Tax relief companies claim to be a lifeline for taxpayers in distress. By charging upfront fees—sometimes amounting to thousands of dollars—they promise to apply for IRS hardship programs that could reduce or eliminate federal tax debts. Some even guarantee to halt back-tax collection.
But do tax relief companies really work? According to the Federal Trade Commission, most taxpayers are unlikely to qualify for the programs that these companies advertise, and many may not even send your paperwork to the IRS. They might promise to resolve your tax woes, but significant risks could be involved, and the reality may be the opposite.
Keep reading for an in-depth examination of tax relief companies, their services, costs, and potential drawbacks.
In this guide:
- How tax relief companies work
- Offer in compromise and the role of tax relief companies
- Pros and cons
- How to choose the right tax relief company
How tax relief companies work
Understanding what tax relief is and how tax relief companies operate is crucial to assessing their real value.
Tax relief companies can:
- Negotiate settlements: Work with the IRS to reduce your owed amount.
- Reduce penalties and interest: Minimize extra costs that accrue on unpaid taxes.
- Apply for hardship programs: Attempt to qualify you for IRS programs to lower or eliminate debt.
For some taxpayers, these services can help save money owed to the IRS. But the fees outweigh the benefits in other instances. Here are three scenarios that show how taxpayers might use tax relief companies:
|Taxpayer||Taxes owed||Cost of tax relief company||Result||Saves money?|
|James||$12,000||$3,000||IRS agrees to reduce amount owed to $8,000||✔️ ($1,000)|
|Sarah||$10,000||$2,000||IRS agrees to reduce amount owed to $8,000||❌ (break-even)|
|Alan||$15,000||$2,500||IRS rejects offer and doesn’t reduce amount owed||❌ (costs an additional $2,500)|
Tax relief companies’ typical fee structures:
- Flat fees: Some companies charge a one-time fee for their services.
- Percentage of savings: Others might take a percentage of the amount saved in negotiations.
Based on our research, tax relief companies can cost anywhere from $250 to $7,500, depending on which services you use.
The ideal candidate for tax relief services might be someone facing significant tax debt—many reputable tax relief companies require a minimum tax debt of $10,000—with a complex tax situation that requires professional intervention.
However, the Federal Trade Commission warns that most taxpayers are unlikely to qualify for advertised programs, emphasizing the importance of direct negotiation with the IRS or your state comptroller.
Offer in compromise and the role of tax relief companies
An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax debt for less than the full amount owed. It can be a viable option if the taxpayer can’t pay the full tax liability or if doing so would create a financial hardship.
Tax relief companies can offer assistance in negotiating an offer in compromise. They leverage their professional expertise to evaluate your financial situation, determine your eligibility for an OIC, and negotiate with the IRS on your behalf. However, you can also file an OIC yourself or consult with a tax professional.
Ask yourself the following questions when determining whether a tax relief company makes sense for you:
- Do you need an expert? Understanding the complexities of an OIC can be challenging. Tax relief companies have professionals who specialize in these negotiations.
- Is it worth the cost? Weigh the potential savings against the fees you’ll pay the tax relief company. In some cases, the costs might outweigh the benefits.
- Are there viable alternatives? Some taxpayers may prefer to handle an OIC themselves or consult with a CPA or tax attorney. Resources such as the IRS’s Fresh Start program offer guidelines for those who wish to pursue this route.
An offer in compromise is a valuable option for some taxpayers, but it requires careful consideration and, often, professional guidance. Tax relief companies can provide assistance, but understanding the associated costs and evaluating alternatives is essential.
Be sure to consult with a reputable professional to determine the best approach for your situation.
Pros and cons of tax relief companies
When considering tax relief companies, weighing the potential benefits and risks is essential. Below are the primary pros and cons that can help you make an informed decision:
Having experts on your side can make navigating complex tax laws and negotiations with the IRS more manageable. Their experience in the field can lead to more favorable outcomes.
By negotiating settlements and reducing penalties, tax relief companies may save you a considerable amount.
Time and stress reduction
Handling tax issues can be time-consuming and stressful. Tax relief companies can manage the process for you, offering peace of mind and freeing up your time.
Costs can outweigh benefits
Tax relief companies’ fees may exceed your savings, especially in cases with minimal tax debt.
Not all companies are legitimate. Some may charge upfront fees without providing the promised services, leaving you further in debt, as the Federal Trade Commission warns.
Limited success in some cases
Even legitimate tax relief companies may not succeed in all scenarios. The qualifications for various IRS programs are strict, and not everyone will be eligible.
Understanding these pros and cons can guide you in evaluating whether tax relief services are suitable for your situation. Always proceed with caution, and consider seeking direct help from the IRS or your state comptroller.
Alternatives to tax relief companies
Not all tax-related challenges necessitate a tax relief company. Sometimes, more cost-effective options are available. Below are alternatives to consider:
- DIY approaches:
- Understand your situation: You can research tax laws, read notices from the IRS or your state comptroller, and ask them about collection alternatives.
- Payment plans: Work out a payment plan with the IRS or your state comptroller if you owe back taxes.
- CPAs or tax attorneys:
- Professional guidance: Certified Public Accountants (CPAs) and tax attorneys can provide personalized advice and assistance.
- Cost-effectiveness: While still requiring payment, these professionals can offer services tailored to your specific situation, potentially saving you money compared to a tax relief company.
- More control: Working with an individual professional allows for a more transparent and personal relationship, giving you more insight and control over the process.
Here are three ways tax relief companies differ from tax professionals:
|Tax relief companies||CPAs or tax attorneys|
|Expertise||General tax resolution||Specialize in taxes (financial implications and tax law)|
|Cost||Can be expensive (up to $7,500)||May offer tailored, cost-effective solutions|
|Transparency and Control||May lack personal relationship||More direct communication and control|
Exploring these alternatives provides options beyond tax relief companies. If you’re unsure which path to take, consulting with professionals or resources such as the IRS’s Taxpayer Advocate Service may provide clarity.
We asked Erin Kinkade, CFP®, for guidance on tax relief companies versus financial professionals. Here’s what she advised:
I would not recommend using a tax relief company; I would advise a client to do it themselves. Or if their situation is more complex, I would recommend hiring a CPA who specializes in tax relief or a tax attorney who specializes in tax relief.
If you’re considering a tax relief company, red flags to watch out for include guarantees and unsolicited phone calls, texts, or emails.
How to choose the right tax relief company
If you decide hiring a tax relief company makes sense, don’t choose a company without doing your research. It can be a complex process, and you’ll want to make sure you pick a company that suits your specific situation.
Our guide to the best tax relief companies can help you make an informed choice. Consider the following:
- Research and reviews:
- Look for credibility: Check online reviews and Better Business Bureau ratings, and ask for references.
- Be wary of red flags: Avoid companies that make unrealistic promises or charge full fees upfront.
- Understand fees and contracts:
- Know what you’re paying for: Read all agreements and understand whether the fee structure is a flat fee or percentage of savings.
- Ask about refunds: Inquire about the company’s refund policy if it doesn’t deliver the promised service.
- Consult with a tax professional:
- Get an expert opinion: Before committing to a tax relief company, consider consulting with a CPA or tax attorney.
- Weigh pros and cons: A professional can help you understand the risks and benefits of using a tax relief company versus other alternatives.
Choosing a tax relief company is not a one-size-fits-all decision. Some may find it beneficial, but different solutions might better serve others. It requires careful consideration of your individual situation, and we recommend consulting with tax professionals.
Can I negotiate my tax debts myself instead of using a tax relief company?
How do I know whether a tax relief company is legitimate?
Determining a tax relief company’s legitimacy requires careful research. Look for:
- Online reviews and ratings from trusted sources.
- Better Business Bureau accreditation.
- Transparency in fee structure.
- A history of successful negotiations. Be skeptical of companies making unrealistic promises or asking for full payment upfront.
How can I avoid scams related to tax relief?
Avoiding scams related to tax relief includes:
- Ignoring promises that you “qualify” for specific programs without a thorough review of your situation.
- Being cautious with companies that charge pricey monthly “maintenance fees” or full payment upfront.
- Consulting a tax professional for an unbiased opinion.
- Reporting any suspicious activities to the FTC.
Note: A massive scam in India targeted thousands of Americans by posing as U.S. tax authorities. As reported by the U.S. Department of Justice in 2016, the perpetrators ran fake call centers, demanding unpaid taxes and extorting millions of dollars.
The scam, which netted over $150,000 a day, serves as a stark reminder of the importance of vigilance and skepticism in dealing with unsolicited tax-related communications.
Can tax relief companies remove all my penalties and interest?
No, tax relief companies cannot guarantee the removal of all penalties and interest. Every taxpayer’s situation is unique, and only the IRS or your state can determine what, if anything, it will waive.
Tax relief companies may negotiate reductions in penalties or interest, but it is essential to be cautious of any company promising to eliminate these costs.