The advertisements proclaim you can settle IRS tax debt for “pennies on the dollar.”
While taxpayers can resolve tax debt for less than the full amount owed through the IRS’s offer in compromise program, settling tax debt for pennies on the dollar is unlikely.
Lawyers say some tax resolution companies use aggressive sales tactics to lure consumers with promises of settling tax debt at dubiously small amounts. Better messaging and guidance from the IRS could help address some of the issues consumers face when settling tax debt with the agency, according to some tax professionals.
“Where these companies really fail is these low-income people who otherwise should be pursuing currently not collectible [status], some kind of hardship status, instead of doing these installment agreements or these offers that these clients really shouldn’t be paying based upon their circumstances,” said Karyna Lopez of Lone Star Legal Aid.
The IRS recently issued a warning about OIC “mills” that “aggressively mislead taxpayers into thinking their tax debts can disappear” and recommended that taxpayers use information available on its website to see if they qualify for the program before paying for an expensive service.
An OIC is available for taxpayers who can’t pay their full tax liability or for whom doing so would create a financial hardship. In determining whether a taxpayer is a candidate for the program, the IRS considers their ability to pay as well as their income, expenses, and asset equity. The IRS has included OIC mills on its “Dirty Dozen” list of tax scams for several years over concerns that taxpayers are being misled by promoters.
Still, the IRS acknowledges that some companies offer legitimate services.
Fewer Offers
“The days of JK Harris and Tax Masters, where they were just taking people’s money, I haven’t seen a ton of that. What I’ve mostly seen is these companies putting people into payment plans because it was simple,” said Eric L. Green of Green & Sklarz LLC.
Green, whose firm submits OICs on behalf of its clients, said his sense is that the bigger tax resolution companies used to submit more offers, but after realizing it takes quite a bit of work and expertise, they now focus on first-time abatements and streamlined installment agreements.
The IRS’s first-time abatement program allows taxpayers who have recently been compliant to obtain automatic forgiveness of some penalties (mostly those classified as additions to tax), including those for failure to file tax returns, failure to pay a tax when it’s due, and failure to make tax deposits. The agency requires at least three years of filing compliance and includes instructions for obtaining relief on its notices.
IRS data shows that it received nearly 68,000 offers in fiscal 2014 and that nearly 27,000 of those offers were accepted. The number of offers received declined to about 30,000 by fiscal 2023, with roughly 12,000 of those offers accepted.
David King, CEO of Optima Tax Relief LLC, a large tax resolution firm, said he thinks the drop in offers can be attributed to reduced IRS activity over the last two years. “If you have a lack of presence, you can have a lack of offers,” King said.
The IRS suspended many collection actions during the COVID-19 pandemic and resumed sending some collection notices only this year. Fewer collection actions mean fewer taxpayers looking to resolve collection issues.
King said Optima Tax Relief carries 30,000 to 40,000 clients at any given time. The company’s intake process begins with an investigation into the taxpayer’s financial situation, King said.
King said his firm checks to see whether the taxpayer qualifies for a hardship program. If they don’t qualify, Optima will present their other options, which might include an installment agreement.
Optima removed OIC from its engagement addendum years ago, according to King. Still, he said Optima reviews all clients to see if they are eligible for an OIC. Customers have to sign a disclosure acknowledging “that they understand that an OIC requires special circumstances, is based on financial hardship, and is not a typical result for most clients,” he said.
Optima has been the subject of complaints on the Better Business Bureau’s website. King said some taxpayers may be unhappy with the result of having to pay for debt resolution, but he said his firm operates in an ethical and transparent manner.
Meanwhile, Mandi Matlock of Texas RioGrande Legal Aid said she’s been submitting fewer offers on behalf of her clients.
The main issue she sees is situations in which a person has a home with a small amount of equity. Matlock said OIC examiners aren’t exercising enough discretion in situations in which a person has very low income but has some kind of asset, whether it’s a small savings account or a retirement account with some balance in it.
“The problem is that they can’t extract their equity from these assets without imperiling their proximate financial future,” Matlock said.
Better Messaging?
Alyssa Maloof Whatley of the Law Offices of Alyssa Maloof Whatley, who also helps clients resolve debt issues with the IRS, said most people aren’t aware of the difference between hiring a tax resolution company and hiring a law firm or CPA.
“I'm not saying all resolution companies are bad, but if you’re not getting tax, legal, or bankruptcy advice, and paying the same amount that you would to obtain tax, legal, and bankruptcy advice, I think most consumers would choose the latter, right?” she said.
Maloof Whatley said the analysis to determine how to proceed isn’t that complicated for a tax professional, but she’s seen people with $10,000 in tax debt pay a tax resolution company $8,000 for their service. “At that point you could have just paid your taxes,” she said.
Many people with small, uncomplicated tax matters who don’t qualify for assistance from a low-income taxpayer clinic end up getting taken advantage of by tax resolution companies, Maloof Whatley said.
“I know the IRS tries, but I don’t think they’re doing a great job of getting out the messages about the correct options,” Maloof Whatley said. “If these people were educated about their options, and [the options were] clear, and if the IRS was easy to deal with, this industry wouldn’t exist.”
‘Not a Good Experience’
Eric Santos of the North Georgia Low Income Taxpayer Clinic said some of his clients believe they can settle their debt for free because of the advertisements they’ve heard. Santos said he works with clients to fix offers that were submitted by tax resolution companies and weren’t done correctly.
“The problem with filing offers for people that are not offer candidates” is that the 10-year collection statute stops or suspends running while the offer is pending, Green said. “It really is a waste of the government’s time. It’s a waste of the client’s time and money, and it really, in many ways . . . sets the taxpayer back.”
Other people might be candidates for an OIC, but the process may be more work than a mill wants to do, according to Green.
“An offer is complicated in that the compliance is an issue — all the documentation. There’s going to be follow-up requests from the offer unit,” Green said.
Last year, one of Lopez’s clients — a veteran on a fixed income — received an IRS notice. After hearing FinishLine Tax Solutions LLC advertise on the radio, her client brought the notice to them seeking help. FinishLine told him they could help him with a payment plan. The veteran agreed to pay $1,900 for their services, which was about half of what he owed the IRS.
But Lopez says anyone with tax knowledge would have known this notice meant the IRS wasn’t trying to collect from him.
“He was already in hardship status. There was no need for a payment plan. They didn’t inform him of that,” Lopez said. “I don’t think they necessarily lied to him. I think that they just didn’t provide him all of the information.”
FinishLine couldn’t be reached for comment by press time.
It’s not just low-income taxpayers that get lured by the advertisements.
One of Maloof Whatley’s clients, a Georgia business owner, told Tax Notes that he called a tax resolution company based in California for help with a tax issue after he saw an advertisement. He paid the company $20,000 to resolve the matter, but they didn’t help him with his problem. After about 18 months, he received a notice of a levy being charged against his business bank accounts. When he asked for his money back, the company refused.
“It was not a good experience at all,” he said.
Helping Taxpayers
Santos said it would be useful if the IRS provided standard resources to taxpayers about tax resolution options available. Typically, taxpayers will call the IRS to get information about their options for resolving tax debt, but Santos said it’s often hard to reach a human to speak to and their answers might not be helpful.
The IRS said in a statement that it has “a consistent and dedicated communications strategy to help taxpayers avoid OIC mills, publishing warnings in the annual Dirty Dozen listing and on our social media sites.”
The IRS said it often updates its OIC webpage to include resources and tools to help taxpayers prepare their own OIC, answer questions about the process, and help taxpayers determine if they’re a candidate. For example, the IRS said in November 2023 that a chatbot that provides answers to questions about the OIC program was added to its website. And in June 2024, a voicebot was added to the OIC telephones, which helps taxpayers find answers to their questions. The IRS said in September that an electronic OIC qualification check was added through the individual online account process and that it is “working on expanding this program to allow individuals and businesses to submit an OIC online.”
Lopez said she thinks giving the IRS the authority to regulate tax preparers could help address issues with OIC mills.
“By extension, I think you can start regulating these settlement companies that are clearly just submitting frivolous offers,” Lopez said.
King agreed. “I think regulation would be good for this space, which might sound crazy, but I think we want to shake the bad players out,” he said.
IRS and Treasury officials’ efforts to persuade Congress to give the IRS authority to regulate paid tax preparers have gained new urgency amid concerns about aggressive promotion of the employee retention credit.
Nathan Richman contributed to this article.
Correction, October 21, 2024: This article has been updated to correct a statement from Green that the 10-year collection statute stops or suspends — and not starts — running while the OIC is pending.