The client's tax problem:
She had a $28,000 student loan debt cancelled in November 2014 and received a form 1099-C for it as "forgiven debt" which she counted as income. She prepared her tax return on turbotax.com and it showed a $10,000 tax debt. Not knowing what to do - she filed an extension and started researching tax help. This lady and her husband are clearly hardship cases and would probably qualify for an Offer in Compromise on this debt if that was the best procedure for this case. But we'll learn more below.
Three "tax relief" companies' analysis and fees:
Door #1: California tax relief firm Fee: $3500 Analysis: Offer in Compromise (OIC) The California firm sized up her case and saw an Offer in Compromise (OIC) to settle the debt. And they are right: the IRS would probably take an Offer on this case (but we'll learn how that analysis is wrong at the end of this post). Nonetheless - that's a pretty steep fee considering the small size of their tax debt and also considering there is a better way to resolve this besides OIC as we will learn below.
Door #2: Chicago Tax Relief Firm Fee: $2150 Analysis: OIC, PP or CNC
In the Chicago firm's "defense," they were non-committal in their analysis: Offer in Compromise, Currently Not Collectible or Payment Plan and their fee was more reasonable. They did make one wrong recommendation to have the tax return filed as "separately" so the husband wasn't liable. Texas is a community property state so filing separately technically doesn't protect the non-liable spouse. And furthermore - OIC is the wrong analysis as you will see below.
Door #3: California tax relief lead-generator Fee: $4000 Analysis: OIC
A California Company which seems to be a "lead-generator" for tax relief companies - people there answer as "Tax Center." The tax relief sales-person said the client qualified to settle her debt with an OIC.The fee? $4000.00. This tax relief sales-person was very intent on getting this fee paid quickly thru a "check-by-phone."
After the speaking with these companies, our Texas client did some research and stumbled upon This Blog and then called us.
DOOR #4, Washington Tax Services Fee $375 Analysis: File 2014 showing insolvency
The staff of Washington Tax Services knew that moving into "tax relief" analysis like OIC was a little premature on this tax case. Knowing that "cancelled debt" is most often NOT taxable in cases of insolvency (negative net-worth), Washington Tax Services offered to do the 2014 tax return for the client for a fee of $375. From reviewing their net-worth, Washington Tax Services had a very good inclination that this client would owe the IRS very little or zero once the INSOLVENCY RULES are utilized.