the chances of saving any money are mighty slim in most cases.

The advertisements offer a lifeline to people drowning in tax debt. "The IRS will give you one chance to resolve your tax debt. Make the most of it," says a commercial for Tax Inc. "Tyson H. from Florida did and saved $1.4 million after hiring Tax Incorporated."

The Internal Revenue Service's Web site, however, warns taxpayers to watch out for companies that advertise that they can drastically reduce tax debt. The IRS says that less than 1% of delinquent taxpayers pay less than their full federal tax payment -- allowed on occasion through the "Offer in Compromise" program -- though about one in four applicants to the program is accepted.

Consumer groups say there are cheaper ways to get educated. "Go directly to the IRS," recommends Sally Greenberg, executive director of the National Consumers League. They have experience dealing with this "age-old problem" and may be able to help get you on a payment plan. If you need additional help, or if you're trying to dispute your tax debt, contact a tax lawyer directly, she says.

For taxpayers looking to find a solution themselves, the IRS says "complete information on the collection process and payment options" is available on its Web site, including how to apply for an offer in compromise or an installment plan.

Tax-resolution companies say they provide a useful service. In addition to helping clients settle their taxes for less, tax-resolution companies can help lift wage garnishments or get clients out of collections procedures, says David Justin Urbas, chief executive of Tax Inc. He says his company helps many clients simply by educating them that their tax debt isn't going away and getting them on a payment plan.

Florida resident Stephen Smith says he paid $9,500 to Tax Inc. after a representative said there was a "100%" chance Tax Inc. would be able to help; and he'd probably pay only 10% to 15% of what the IRS said he owed in interest and penalties. But just over a week later, Smith says, he was told there was nothing Tax Inc. could do for him, despite the fact he had given them a detailed description of his tax problems over the phone before they agreed to take on his case.

Smith requested his money back but says he was denied. "It's a pretty good gig -- $9,500 for doing nothing except answering a few phone calls," Smith says.

Urbas says there is "no way" his company would have guaranteed Smith that his debt would be reduced. After being contacted by

TheStreet.com

about Smith's experience, Tax Inc. contacted Smith and offered him a full refund. He accepted. He's now working with a tax attorney to dispute his debt.

Tax Inc. says its restrictive refund policy -- clients who ditch the service within five days get only a 50% refund, after five days they can't get anything back -- is necessary because their client base is made up of errant taxpayers who are likely to demand refunds after getting what they want from the company. The company says it also spends significant time and money soon after taking on a case. And clients sign a form agreeing to the refund policy.

Tax Inc. says the problem isn't the policies, but its clients' unrealistic expectations. "Most of the time the clients think we can part the red seas," Urbas says.

Far from being an anomaly, complaints about tax-negotiation companies are common: As of February, the Los Angeles Better Business Bureau lists over 20 tax negotiation companies with more than five complaints. Last May, a court allowed a deceptive trade practices case brought by New York City's Department of Consumer Affairs against American Tax Relief to proceed. And tax-resolution company JK Harris & Company -- without admitting guilt -- agreed last year to pay $6 million to settle a class-action suit that alleged that its "Offers in Compromise" services were negligent.

There's not much to force a company to fully resolve problems for its customers, says Lona Luckett, senior trade practice consultant with the Los Angeles Better Business Bureau. Clients often pay in advance and sign away refund rights, so they've already lost their money before realizing they won't get any help, she says.