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Relief from tax debt possible, but beware of lofty promises

The Federal Trade Commission recently went after a company that made claims they could settle tax debt for pennies on the dollar. The problem was that once consumers sent an upfront fee they often did not receive any tax-debt relief.

Under the FTC settlement, the agency will refund $16 million to 18,000 customers. The agency secured millions in assets, including jewelry and a Ferrari from the company and its owners. However, customers should not expect a full refund because much of the money is gone.

This case provides a warning that if a claim sounds too good to be true, it probably is. The IRS does offer some relief in limited cases of severe financial hardship. For instance, our April 16 post noted an increase in the Offer in Compromise acceptance rate to 42 percent. An experienced tax attorney can discuss requirements and advise whether the program may help.

Through its Twitter feed, the IRS recently offered six tips for paying taxes owed. The first and second tips are to pay as much as possible as soon as you can through the IRS Direct Pay tool to reduce interest and penalties.

Here are the other four tips offered:

  • Request a short-term extension – this allows approximately three more months to pay
  • Set up a monthly payment plan – a small set up fee allows you to use direct debit to stretch out the repayment of a debt that is less than $50,000
  • Offer in Compromise – when an illness or disability affects your ability to pay in full, you may be able to negotiate on the amount owed
  • Update withholding or estimated tax payments – having more tax withheld from your pay could avoid a large tax bill in future years.

When back taxes are not paid, the IRS will begin collection activities. These efforts often start with a tax lien and could lead to a tax levy of a bank account or wage garnishment.

Source: Boston Globe, "If an advertiser says it can cut your tax bill, check with the IRS," Michelle Singletary, August 13, 2014.

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