I was driving my daughter to dance classes when I heard the ad for a tax relief company on the radio:

“They were about to garnish my wages! This tax relief* company worked with the IRS to save me thousands of dollars.”

* – I’m choosing not to name this tax relief company, although a Google search reveals there are literally hundreds of such businesses that operate locally, regionally, and nationally.

The idea of tax relief made me stop in my tracks. To this taxpayer – who happens to “support” the so-called 47 percent, even if she isn’t among them – allowing someone who is supposed to pay taxes get out of his or her burden on a technicality seems unfair. So I decided to educate myself about tax relief, how it works, and who qualifies.

How Tax Relief Firms Works

Tax relief companies operate by working as a middle man between you and the IRS. Say the IRS sends you a notice that you owe thousands of dollars in back taxes; you panic, and – if you don’t know how to handle the situation on your own – you contact one of these tax relief firms for help. In exchange for a fee (sometimes a flat fee, sometimes a percentage of what you owe), these companies talk to the IRS on your behalf to delay collections or reduce the amount you owe.

The truth is, there are very real, very legal programs open to people who qualify for an IRS hardship status that allow delinquent taxpayers to postpone paying taxes or pay less than they owe. It’s also true, however, that many people who owe back taxes can’t qualify for them.

IRS, Tax Relief, and You

There are a variety of reasons why a person may qualify for a legitimate IRS hardship status. Natural disasters or a failed business may buy you hardship status; simply jipping the IRS when paying your taxes every year won’t.

To determine if you qualify for a hardship status, you’ll need to fill out a forms. The first is IRS form 433-A; some taxpayers may need to fill out forms 433-B and 433-F as well, depending on the circumstances of their supposed hardship. After you fill out these forms – which you can do on your own, you don’t need the help of a tax relief firm to get this paperwork – you submit it to Uncle Sam, who will then determine whether or not you qualify for the hardship status.

If you do qualify, the IRS will give you up to a year to get back on your financial feet before resuming collection efforts, although the government may check in every now and then to make sure your financial situation hasn’t improved and you’re now in the position to pay back what you owe.

Settling Your Debts

Whether or not you work with a tax relief company, resolving your tax issues ultimately comes down to one of three options – provided you’ve already qualified for IRS hardship status:

  1. The IRS may offer you an installment agreement, which lets you pay back your tax debts on a predefined schedule, similar to a mortgage loan or car loan.
  2. When you hear tax relief businesses talk about someone paying back their debt for “pennies on the dollar,” they’re talking about an offer in compromise. As a Federal Trade Commission publication says, “taxpayers are eligible only after other payment options have been exhausted and their ability to pay has been reviewed by the IRS.” In other words, these aren’t easy deals to come by.
  3. An abatement is basically IRS-speak for tax forgiveness. In very limited circumstances, taxpayers with proof of extreme hardships may have their debts forgiven. These abatements come in two forms: a penalty abatement, which forgives the original taxes owed, and an interest abatement, which forgives the interest owed on the back taxes. An abatement, particularly a interest abatement, is even rarer than an offer in compromise.

You don’t need to work with a tax relief firm to qualify for any of these programs; it will all come down to your IRS Form 433 information, which you can provide yourself. If you don’t feel comfortable doing it on your own, you have options beyond tax relief companies, including CPAs, tax lawyers, and agents enrolled with the IRS.

The Final Word

This isn’t to say that all tax relief firms are bad – although there have been a slew of highly publicized lawsuits on behalf of consumers against them. The Minnesota Attorney General has even issued a consumer alert about tax relief scams, which prey on taxpayers in need of help.

If you plan to work with a tax relief company to delay or reduce tax collections, do your research. Make sure the business employs professionals who are licensed to work with the IRS on your behalf. Contact your local Better Business Bureau to ensure the firm is in good standing. And, look for reviews from past customers, not just the ones provided on the company’s website, but at places like Angie’s List. Finally, read the fine print on any deal before you sign it, so that you know exactly what you’re getting in to; if you don’t understand the agreement, don’t sign it.

Reader, have you ever used a tax relief service? Or, have you ever resolved a tax issue on your own? How did it go?