Are tax relief companies legit?

How do tax relief companies work?

Tax relief companies serve as middlemen, working between you and the IRS to resolve outstanding tax debts. They can negotiate on your behalf and potentially lower the balance owed. They may also be able to reduce or eliminate certain taxes, fees and penalties, saving you extra dollars.

For example, if your spouse is responsible for tax liabilities you were not aware of, you may not be responsible, and a tax relief company may be able to help with innocent spouse relief. There are several other things tax relief companies can help with, including:

• Negotiate an installment payment plan with the IRS that allows you to pay down your debt over time.
• File for IRS hardship programs, such as offer in compromise (OIC), on your behalf.
• Help with the release of tax liens and levies affecting your property.
• Assist in filing missing tax returns and help you reduce and manage your debt.
• Help navigate an IRS audit.

Pro tip

Not every tax relief company specializes in all areas of tax debt, so it is best to consider what services you need and then select a company that specializes in those areas.

» LEARN: What is tax relief?

» MORE: How does tax relief work?

How much do tax relief companies cost?

Tax relief companies vary in cost, depending on your needs and services, but services can cost anywhere from $250 to $7,500, according to LendEDU.

Services can be billed in a few different ways. Some companies charge a percentage of your tax relief based on the savings they were able to negotiate for you. There may be a one-time fee for services. This is rare among tax relief companies but still used by some.

» MORE: Tax updates and scam alerts

Are tax relief companies legitimate?

You shouldn’t have to pay for services entirely upfront.

Experts do not generally recommend tax relief companies. In fact, the IRS warns strongly against them. These companies have a reputation for making promises they cannot always keep. Be leery of companies that promise to eliminate all your debt.

These companies, known as “offer in compromise mills,” will lead customers to believe that they can completely resolve debt, or they may guarantee a specific outcome that is not certain. They also may push you to file an OIC or apply for an IRS hardship program, knowing you will not qualify but pushing you forward nonetheless to receive that fee for their service.

When does hiring a tax relief company make sense?

A tax relief company can be an enormous relief to those who are not well-acquainted with the ins and outs of tax law and regulations. However, these services can come at a steep cost, and the savings are not always worth it. In many cases, it is better to apply or file for IRS programs yourself so you do not incur the extra costs of a third-party service.

As a general rule of thumb, if you owe less than $10,000, it’s often a better idea to skip the tax relief company and handle the matter yourself. Otherwise, you could end up owing more than you save.

What are the benefits and risks of using tax relief companies?

There are pros and cons to using a tax relief company. You can often benefit from a tax relief company’s expertise when it comes to tax regulation and processes. You might also save on your tax debt if the company is able to reduce or eliminate fees, penalties, interest and even the balance due.

On the other hand, tax relief companies are not cheap. They also cannot guarantee a particular outcome because the ultimate decision rests with the IRS.

How to choose a reliable tax relief company

Take the time to review the services provided, any included benefits and the overall cost for the service, as well as the terms and conditions of your contract. Look for a company that is invested in your case and works with you to fully understand the ins and outs of your situation so they know how best to help you. Additionally, consider these factors.

• Knowledge: A legitimate service should be acquainted with all IRS programs and options to ensure that it can advise you on the best steps for your particular situation.
• Experience: Ensure the company has successfully handled cases similar to yours.
• Certifications: Check to see if the company has the necessary certifications, licenses and accreditations to handle your case.
• Costs: Make sure the company clearly outlines all fees and charges with no payments due upfront.

What to avoid in a tax relief company

These are some of the most common red flags that a tax relief company is actually a scam:

• Promises to eliminate all or the majority of your debt
• High-pressure tactics
• Demands for upfront payment
• Frequent mailers via letters or emails
• Repeated requests for the same information
• Notices that your application has been rejected after you have paid a fee

5 alternatives to a tax relief company

If a tax relief company is out of your budget or you feel you can find help elsewhere, a great alternative is a tax attorney or CPA. You could also negotiate one of the following IRS plans yourself.

1. Installment plan

If you cannot pay your tax debt in one lump sum, you may be able to work out a payment plan with the IRS. You can enroll in a plan lasting up to six years, making your payments much more manageable.

An IRS installment plan can help you avoid wage garnishment, liens and levies, as well as further debt collection efforts. You will have to pay any interest and fees accrued so far, but your enrollment in the payment plan will stop future charges as long as you honor the terms of your commitment.

2. Offer in compromise

Formerly known as the Fresh Start program, the IRS now offers an offer in compromise, which lets you make an offer to the IRS to pay a certain amount of your tax debt. If accepted, the rest of your debt may be forgiven or canceled. To find out if you are eligible, use the available offer in compromise pre-qualifier tool provided by the IRS.

3. Currently not collectible (CNC) status

You may have your tax debt temporarily deferred if you can prove that you are unable to pay your bill. The IRS can then deem your tax debt “currently not collectible,” which will cause all collection efforts to stop immediately.

However, you will still accumulate fees and interest, adding to your debt during this break. A lien may also be filed against your property if you fail to pay.

4. Penalty abatement

Through its First Time Penalty Abate waiver, the IRS may approve a penalty abatement in instances of extreme hardship. This can result in the removal of certain penalties and fees when you fail to file a tax return on time and submit proper payment.

5. Innocent Spouse Relief

There are some cases when a spouse may act independently without the knowledge of the other spouse. If this happens and your joint taxes are filed incorrectly, you may not be responsible for the ensuing debt. All debts, including fees and interest, may be discharged if you were unaware of the tax errors and live in a community property state.

Bottom line

It may be worth it to hire a tax relief company if you find a legitimate company that may be able to reduce your debt. However, scams are prevalent, so be sure to carefully vet the company before moving forward.

Remember, tax relief companies are an extra expense at a time when you are already battling debt and going through hard times. Unless you have reasonable cause to believe that a tax relief company will make a difference in your case, it could be better to go on your own or enlist the help of a licensed professional, such as a tax attorney or CPA.