Claudia Buck

Personal Finance: When tax 'help' is just a mirage

Published: Sunday, Apr. 21, 2013 - 12:00 am | Page 1D
Last Modified: Sunday, Apr. 21, 2013 - 7:41 am

Maria Garcia never dreamed she would land in so much trouble with the IRS. But a few years ago, she found herself owing about $32,000 in back taxes – a situation she says was partly caused by a family member fraudulently using her name and Social Security number for work.

Desperate for help, Garcia turned to TaxMasters, one of the many "tax relief" companies advertising heavily on TV, radio and the Internet.

"I'd run into tax problems, and their advertising was enticing," said the Roseville resident and mother of four adult children. "Needless to say, it was a fiasco. They prey on your fears of the IRS coming and taking what little you have: my car, my wages. …"

After paying about $4,000 in upfront fees – and giving the company power of attorney to represent her before the Internal Revenue Service – Garcia thought her problems were over. Instead, they just got worse.

Months went by without any resolution. Meanwhile, the IRS tax penalties and interest kept climbing. After a year or so, Garcia owed more than $42,000.

"Every time I emailed (TaxMasters), they said: 'We're working on it.' "

In March 2012, the company, Texas-based TaxMasters Inc., filed for bankruptcy, leaving thousands of hapless taxpayers, including Garcia, in worse shape than when they started.

Every year, as the tax season closes, many Americans are unable to pay their full IRS bill or resolve their past-due obligations. These folks are often the target of "tax relief" companies.

As the economy perks up, many of these companies actually drum up more business, said Gary Almond, president of the Northeast California Better Business Bureau. "As the economy improves, some (consumers) want to resolve their past debts. They now may have equity in their home to resolve debt. Or they want to refinance their mortgage and need to settle their tax liens. Or they've become employed again and find that their wages are being garnished."

While plenty of legitimate companies offer tax help to struggling consumers, a number of unethical companies, especially those charging high upfront fees, prey on unsuspecting taxpayers.

On its website, the Federal Trade Commission warns against companies charging upfront fees while claiming they can "reduce or even eliminate" tax debts.

"The truth is that most taxpayers don't qualify for the programs these fraudsters hawk, their companies don't settle the tax debt, and in many cases don't even send the necessary paperwork to the IRS," notes the FTC's website.

In all cases, consumers should be wary of too-good-to-be-true claims.

"Some of these 'effectiveness' claims should be taken with a grain of salt. Everyone's case is different; there are no blanket guarantees," said the BBB's Almond.

In California, state Franchise Tax Board officials say free help is available, particularly for those facing financial hardships.

"Taxpayers seeking help should be aware that the same debt relief options are available, regardless if (they) use a 'tax relief' company or handle it on their own," FTB spokesman Daniel Tahara said in an email.

"When a taxpayer can't pay, we prefer to work with them to resolve the collection issue … as quickly as possible through the method best suited for their situation." (See box for details on IRS and FTB repayment options.)

Among the more notorious tax-resolution empires was run by former Sacramento attorney Roni Deutch, who famously branded herself "The Tax Lady" in late-night cable TV ads. Starting from a solo law practice in the late 1990s, Deutch eventually presided over a $25 million-a-year company with franchises and offices in 23 states.

In 2010, then-state Attorney General Jerry Brown filed a lawsuit accusing Deutch of swindling thousands of customers facing IRS tax woes. The state's lawsuit said she charged individual clients up to $4,700 for tax help but delivered little or no results. As part of the lawsuit, she was ordered to pay $435 million in refunds to unsatisfied clients.

Defiantly maintaining her innocence, Deutch eventually closed her offices and surrendered her law license in May 2011, saying she was broke and unable to keep her company going.

While companies like Deutch's and TaxMaster have been magnets for complaints, other tax-relief firms operate virtually complaint free.

"There are so many bad ones, but the credible companies are making a difference in people's lives," said Kathy Hill, founder and CEO of Tax Tiger in Sacramento, a tax resolution company with franchises in three other states.

Last year, she and others formed the National Association of Tax Resolution Companies, a Washington, D.C.-based group whose mission is to preserve the industry's reputation and protect consumers from "unfair and deceptive" tax-resolution advertising tactics.

"It's an association of the 'good guys,' " says Hill, whose firm has an A-plus rating from the BBB.

With first-time clients, Hill's company typically does a free financial consultation, looking at income, assets and monthly expenses to see what kind of repayment plan is possible.

"If they have little to no assets – no equity in a home, no 401(k), no investments, cars or real estate, they probably qualify for an 'offer in compromise," she said. A so-called OIC is where the IRS or Franchise Tax Board agrees to settle a tax debt for less than what is owed.

"The IRS hates the program because they have to settle for less than what's owed," said Hill. "But it's a blessing for those who can't pay the $50,000 or $60,000 they owe."

But it's not a quick-fix solution. Hill said it can take up to a year to get all the documentation and paperwork – everything from rental receipts to wages to car payments – submitted and approved by the IRS.

She typically charges a flat fee, anywhere from $1,000 to negotiate an IRS or FTB installment plan to $4,800 for more time-consuming offer-in-compromise settlements. Rather than an upfront fee, clients make an initial down payment, then pay the rest within 10 to 12 months.

One Tax Tiger customer, Roseville resident Jennifer Dunn, discovered a year or so ago that she was on the hook for nearly $70,000 owed to the IRS by her estranged husband's concrete business. Amid her divorce, "I tried resolving it on my own with the IRS but wasn't getting anywhere," said Dunn, who said the IRS payment plan was more than she could afford on her schoolteacher salary.

She turned to Hill, who arranged an IRS compromise settlement of $871. As part of the 2012 agreement, Dunn must file her taxes on time for the next six years, or the deal is off.

Dunn said the relief of resolving her situation is huge. "She (Hill) was a savior, I tell you."

To avoid getting defrauded by an unsavory company, do your homework, say state and local officials. Check with the Better Business Bureau or appropriate state agency for a company's record.

"With anybody who requires an upfront fee for a service they can't guarantee, run," said Mark Leyes, spokesman for the state Department of Corporations.

Currently, the IRS and its Taxpayer Advocate Service are working to resolve tax debts of former TaxMasters clients such as Maria Garcia.

Garcia, who works full time at a warehouse store, says she now wishes she had gone directly to the IRS for help. Her recent 2012 tax refund – $300 – went straight to the IRS for repayment.

Looking back, "I made mistakes," Garcia said. "I thought I could fix it on my own. And I couldn't."

NEED TAX RELIEF? HERE'S HOW TO GET IT

INTERNAL REVENUE SERVICE

Under its "Fresh Start" program, delinquent taxpayers can request installment payments or an "offer-in-compromise" plan to wipe out existing tax debts. The IRS expanded its program in 2010, making it easier for more people to qualify.

Installment payments are generally available for individuals with up to $50,000 to repay. If approved, you repay in regular monthly payments, starting as low as $25.

For OICs, taxpayers must show they have no way of repaying their debt in a reasonable amount of time, based on their income and assets. In most cases, the tax debt must be $50,000 or less. Taxpayers offer a settlement amount, which is reviewed by the IRS.

The IRS has also raised the debt amount – to $10,000 – that triggers a lien for unpaid back taxes being placed on a person's home or property.

For details on resolving IRS debts, go to: www.irs.gov. Or call (800) 829-1040 (individuals) or (800) 829-4933 (businesses).

FRANCHISE TAX BOARD

The FTB also offers installment-payment and offer-in-compromise plans for struggling taxpayers.

If the balance owed is up to $25,000 and can be paid within 60 months, the FTB has a simplified process for taxpayers to set up a monthly payment plan. For larger amounts, the process requires more documentation. Tax liens are not typically filed against taxpayers using payment plans.

For an offer-in-compromise, the FTB reviews the taxpayer's income and assets to determine if a compromise offer is acceptable. It can take 90 days or more to complete a review.

To request an OIC or installment plan, go to www.ftb.ca.gov or call (800) 689-4776 for help in English and Spanish.

HELP FROM PROS

If you don't want to seek IRS or FTB relief alone, get help from professionals: CPAs, tax preparers, enrolled agents or reputable tax-resolution companies.

Before hiring anyone, check a company or individual's reputation with the Better Business Bureau or appropriate state or federal agencies.

Call The Bee's Claudia Buck, (916) 321-1968. Read her Personal Finance blog, www.sacbee.com/personalfinanceblog.

© Copyright The Sacramento Bee. All rights reserved.

Read more articles by Claudia Buck





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