Promises Too Good To Be True
In 1931, the famous jurist, Benjamin Nathan Cardozo, in discussing fraud stated that: “Fraud is the pretense of knowledge when knowledge there is none.” Ultramares Corp. v. Touche, 255 N.Y. 170, 179, 174 N.E. 441, 444 (1931). This famous quote has withstood the test of time and is particularly relevant to the tax resolution industry and the rampant fraud perpetrated upon the public each day.
Tax resolution or tax settlement firms are firms that advertise that they have tax experts who are capable of negotiating a settlement with the IRS for pennies on the dollar. In all but limited circumstances, the IRS will insist on full payment. The IRS offers Installment Agreements and Partial Payment Arrangements. In addition, a taxpayer who is in financial dire straits may qualify as being “noncollectable” thereby suspending IRS collection efforts. In rare circumstances, a taxpayer may be able to reduce the amount that he or she has to pay in order to settle up with the IRS.
False claims are repeated on late night TV, the radio, print ads and the internet. The constant barrage of advertising usually includes assertions that tax attorneys, certified public accountants and former IRS employees are on staff and are prepared to lead the charge on your behalf. In reality, most of these charlatans are merely sales people reading from a script designed to separate you and your hard earned money. Make no mistake, these enterprises are “boiler room” operations engaged in the unauthorized practice of law and operate in violation of federal and state consumer protection laws
Every year, I receive inquiries from taxpayers who have been scammed by one of the many tax resolution companies out there. In each case, the taxpayer paid a tax resolution company anywhere from $3,000 to $10,000 and received nothing in return. Consequently, the taxpayer’s tax problem was not resolved.
Offer in Compromise (OIC)
When a tax resolution company claims that they can settle IRS debt for pennies on the dollar, they are referring to what is known as an Offer in Compromise (OIC). Offers are rarely successful for a number of reasons. First, the documentation is substantial. Second, there is a high level of IRS scrutiny when reviewing an Offer. Finally, whether an Offer is accepted is based upon objective criteria including income and expenses, assets and liabilities and the time remaining under the statute of limitations for collections. The notion that a representative from a tax resolution company is going to march into an IRS and negotiate face to face is nothing less than absurd and conjures up the vision of a personal injury attorney negotiating the settlement of a slip and fall case with an insurance carrier.
Tax liens & Levies
These Companies utilize aggressive sales tactics and typically represent that they can have tax liens removed from public record and also remove levies. While it is possible to have a tax lien withdrawn in certain cases, the IRS will generally not subordinate its claims against a taxpayer. Nevertheless, tax resolution companies boast that they have the ability to magically have liens and levies released.
Many Taxpayers have told me that when they asked for a refund, the Company told them to go pound salt or engaged in dilatory tactics, thus avoiding having to refund the client fees. The most extreme case I handled involved an offshore disclosure where the Taxpayer paid a Tax Resolution Company over $45,000. The Company did nothing, except obtain the Taxpayer’s transcripts from the IRS exposing the Taxpayer to significantly greater penalties than would have been assessed had the Company taken appropriate action.
Tax resolution companies’ business model
The tax resolution business model compensates most of its employees based upon commission, which is an invitation for misrepresentations to the public, since the goal is to sign as many individuals as possible, irrespective of the facts surrounding a particular tax case. The sales people are well trained to tell anyone who calls that their case can be settled for a fraction of the outstanding tax debt. These assurances are generally made without ever reviewing a document or interviewing the client. Consequently, false advertising and representations are the order of the day.
Standards of practice
Since most of these scammers are unlicensed they operate outside the State Bar Ethics Rules, State Regulations governing Certified Public Accountants or Circular 230 all of which proscribe standards of practice, ethics and continuing professional education. The Department of the Treasury, Office of Professional Responsibility handles consumer complaints, as they relate to those subject to Circular 230, which includes attorneys, certified public accountants and those enrolled to practice before the IRS.
There has been ongoing debate in terms of who is subject to Circular 230 particularly in light of Loving v. Internal Revenue Service, a 2014 decision. In Loving the U.S. Court of Appeals held that a Department of Treasury rule governing a “tax return preparer,” (which is defined as a person who prepares tax returns for compensation) exceeded IRS rule making authority. The 2011 regulations required a tax return preparer to register with the IRS, pay a fee and pass a qualifying exam.
Karen Hawkins, former Director of the Office of Professional Responsibility, asserted that
“there is no doubt that OPR has jurisdiction over the tax debt resolution industry and those working in it.” OPR Targets Debt Resolution Industry in Campaign Against Sanctionable Practices. Since OPR only reports the names and professional designation of those who are disciplined by the OPR, it is difficult to assess the number of individuals who are engaged in the tax resolution business who have been sanctioned. In addition, an integral part of tax resolution involves tax return preparation including original and amended tax returns. As such, the OPR’s assertion that they have jurisdiction over the tax resolution industry is suspect.
Legal actions against tax resolution companies
In addition to the OPR, some states have taken legal action against tax resolution companies. In September of 2017 the State Attorney General for the Commonwealth of Virginia filed a lawsuit against Wall & Associates, Inc. (“Wall”) alleging that the Company misrepresented its tax debt settlement services, while at the same time they collected large retainers and monthly payment from their victims. The lawsuit alleges that Wall violated Virginia’s Consumer Protection Act by deceiving consumers by claiming that Wall’s average client settled his or her IRS debt for 10% of the total amount. The complaint further alleges that the Company made false claims concerning the tax related experience, qualifications and abilities of its employees, including characterizing sales people as “tax consultants” or “tax experts” and claiming that Wall’s employees were authorized, qualified or certified to practice before the Internal Revenue Service or state tax authorities when they were not. Id.
In December of 2018, the Attorney General for the State of Minnesota sued Wall alleging that the Company violated Minnesota’s consumer protection laws by failing to register with the state and collecting large advance payments, while remaining unresponsive to customers.
Other honorable mentions include the television “Tax Lady” Roni Deutch, who was sued in 2010 by the State of California for swindling thousands of consumers who were facing serious IRS problems. Other Companies such as JK Harris and Tax Masters were subject to multiple suits for deceptive practices and elected to file for Bankruptcy. Needless to say, these firms are no longer in business. In fact it is estimated that some 109 tax resolution companies have gone out of business from 2001-2011.
If you are contemplating retaining a professional in order to resolve your tax debt, you should only hire a duly licensed tax attorney who has the requisite training and experience to assist you in achieving closure with the IRS. If you do your homework, you can find a tax attorney whose fees are commensurate with the fees charged by the scammers.
By: Anthony N. Verni, Attorney at Law, Certified Public Accountant
© March 29, 2019.