The Promise of Tax Relief
When facing substantial IRS tax debt, many Americans turn to national tax resolution firms that promise to reduce their tax burden. While some companies provide valuable services, others employ questionable strategies that could leave taxpayers in an even worse position. A recent case highlights the potential pitfalls of working with such firms without proper due diligence.
A Case Study in Tax Resolution Risks
Consider this scenario: A taxpayer with over $30,000 in tax debt sought help from a national tax resolution company. The firm’s promise was appealing – they claimed they could settle the debt for less than the full amount owed. However, their approach raised serious red flags that taxpayers should be aware of.
Dangerous Delay Tactics
First, the firm advised holding off on filing the client’s already-late 2020 and 2021 tax returns. Their strategy? Wait until 2024 to file everything together for a comprehensive installment agreement. This advice directly contradicts sound tax practice and IRS requirements. While the failure-to-file and failure-to-pay penalties would have already reached their respective caps of 25%, delaying tax filings still results in continued interest accrual on the unpaid tax and penalties. Most importantly, maintaining compliance with filing requirements is fundamental to establishing credibility with the IRS and accessing various relief options.
Missing Critical Analysis
Perhaps more concerning was the firm’s failure to perform a Reasonable Collection Potential (RCP) analysis – a crucial step in determining whether a taxpayer might qualify for an Offer in Compromise or other tax relief programs. Without this analysis, it’s impossible to know whether the installment agreement they eventually arranged was the best option for their client.
Risky Payment Planning
The firm then set up a payment plan that presumably included an estimate of the taxes for the unfiled returns. This approach is precarious because if the actual tax liability is higher than estimated, it could default the entire agreement, potentially leaving the taxpayer in an even worse position than before.
The Right Approach to Tax Resolution
The proper approach would have been to:
- File all past-due returns immediately to stop the accumulation of failure-to-file penalties
- Conduct a thorough RCP analysis to understand all available options
- Consider alternatives such as an Offer in Compromise or Currently Not Collectible status
- Implement the most advantageous solution based on the taxpayer’s specific circumstances
Conclusion
This case serves as a reminder that when dealing with tax debt, immediate action, and proper analysis are crucial. While tax resolution companies can provide valuable services, taxpayers should be wary of strategies that involve delaying filings or skipping essential analysis steps.
