Spot the “pennies on the dollar” trap before you pay
Ads promising to settle your IRS debt “for pennies on the dollar” are everywhere — and mostly too good to be true. Here’s why tax relief firms rarely deliver, and how to work with the IRS yourself for free.
1 Too Good to Be True
Now that we’re in the post-tax season, you may have noticed that the airwaves and Internet are awash in ads from companies offering to help settle the taxes you owe the Internal Revenue Service (IRS) “for pennies on the dollar.”
Because Billshark is always trying to watch out for your money, we thought we’d take a closer look at these too-good-to-be-true claims. And we’ve found that the old saying seems to hold in this case as well: If it’s too good to be true, it probably is.
As we warned you earlier this year in regard to debt settlement firms, there’s nothing legitimate companies like these can do for you that you can’t do for yourself, for free. The illegitimate ones will just flat-out steal your money.
2 How the Ads Skirt the Line
The problem is, so often people see ads on television and tell themselves, “Well, it must be true, or the government wouldn’t let them get away with saying it.”
So why doesn’t the federal government ban these ads? Because while they might be a bit misleading or deceptive, the government has to prove that their claims are actually false. And advertising like this often walks right up the edge of the line, but is careful never to actually cross it.
Think about the claims: “settle for pennies on the dollar” could mean 99 cents of every dollar owed; “we can” stop wage garnishments, etc., doesn’t guarantee they will; “significantly reduce your tax debt” depends on your definition of the word “significantly.”
The fact is, you put your money at serious risk if you give it to these firms instead of contacting the IRS yourself.
3 What Taxpayers and the FTC Report
A recent column in The Washington Post reported interviewing taxpayers who had used these tax settlement firms, and summarized their experiences:
“You call. They take your information and you send them documents—W2 forms, 1099s, etc. Then you wait. And wait. And wait. You call back. You are told they are processing your application or that they are waiting for a response from the IRS. You call again, but this time you can’t get anyone to explain why it’s taking so long for you to get relief. You’ve been had. And the money you’ve spent could have been used to pay down your debt.”
Still not convinced? Here’s what the Federal Trade Commission (FTC) has to say on the subject:
“If you pay [tax relief companies] 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 further in debt.”
4 What to Do Instead: Contact the IRS
So what can you do instead? Contact the IRS. Do not, under any circumstances, ignore the fact that you owe them money you can’t afford to pay, or worse, not file your taxes at all. Every single day you don’t deal with the issue, penalties pile up with interest added not only to the original debt but to the penalties. One taxpayer reported starting with a $14,000 tax bill that eventually ballooned to $182,000 due to interest and penalties.
The IRS has three ways to assist delinquent taxpayers.
If you are nearly destitute and really, really can’t pay a dime, the IRS may put your account in a “Currently Not Collectible” status, but penalties and interest will still accrue.
Second, the IRS may allow you to set up a payment plan. If you’ve filed all required tax returns in the past, and owe less than $50,000 in tax, penalties, and interest, you are eligible to spread out your repayments over as long as six years.
Third, the program that the tax relief companies are referencing in their ads is called an “Offer in Compromise Qualifier,” or OIC, an onerous and time-consuming process.
“The tax-debt relief companies often don’t adequately disclose that getting an OIC accepted is a Herculean process,” The Post wrote. “To qualify, the IRS will look at your income, expenses, ability to pay and, most importantly [sic], whether you have any assets—including equity in your home.”
You can apply for an OIC, and these other programs, yourself. You do not need to pay their “tax specialists and attorneys” for access to them. If you feel unequal to the task, the IRS sponsors the free Low-Income Taxpayer Clinics (LITCs) nationwide to help you through the process. Find more information about it here: Low Income Taxpayer Clinics (LITC) overview.
And let Billshark help you find extra cash to pay on debt like this or spend however you like. Let us examine your bills, and find you hidden savings.
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Frequently Asked Questions
Can tax relief firms really settle my IRS debt for pennies on the dollar?
Rarely. The claim is often misleading: "settle for pennies on the dollar" could mean 99 cents of every dollar owed. According to the FTC, most taxpayers don't qualify for the programs these companies promote, the companies frequently don't settle the debt, and in many cases they don't even send the necessary paperwork to the IRS. You put your money at serious risk by paying them instead of contacting the IRS yourself.
Why doesn't the government just ban these tax relief ads?
While the ads might be a bit misleading or deceptive, the government has to prove the claims are actually false. Advertising like this often walks right up the edge of the line but is careful never to cross it. Phrases like "we can" stop wage garnishments don't guarantee they will, and "significantly reduce your tax debt" depends on how you define "significantly."
What should I do instead if I owe the IRS money I can't pay?
Contact the IRS. Don't ignore the debt or skip filing your taxes. Every day you wait, penalties pile up with interest added to both the original debt and the penalties. One taxpayer reported a $14,000 tax bill that ballooned to $182,000 due to interest and penalties. The IRS offers three ways to assist delinquent taxpayers, and you can apply for these programs yourself for free.
What relief options does the IRS offer delinquent taxpayers?
The IRS has three ways to help. If you truly can't pay a dime, it may put your account in "Currently Not Collectible" status, though penalties and interest still accrue. Second, it may let you set up a payment plan over as long as six years if you've filed all returns and owe less than $50,000. Third is an Offer in Compromise (OIC), an onerous, time-consuming process the ads reference.
Can I apply for an Offer in Compromise myself, and where can I get free help?
Yes. You can apply for an OIC and the other IRS programs yourself, and you do not need to pay a firm's "tax specialists and attorneys" for access. Getting an OIC accepted is a Herculean process; the IRS reviews your income, expenses, ability to pay, and assets, including home equity. If you feel unequal to the task, the IRS sponsors free Low-Income Taxpayer Clinics (LITCs) nationwide to help.
