IRS warns of tax debt OIC scams

The Internal Revenue Service posted a series of videos to explain how taxpayers can steer clear of scammers who claim to be able to help them with their tax debts while charging exorbitant fees and making outrageous claims.

The videos show how taxpayers can apply for Offers in Compromise directly with the IRS instead of going through a tax debt business that may or may not help them. An Offer in Compromise can help a taxpayer to settle their tax debts for less than the full amount they owe, but only if they qualify.

Even with the OIC program, many taxpayers who owe back taxes still face hardship in paying the negotiated amount, and the IRS isn’t always open to compromise or it may keep part of the tax refund to which taxpayers would otherwise be entitled. Earlier this week, National Taxpayer Advocate Erin Collins announced the IRS would relax some of its restrictions and allow taxpayers who have received an OIC to receive Offset Bypass Refunds to enable them to pay for necessities, but only under certain conditions (see story).

Still, an OIC can be a legitimate option if a taxpayer can't pay their full tax liability or doing so would lead to financial hardship. The IRS said it considers a taxpayer’s unique set of facts and circumstances when making its determination. However, some tax debt settlement companies take advantage of the program by overpromising what they can deliver.

Andrew Harrer/Bloomberg

"We encourage eligible taxpayers in real financial distress to consider looking into an Offer in Compromise to resolve their tax issues," said IRS Commissioner Chuck Rettig in a statement Wednesday. "People also need to use caution with the program. Some companies routinely overstate how they can help with this program and clear up people’s back taxes for pennies on the dollar. A quick visit to IRS.gov can provide important information to help people with this program."

The IRS sometimes warns taxpayers against hiring and paying needless fees to what it refers to as "Offer in Compromise mills" that distort the IRS program and mislead taxpayers who have no chance of meeting the IRS requirements for an OIC while charging high fees, sometimes in the thousands of dollars. OIC mills were listed among the last two annual IRS Dirty Dozen lists of tax scams to avoid.

For the new video series, the IRS has split the new educational videos into separate chapters and sections that match the layout of the OIC booklet and forms. Taxpayers can also bookmark information they’d like to revisit later. This new OIC videos include an overview of the OIC process, forms and pre-qualifier tool for help in getting started; along with step-by-step walkthroughs of Forms 433 – A & B OIC, which are known as “collection information statements” and necessary for individual and business-related offers. The videos also provide a step-by-step example of how to complete the OIC application, Form 656, along with a final checklist to make sure taxpayers have filled out everything they needed to submit a valid offer.

The vast majority of tax professionals are honest and don't make false claims about getting taxpayers special deals that only they can get. Taxpayers should consult a trusted reputable tax professional when needed. The videos and web materials make it easier for taxpayers to navigate the OIC process on their own.

The IRS noted that some taxpayers may need to pay a $205 OIC application fee, depending on their income and the basis of their offer. They can find out if they qualify for the waiver of fees and payment(s) by consulting the Low-Income Guidelines in Form 656. The exception applies only to individuals.