In recent years, the Internal Revenue Service (IRS) has increased its efforts to collect unpaid back taxes from individuals and businesses who have outstanding balances due. If you have tax debt, then you probably already know this. By now, you’ve likely heard not only from the IRS but you’ve also likely heard from numerous tax settlement firms (also known as tax resolution or debt resolution firms), which promise – for a thousands-of-dollars retainer – to help reduce or even eliminate your tax debt.
That promise might sound overwhelmingly appealing, especially when your stress levels are elevated and you’re up all night wondering how to fix your tax problems. But the truth is, these companies often end up piling more weight onto an already too-heavy burden. In fact, the Federal Trade Commission (FTC) has issued a scam alert about these firms, stating:
“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 tax debts and stop back-tax collection by applying for legitimate IRS hardship programs. 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. Adding insult to injury, some of these companies don’t provide refunds, and leave people even further in debt.”
A far better option for getting assistance with your tax debt is to head to a law firm with experienced tax attorneys, like Robinson & Henry, P.C.
Law Firms Versus Tax Settlement Firms
There are big differences between the individuals working for tax settlement firms and attorneys, as well as big differences in the standards and regulations each are held to. A prime example of such a difference is, unlike tax settlement firms, law firms cannot use salespeople to call individuals on the Notices of Federal Tax Lien (NFTL) list.
When a taxpayer gets a call from a tax settlement firm, or vice versa, the representative from the firm is usually a salesperson whose primary goal is to get the taxpayer to pay the firm’s retainer, which can be $5,000 or more. Complaints to the Better Business Bureau (BBB) and FTC show that more often than not, the settlement firm does little to nothing with that retainer which, in the end, usually results in the taxpayer and the firm parting ways to the detriment of the taxpayer, who is by then likely in greater debt and still without a resolution.
The IRS allows Enrolled Agents (EA), Certified Public Accountants (CPA) and licensed attorneys to represent taxpayers before it. As you can see in the table below, the differences in education, knowledge and experience requirements between these three roles are dramatic.
You’ll often find EAs and CPAs at tax settlement firms, but it is illegal in the State of Colorado for settlement firms to promote themselves as staffing attorneys, so if a tax settlement firm is advertising that they have tax attorneys on staff, that should be a red flag.
|Can represent taxpayers in front of IRS?||Yes||Yes||Yes|
|Required to hold a higher education degree?||Yes (7-9 years)||Yes (4-5 years)||No|
|Area of focus||Tax law||Accounting, auditing and
|Income tax prep|
|Fee options||Hourly, flat fees, unbundled
services or pro bono
|Able to litigate?||Yes||No||No|
|Services best used for||Tax preparation/filing,
tax resolution, tax litigation
|Tax filing and audits||Tax filing|
Closer Look: Major Differences
Client’s best interest. According to Forbes, taxpayers are best served by a reputable tax lawyer because lawyers know law and how to research and argue it. Further, they are trained in the art of advocacy and are subject to disciplinary authority of their state bar, which holds them to a high set of legal and ethical standards.
Just as a doctor is ethically bound to “first, do no harm,” an attorney is ethically bound to act in his/her client’s best interest or risk losing his/her license. CPAs and EAs don’t advocate for their clients in the same way an attorney does, and those who call on behalf of a tax settlement firm are often salespeople focused on one thing: trying to get you to buy their product, regardless of if it’s in your best interest.
Unable to testify against you in court. Also consider that communications between a client and his/her lawyer are privileged. This is not the case when it comes to communications between a client and an accountant or between a client and a tax consultant. For example, your EA or CPA could be subpoenaed to testify against you in an IRS court case, however, under attorney-client privilege, an attorney could never divulge private information that you had discussed with him/her.
Multiple Solutions. A tax attorney can also look at your situation and offer solutions that CPAs and EAs wouldn’t know to offer, like bankruptcy or suing a collector if they violate the Fair Debt Collection Practices Act. Additionally, a tax attorney must remain up-to-date on the latest laws, tools and tactics available to them and their clients.
How to spot a scam
Be wary of tax settlement firms that …
Make unrealistic claims in their advertising, by using statements like, “We’ve helped thousands of people settle their tax debts for a fraction of the amount owed.” Or, “We can significantly reduce your tax debt, call for a consultation.”
Use high pressure sales-tactics to strong-arm you into paying their retainer.
Require large upfront fees.
Don’t offer face-to-face consultations and/or ask for your credit card information over the phone. Know that often these firms aren’t even in the same state as you.
If you’re seeking help sorting out your tax debt and dealing with the IRS, even if you’ve already been contacted by a tax settlement firm, it’s critically important that you contact a tax attorney to get a second opinion on your tax case.
Get Help From an Attorney
If you have a question about the above content or need help with your taxes, please call us at 303-688-0944 to schedule a free, 30-minute consultation with a member of our Tax Team.