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(This is the first in a series of discussions on tax-related issues entitled Taxtalk. All of the articles in the series can be found at http://lifeinnumbers.net/category/series/taxtalk/)

A recent settlement between the IRS and tax-resolution firms should better protect taxpayers from companies trying to take advantage of their desperate situations. Tax resolution firms, such as J.K. Harris & Co., advertise heavily on television, touting the ability to drastically reduce tax bills for those individuals who owe substantial sums to the government. These firms claim they will help their customers navigate the IRS’ “offer in compromise” program, intended to allow taxpayers to settle their tax debt for what they can actually afford. But for many taxpayers, these tax-resolution firms resolve nothing, usually adding to the taxpayer’s problems instead.

According to complaints reported by The Wall Street Journal, many people who sought help from the likes of J.K. Harris & Co. and Roni Lynn Deutch paid fees to these companies and received nothing in return. One former Harris customer, Susan Brennan, paid $4,550 in up-front fees, only to have the firm omit important information she had provided to them. When informed of the mistakes, J.K. Harris requested additional money. When she refused to pay, Harris refused to provide further assistance. Ms. Brennan then sought help from a local accountant, who was able to resolve her problems for substantially less than what J.K. Harris charged her. This is just one of the examples cited in by the Journal, but others interviewed reported similar experiences.

At the heart of their settlement with the IRS are the advertising practices of tax-resolution firms. Complainants accused the firms of misrepresenting their services and overstating their abilities to lower tax bills. Based on the exaggerated claims made in their advertisements, many taxpayers paid several thousand dollars in fees with the understanding that their tax bills would be drastically reduced or eliminated. For these individuals, the fees paid were not inconsequential, as these people are already in troubled financial positions. Tax-resolution firms are able to deceive individuals into paying such exorbitant fees for their services because they prey on taxpayers’ desperation and ignorance.

For a taxpayer who finds him- or herself in a situation where the services of a tax-resolution firm are appealing, the options are limited. One of the best options may be the “offer in compromise” program, which is precisely what tax-resolution firms offer their clients. Unfortunately, these firms advertise much higher success rates than their clients can expect. In 2004, the IRS accepted 20,000 of the 106,000 offers made. In 2007, acceptance fell to 12,000 out of 46,000. As part of their settlement with the IRS, tax-resolution firms must comply with advertising restrictions and better represent their success in negotiating with the government.

Sources:

• “IRS Tightens Rules, as Firm That Acts as Middleman Settles Cases With 18 States,” The Wall Street Journal Tax Report, July 23, 2008.

In the coming days, look for the first post in an occasional series called “Taxtalk.” The series will look at a variety of issues related to taxes, but will not provide advice for preparing tax filings. Instead, Taxtalk will be a sort of insider’s account of what it’s like to be a “tax professional.” The first post in the series, “Praying on Desperation,” deals with the recent settlement between the Internal Revenue Service and so-called tax-resolution firms.

To comply with Internal Revenue Service regulations as codified in Circular 230, the following disclaimer is made:

Pursuant to U.S. Treasury Department Regulations, I (we) must inform you that any tax advice contained in this communication, including any attachments and enclosures, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.