Tax debt relief: Legit help or a real scam?

Businessman sitting at his desk, wondering if tax debt relief could help him.Image: Businessman sitting at his desk, wondering if tax debt relief could help him.

In a Nutshell

If you’re struggling to pay current or back taxes, you may wonder if tax debt relief is the answer. Proceed with caution. Scammers use the promise of help to steal your money, and legitimate tax-settlement companies rarely do anything you can’t do yourself.
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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2019 tax year.

If you’re expecting a refund, you may actually feel excited about tax time.

But if you end up owing and it’s more than you can afford, or you’re still behind on previous years’ taxes, the stress and anxiety can feel crushing.

Tax-debt-relief companies claim to be able to help you settle your bill with the IRS for far less than what you owe. Some of these offers are outright scams. Others may just be an expensive way to do something you can do on your own for free. Learn how to reduce the risk with the knowledge and tips we’ve gathered.

What is tax debt relief and why might you need it?

If you can’t afford to pay your taxes on time, you may qualify for some form of tax debt relief. Usually, this relief comes in the form of a payment plan or debt settlement with the IRS.

If you think you need tax debt relief, act quickly to resolve your issues. The IRS charges a failure-to-pay penalty of 0.5% of your unpaid taxes per month or part of a month, plus interest. Interest starts accruing on the day your taxes are due (Tax Day, which is generally April 15), and continues until you pay your bill in full.

So if you owe $1,000 and you pay the balance six months late, you’ll be hit with a failure-to-pay penalty of $30, plus the amount of interest that’s accrued. That doesn’t sound like a lot, but if you delay payment long enough, the penalty can be as much as 25% of your unpaid taxes.

What’s more, the IRS can put a lien on your property (a legal claim) if you don’t pay what you owe. A lien can result in the IRS seizing the proceeds when you sell the property. Or it may place a tax levy on the property, in which case it can take the property and sell it to recoup the taxes you owe the government. Affected property can include not only your home, if you own it, but also personal property and financial assets.

Why you should be wary of tax relief companies

You’ve probably heard or seen advertisements from tax relief companies offering to help distressed taxpayers by reducing or even eliminating their tax debt. And technically, it is possible to settle your tax debt for less than the full amount you owe through an IRS offer in compromise, known as an OIC.

Even though many of these companies charge nonrefundable fees — which can be thousands of dollars — they may not be able to deliver on their promises. It’s not easy to qualify for an offer in compromise. The criteria are strict — you can’t be in the middle of a bankruptcy, must be up to date with all filing and payment requirements, and meet other qualifications. We’ll talk more about an offer in compromise shortly.

Some of these companies even venture into scam territory by taking your money and then neglecting to send the IRS the necessary paperwork to apply for a payment plan or OIC.

The Federal Trade Commission has even received complaints that some tax relief companies have made unauthorized charges on top of the upfront fees.

Some also offer to advocate on your behalf with the IRS to get you on a payment plan. But in this case, you’ll likely overpay the company to do something that you can do on your own by contacting the IRS or your state directly.

Signs of a tax-debt-relief scam

Scammers know that being in debt to the IRS can make people desperate and that they can capitalize on your fear. While there may be legitimate tax-debt-relief companies, there are also plenty of scammers.

The Federal Trade Commission says that a company demanding payment before doing anything for you is a sign of a scam. Here are some other indicators to look out for.

  • Guaranteeing debt forgiveness
  • Promising to drastically reduce or even eliminate your tax debt
  • Pledging to get penalties and interest waived
  • Soliciting your business directly through letters or emails
  • Failing to assess your financial background (the IRS looks closely at your financial situation when considering an offer in compromise, any company that actually has the ability to help you should too)
  • Using tactics that delay your case, such as repeatedly asking for the same documents
  • Informing you — after you’ve prepaid and waited a long time — that you no longer qualify for debt relief or that the IRS rejected your offer in compromise

IRS tax-debt-relief options

If you’re struggling with paying the amount you owe in taxes, the key is to respond quickly.

“People freak out when they receive a notice from the government,” says Julie Magee, director of tax regulatory affairs at Credit Karma. “And people tend to ignore or hide from the problem. But all they really need to do is talk to a government worker who can help them fix the problem.”

If you can’t pay your taxes, your first step should be to contact the IRS directly. In the case of federal taxes, the IRS has options that might be able to help you.

Payment plans

If you can’t pay your taxes in full now, you may be able to set up a short- or long-term payment plan with the IRS. But be aware that any payment plan will come with penalties and interest on the unpaid balance until you make your final payment.

“As long as you don’t have the assets accessible to pay off the debt, there’s no income requirement [for the payment plans],” says Magee.

The short-term plan gives you 120 days over which to make automatic payments on the tax you owe. You can use a checking account, check, money order, or debit or credit card to make your payments.

If you need more than 120 days to pay, the long-term payment plan gives you a couple of options. The first requires automatic payments from your checking account and the second allows you to pay manually by any electronic payment method, check or money order.

Unlike the short-term payment plan, the long-term plans cost money to set up.

  • Automatic plan: $31 to apply online, $107 to apply by phone
  • Nonautomatic plan: $149 to apply online, $225 to apply by phone

Both plans offer a $43 setup fee for low-income applicants based on the federal poverty guidelines. If you chose to sign up online for the automatic plan, it’s $31 regardless of income level. Plus qualifications for arranging a payment plan aren’t as stringent as the ones for an offer in compromise.

Offer in compromise

As mentioned earlier, if your tax debt is so high that you can’t pay it back or to do so would create a financial hardship, the IRS might allow you to settle for less than what you owe.

Check to see if you’re eligible to participate in an OIC by using the offer in compromise pre-qualifier. The IRS determines your eligibility by looking at the following:

  • Ability to pay
  • Income
  • Expenses
  • Asset equity (your assets minus your liabilities or debts)

That said, the IRS suggests that you try all other payment options before applying for an offer in compromise.

“Some states also have an offer in compromise program,” says Magee, “so it doesn’t hurt taxpayers to ask their state if they have such a program if you have a state debt in addition to federal debt.”

Bottom line

If you’re having trouble paying your taxes, think twice before soliciting help from a tax-debt-relief company. Best case? You could end up paying a lot for something you could do for less (or even for free) by working directly with the IRS. Worst case? You could end up getting scammed.

“Your best solution is to jump on that notice you get and work it through with a government official,” says Magee.

You can even do it in person through a local IRS office. Just be sure to make an appointment. And the sooner you start working on a solution, the less you should have to pay in penalties and interest.

Relevant sources: IRS: IRS Fresh Start Program Helps Taxpayers Who Owe the IRS | IRS: Additional Information on Payment Plans | IRS: Important Facts About Filing Late and Paying Penalties | IRS: Topic No. 653 IRS Notices and Bills, Penalties, and Interest Charges | IRS: Understanding a Federal Tax Lien | IRS: Offer in Compromise | FTC: Tax Relief CompaniesFTC: Signs of a Debt Relief Scam

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.