The economic recession (or depression, depending on the hit you’ve taken) has been hard on people in the horse industry. Money goes out faster than it comes in, buyers for horses vanish, bills go unpaid, and creditors start lining up at the stable gate. It’s a vicious circle. Add back taxes to the mix and you have the ultimate whammy.
Anyone in hot water with the Internal Revenue Service might be tempted by a spate of recent television ads from businesses that promise to settle your IRS debt for "pennies on the dollar." It sounds like a great deal, and for the small percentage of taxpayers who qualify, tax resolution really can reduce the amount you owe the IRS. The problem is that some of the advertisers are better at collecting retainers from their clients than they are at delivering on their claims to reduce IRS debts.
Late last year, for example, the Federal Trade Commission filed a lawsuit against American Tax Relief LLC, a prominent television, radio, and web advertiser of tax relief services. According to the FTC complaint, American Tax Relief scammed delinquent taxpayers out of some $60 million by promising tax reductions that in nearly all cases the company could not deliver. A federal judge subsequently issued a restraining order prohibiting deceptive claims and appointed a receiver to manage the business. The FTC claimed that American Tax Relief charged up-front fees ranging from $3,500 to $25,000 and promised most clients that they would qualify for a tax relief program that would significantly reduce the money owed the IRS.
The IRS does have a debt reduction program called "offer in compromise." If you owe more in taxes than you can pay, the IRS might accept a deal that eliminates the entire tax liability for less than the full amount. Despite the promises of some tax resolution companies, however, most people (nine out of 10, according to one estimate) will not qualify for the program. If the IRS believes that the total tax liability eventually can be collected in full, either through payment of a lump sum by the taxpayer or through a series of installment payments, an offer in compromise generally will not be accepted.
An offer in compromise is a reasonable alternative from the IRS perspective in three situations: Either the IRS believes that the taxpayer cannot pay the full amount owned during the time limit allowed by law for collection of back taxes, or there is doubt that the taxpayer actually owes the back taxes (this one is troublesome because if there is doubt, perhaps the IRS shouldn’t be trying to collect in the first place), or a taxpayer can show that collection of the full amount owed would create an economic hardship or would be unfair.
Running a successful horse business is tough enough in today’s economy without having to deal with a disreputable tax firm. If a promise sounds too good to be true, it probably is and should be evaluated with a healthy dose of skepticism. At the very least, you should investigate any business guaranteeing to reduce your back taxes with the Better Business Bureau. A low rating by the BBB is an obvious red flag. A good rating, on the other hand, is may not be conclusive evidence that a business is legitimate. The ratings are based primarily on complaints and how well they are resolved, and a new business may not have been operating long enough to have a track record of problems. Other warning signs include a hefty fee that must be paid in advance, high-pressure sales tactics, unrealistic promises, and a refusal to identify the names and qualifications of tax "experts" working for the business.
Do your homework before signing on with a company that promises more than it can deliver, especially when dealing with the IRS.