Tax Resolution Scams 101
By Stephen J. Dunn
Tax resolution firms are a misnomer. They exact high fees from unassuming consumers and seldom resolve anything. These firms are a relatively recent development, and they are becoming a serious problem for consumers in our country.
Tax resolution scams advertise heavily, offering to settle Federal tax obligations for a fraction of the amount owed, even for “pennies on the dollar.” I have heard ads announcing a “special IRS program” to compromise tax balances, available for only a “limited time.” One firm claims to have saved “tens of thousands of taxpayers tens of millions of dollars.”
These ads are, of course, false. The IRS rarely accepts an offer in compromise. There are much better ways of securing relief from a threatened or actual levy (seizure) of a taxpayer’s wages or bank account. But the unsophisticated people targeted by the ads do not know this. Many taxpayers are facing IRS levy of their wages or bank account. A taxpayer who calls the tax resolution firm is connected with a high-pressure salesperson, and maybe with two of them. The taxpayer is assured that the firm will settle and resolve the taxpayer’s tax obligations. The salespeople earn commissions and large bonuses. Tax resolution firms take large retainers, typically $5,000-$10,000. The taxpayer somehow comes up with the retainer money. It is unlikely that an offer in compromise will even be submitted to IRS on the taxpayer’s behalf.
Employees of the tax resolution firm send the taxpayer form letters requesting information by artificial deadlines. When there is no response to the letters, the tax resolution firm does not bother to call the taxpayer. Instead the tax resolution firm deems the matter concluded and closes its file, the taxpayer realizing no relief. If the taxpayer requests a refund of fees paid to the tax resolution firm, the firm relentlessly refuses. All of this is pursuant to fine print in the retainer agreement which the tax resolution firm required the taxpayer to sign. That fine print also undoubtedly has language exculpating the tax resolution firm from liability to its client.
The taxpayer still owes his balance to the IRS. In fact the balance is now higher with additional accrued penalties and interest. And the taxpayer is out the fees paid to the tax resolution scam.
Not surprisingly, there is much litigation against tax resolution firms. J.K. Harris & Co., of Charleston, South Carolina is the largest such firm, with 325 local offices and $100 million in annual revenue. CPA John K. Harris founded the firm in 1997. The firm has been sued numerous times throughout the country. In 2007 it settled a class action brought in Charleston County, South Carolina Circuit Court for $6.2 million. In 2008 it settled a suit brought by the attorneys general of 18 states for $1.5 million.
Attorney Roni Deutch, of North Highlands, California, opened her tax resolution firm in her condo in 1991. Today it enjoys $25 million in annual revenue. Deutch advertises heavily on TV, especially in California, where she is known as “the Tax Lady.” Deutch has been the object of much litigation. In 2007 she settled a suit brought by the New York City Department of Consumer Affairs agreeing to pay $200,000 restitution to consumers and $100,000 in fines to the City. On August 25, 2010, the California Attorney General sued Deutch in Sacramento County Superior Court seeking $33.9 million in restitution, civil penalties, and a permanent injunction. The pleadings and exhibits are eye-opening. To view them go tohttps://services.sacourt.com/publicdms2/DefaultDMS.aspx and enter the case number―34-2010-00085933.
Founded by CPA Patrick Cox just a few years ago, Houston’s TaxMasters, Inc. sold its stock in a public offering in 2009. No doubt the proceeds of the stock offering fund TaxMasters’ national advertising campaign. On May 13, 2010, the Texas Attorney General sued TaxMasters on behalf of over 1,000 consumers.
The Better Business Bureau has issued its lowest rating of “F” to JK Harris, Deutch, and TaxMasters. The California Attorney General’s Complaint alleges that, by August, 2010, 69% of clients who retained the Deutch firm in 2006, 67% of clients who retained the Deutch firm in 2007, 63% of clients who retained the Deutch firm in 2008, and 51% of clients who retained the Deutch firm in 2009 had either cancelled the firm’s services or been terminated as a client of the firm. Quite a business model.
I find that tax collection cases can be resolved to the client’s satisfaction. Usually that involves entering the client into an installment agreement with the IRS or having the client posted as CNC. Sometimes it involves litigation with the taxing authority. Once in a great while it involves making an offer in compromise. Currently I am doing an offer in compromise for a client who suffers chronic heart disease and diabetes and is permanently disabled from working. He has difficulty talking because of shortness of breath.
Taxpayer lawsuits against tax resolution firms have a beneficial effect. The Federal Trade Commission should also act against tax resolution firms. The firms advertise nationally across state lines. The FTC is uniquely able to investigate tax resolution firms and bring them to justice.
The IRS has been inexplicably, shamefully quiet about tax resolution firms. These firms enrich themselves with funds that should be used to pay taxes, to the detriment of taxpayers and the Federal treasury.
Lack of professional regulation of tax resolution firms is a large problem. The IRS allows only Enrolled Agents, licensed CPAs, and licensed attorneys to represent taxpayers before it. But the IRS rarely exercises its disciplinary authority over representatives of taxpayers.
Enrolled Agents pass a test administered by IRS and are qualified to represent individuals and small businesses in routine matters before the IRS.
CPAs are trained not to represent taxpayers in tax controversies but to audit companies’ financial statements. Even a CPA with an MS in Taxation does not possess the skills of advocacy.
Neither Enrolled Agents not CPAs can litigate. In a tax controversy, it important for the taxpayer that IRS personnel understand that there is potential that the case will go to litigation.
Taxpayers are best served by a reputable tax lawyer—CPA, JD, and LLM in tax law is the best group of credentials. Lawyers know law, and how to research it and argue it. They are trained in the art of advocacy. Lawyers are subject to disciplinary authority of their state bar.
Communications between a client and his lawyer are privileged, meaning that neither the client nor the lawyer can be compelled to divulge those communications, unless the privilege has been waived. There is no privilege in Federal practice for communications between a client and an accountant or between a client and a tax consultant.
Many of the people who work taxpayer files at tax resolution firms are not subject to any professional regulation at all. These include salespeople and clerical personnel who send out letters to clients requesting information and who close files the case when the requested information is not received.
According to the California Attorney General’s Complaint against the Deutch firm, Deutch pays employees who work on taxpayer files as little as $12 per hour. But in justifying refusal to refund any part of a taxpayer’s retainer, Deutch claims as much as $300 per hour for such employees’ time.
The California Attorney General’s Complaint alleges that when a client fails to make a scheduled payment due to the Deutch firm, collection personnel of the firm call the client and use aggressive, rude, and harassing language to collect the balance, including screaming and cursing at the client.
I represent mostly wealthy individuals and corporations. When a working-class person comes to me with tax issues, I tell them that I expect them to pay me. Most of them do pay me. But if they don’t, that’s ok. It is an honor to represent such people.
As already noted, an offer in compromise is rarely in a taxpayer’s best interests. About the only time the IRS accepts one is when the taxpayer is permanently disabled from working. The making of an offer in compromise tolls the 10-year statute of limitations on collection of the tax. If the offer is for a lump sum, and the taxpayer’s income is above what IRS considers the poverty level, the taxpayer must pay a deposit of 20% with the offer. When the IRS rejects the offer it keeps the deposit.
When the IRS issues a notice of intent to levy or a notice of levy against a taxpayer, the taxpayer’s representative should call IRS collections and inform them that the taxpayer wishes to enter into an installment agreement with the IRS or that the taxpayer qualifies to pay nothing to the IRS (this is called being posted as “currently not collectible” or “CNC”). The representative should request a hold on collection action to give the representative time to submit a Form 433-A to IRS for the taxpayer. The IRS will generally grant two weeks for this purpose. More time can be requested if necessary.
A Form 433-A is a detailed, six-page personal financial statement. I review it with the taxpayer, request information from them, and complete it for them. It is important that the Form 433-A be completed accurately and in good faith, as the taxpayer signs it under penalty of perjury. Moreover, the Form 433-A serves as the basis of the IRS’ determination of the amount of the taxpayer’s installment payment, or whether to post the taxpayer as CNC.
One of my clients, an attorney, is embarrassed that he has unpaid tax obligations. He is practicing on his own after parting ways with his firm in the down economy. As he is an attorney, I sent him a blank Form 433-A to complete and send back. I know that he had been struggling financially. When the Form 433-A came back, the client had erred on the side of overstating his income and the value of his assets. This was human nature—a matter of personal dignity. It certainly would not help his situation with the IRS. I called the client and went over the Form 433-A with him. We came up with a realistic Form 433-A, which the attorney and his wife signed and we submitted to the IRS.
An installment agreement can be either formal or informal. In an informal installment agreement, the taxpayer promises to make monthly payments in an agreed amount which will pay off his balance within two years. A formal installment agreement is a written agreement in which the taxpayer promises to make, and IRS agrees to accept, monthly payments in a specified amount. A taxpayer can allocate payments, such as against the trust fund portion of employment taxes, under an informal installment agreement but not under a formal installment agreement.
IRS collection personnel are generally reasonable people. If an IRS collection employee sets a taxpayer’s installment payment at an amount which the taxpayer’s representative believes is too high, the representative can speak with the collection employee’s manager. If the representative is unable to resolve the amount of the employee’s installment payment by talking with the collection employee’s manager, he can appeal the matter to the IRS appeals office.
Once IRS enters into an installment agreement with the taxpayer, or posts the taxpayer’s account as CNC, the IRS removes the taxpayer’s account from collection status. If the IRS has already issued a notice of levy against property of the taxpayer, the IRS will issue a discharge of it. But a discharge of levy has prospective-only effect. Thus, a discharge will stop a continuing wage levy. But once a levy attaches to a bank account, the IRS owns the balance then in the account, notwithstanding a discharge of the levy later issued by the IRS.
The 10-year statute of limitations on collection continues to run while an installment agreement is being negotiated and while it is in effect, and while an account is in CNC status. During that time the IRS will seize any Federal tax refunds due the taxpayer, and it may record a notice of Federal tax lien against the taxpayer in the local register of deeds office, but will not take any other collection action again the taxpayer.
Once the IRS enters into an installment agreement with a taxpayer or posts his account as CNC, it is important that the taxpayer timely file all of his Federal income tax returns and pay all tax reported on those returns. Noncompliance by the client will void his installment agreement or CNC posting and return his Federal tax account to collection status.
Once the statute of limitations on collection of a Federal tax account expires, the IRS can no longer lawfully collect the tax, notwithstanding the unpaid balance of an installment agreement.
John K. Harris refers to the tax resolution “industry.” Let’s prove him wrong. Let’s get out the word and bring an end to this terrible scourge upon consumers.