Getting an IRS letter is always a scary thing.  Though the worse case consequences of IRS debt are real and can include such things as garnishment of wages or confiscation of property, being subject to such action can be a long process.  Unless you are already in garnishment or have a court date, you have time to take circle the wagons, respond in a calm and rational matter, and settle the claims in a manner that you can live with.

In many cases, you can handle the actions required yourself, often with a simple phone call.  There is a phone number on your bill.

However, there are a great number of circumstances where it is best to seek out professional help to stand between you and the IRS.  People familiar with the IRS collection processes are know how to use those processes to help you settle your case without paying more than you half to and without setting off any tripwires.

So, you get a letter and you go talk to someone whose ad you saw on TV.  The offer in compromise solution is described to you where you are allowed to pay pennies on the dollar in settlement of your tax debt.  All you need is to sign here and pay us some money (usually between $5 and $10,000) and we will take care of your problem.

You know it is probably too good to be true but hope outweighs common sense and you sign and pay thinking that maybe you will only have to pay $1000 of that $10000 you owe and it will all be worthwhile.

And sometimes it is, but it is rare.  But what you weren’t told is that the IRS settles about 4 in 1000 collection cases using the OIC process.

With over 14 million taxpayers now entangled in the IRS collections process, problem resolution is a huge business.  Most of the ads you see will state somewhere that they especially want your business if you owe more than $10000 in taxes.  This is because the minimum fee these firms expect to collect is about $5000.  If you take a class in how to setup such a business, they tell you to use that number to determine your budget.  1 client is $5000.  10 clients = $50000  50 clients = $250,000.  What a great racket.  The downside is the marketing costs are huge.  The cost of getting a client in the door is thousands of dollars which is what makes their services so expensive and why, in most cases, it is wise to seek out a smaller firm like AFS (shameless plug).

So when you sign that paper and pay your retainer, it is almost a certainty that it will not end there.  You will pay that and more, sometimes much more.

Let me describe a case I just came in contact with.

A lady came into my office in February of this year seeking advice about her tax problem.  She had not filed 7 years of tax returns and the IRS was sending threatening letters.  She had gone to an attorney that specialized in  tax resolution, signed their engagement letter and paid her retainer but was now questioning her decision.  I asked her a few questions and based on her estimate of what she owed to the IRS and her current financial situation, it was obvious that she would not be eligible for the offer in compromise (it was also obvious that the other firm had not told her that until late in the process).  I thought she might end up with a payment plan but it was possible that she would qualify for a temporarily uncollectible status to give her a bit more time to get her finances in order and make the payments easier to handle.  That couldn’t be known until all the tax returns were filed and a financial report was filled out.

About 3 months later, she was back and dropped off a bunch of tax returns and told me she was done with the other company but would end up paying them about $4000 for services she had already agreed to, including preparation of her tax returns.  It looked like she would owe about $8000 to the IRS plus the $4000 that had been or would be paid to the firm she was working with.

But here is the problem.  In doing a standard tax preparation interview with her, I saw that the firm that had prepared her tax returns had not asked her about medical expenses.  She actually had almost $40000 in medical expenses that were unclaimed on her prior year returns.  If those returns are amended to include those additional deductions, her tax debt is going to be just about what she paid the attorney to handle her case.  And she still owes the $4000 to the IRS.  And she is making payments to the attorney.

I don’t think this case is all that unusual.

Tomorrow I will share how our firm (or most other firms that I am familiar with) would have handled this case and how to keep from paying exorbitant fees if you find yourself in this situation.