Tax scandals have plagued the United States in the last decade. Taxpayers and organizations have been victims of tax scams both by tax resolution firms as well as the IRS. In order to avoid being a victim of either, it is important tax payers understand their rights and what representatives and the IRS can and cannot do. Knowing and understanding them will set up safeguards to prevent being enveloped in a tax resolution scandal.
In the last decade, major tax resolution firms have been sued by taxpayers and state authorities for allegedly misrepresenting their ability to resolve IRS tax debt, and for some, this resulted in the company going out of business.
J.K. Harris & Co. was founded by CPA John K. Harris in 1997 and became the largest tax resolution firm in the United States. This firm has been sued several times by taxpayers. In fact, in 2007, it settled a class action suit filed in the South Carolina Circuit for approximately $6.2 million. Then in 2008, J.K. Harris also settled a suit with several Attorneys General of 18 different states for approximately $1.5 million.
Roni Lynn Deutch, a Professional Tax Corporation, was founded in 1991 by Tax Attorney Roni Lynn Deutch, LLM. In 2007, the New York City Department of Consumer Affairs brought suit against Deutch in which the firm settled by agreeing to pay $200,000 restitution to consumers and $100,000 in fines to the City of New York. Then in 2010, then California Attorney General Jerry Brown, and now Governor of California, filed suit against Deutch in California Superior Court in the County of Sacramento for $33.9 million in civil penalties and restitution to taxpayers, and a permanent injunction. Deutch then publicly announced that her firm would be closing in May of 2011.
TaxMasters Inc. was founded by CPA Patrick Cox in Houston, Texas. In 2010, it was sued by the Texas Attorney General on behalf of over 1,000 taxpayers. The Attorney General of Minnesota filed suit against TaxMasters for allegedly misleading Minnesota residents about its ability to reduce their tax debt and for making unrealistic promises.
Each of these firms had an “F” rating with the Better Business Bureau. Each was high-profiled within the media. Each did extensive promotional advertising. And each bamboozled many thousands of taxpayers.
Identifying and Selecting Competent Tax Resolution Professionals
It is important to remember that if something sounds too good to be true, it usually is. Prior to determining eligibility for a settlement, the firm must ask questions about income, expenses and assets. If these questions are not asked, the only eligibility would be for a Streamlined Installment Agreement assuming the taxpayer owes $50,000 or less.
Selecting a reputable tax professional can save from more than the stress of dealing with the IRS; it can save time and money. Below are tips for selecting a reputable tax professional:
1. Investigate the reputation of the tax resolution professional. If the tax resolution professional/company has derogatory remarks about it or has been sued before by taxpayers and has lost, this is an indication of a tax scam. A reputable tax resolution professional/company will have great rapport with clients as well as other tax resolution professionals/ companies. A starting point in your research may be the Internet, or the Better Business Bureau. On the Internet, do a Google search with the company’s name followed with: “complaint,” “con,” “lawsuit,” “problems,” “scam,” “fraud.” Read everything. It’s consumer beware.
2. Do not believe a tax resolution professional who makes promises or guarantees. The only thing a tax resolution professional/company can guarantee is that they will do their best or put forth the best effort on the case. Tax resolution professionals and companies cannot promise or guarantee an outcome because the final determination is made by the IRS. They cannot guarantee the taxpayer will qualify to settle debt for less, or that they can stop IRS collections.
3. Do not believe the success rates reported by tax resolution professionals without conducting independent research. Be fully aware that the success of one case does not guarantee the success of another. Reputable tax resolution professionals will not disclose their success rate or indicate that their success on another case guarantees the success on a new case.
4. Do not pay unreasonable fees. Most tax resolution professionals will charge a flat fee for their services. Typically, the cost may vary with the service. All fees should be reasonable. One way to tell if the fees are, in fact, reasonable is by researching how much other tax professionals charge for the same service. Discuss the case with other tax professionals prior to choosing one.
5. Make sure the tax resolution professional is responsive. A reputable tax resolution professional/company will understand client communication is the most important responsibility in representing taxpayers, its clients. Tax payers a right to know what is going on with their case, and have the right to contact the tax professional to ask any questions concerning their case.
If the tax resolution professional fails to respond to your calls within a reasonable time (usually 24 to 48 hours), consider hiring one who is able to do so. Allow the tax resolution professional a reasonable time to respond to requests.
6. Read the Retainer Agreement thoroughly. All tax resolution professionals should have a retainer agreement or contract to sign prior to retaining their services. The contract should explain what service/services are being provided, and what the taxpayer is paying for. Do not sign an agreement without reading and understanding every clause. Ask questions for any items that raise a concern. If there isn’t a retainer agreement or contract, this is a strong indication that it may be a scam.
IRS Tax Scandal of 2013
In general, the IRS handles cases professionally and follows the guidelines, policies and procedures of the Internal Revenue Manual (IRM). In 2013, however, a scandal erupted involving the IRS and its treatment of various 501(c)4 tax exempt organizations.
Donations given to 501(c)4 organizations are usually not tax deductible and donors are kept anonymous unless the donations are $5,000 or more. If they exceed $14,000, they may be subject to the gift tax.
While these organizations are prohibited from donating to the campaigns of political candidates, they are able to participate in lobbying and campaigning. The IRS experienced a rapid increase in applications for 501(c)4 status. Applications nearly doubled after the January 2010 Supreme Court decision that loosened campaign-finance rules.
It has been alleged that employees of the IRS inappropriately targeted conservative 501(c)4 organizations by applying more scrutiny than to those supporting liberal causes, and it deviated from the policies and procedures dictated by the Internal Revenue Manual (IRM). Tea Party groups investigated by the IRS reported the IRS made unusually extensive demands, such as asking them to provide social-media posts, books that members had read, and whether any members of the group planned to run for public office in the future.
In some cases, the questioning took almost three years, which prevented some groups from participating in the 2010 and 2012 elections. General Russell George, Treasury Inspector, investigated the scandal in order to determine whether the IRS has correctly applied the law to these 501(c)4 groups, or whether political influence was a contributing factor of the inappropriate targeting of conservative 501(c)4 groups.
The acting IRS Commissioner, Steven Miller, was fired by President Obama. Miller alleged that the targeting of conservative groups was the result of mismanagement, and not due to partisan politics. In the first hearing, Miller acknowledged that he was aware of the investigation for almost a year. He refused to release the names of the IRS employees that targeted the conservative groups, and Republicans learned that Deputy Treasury Secretary, Neal Wolin, was aware for almost a year that a government watchdog was looking into inappropriate targeting by the IRS.
If You Suspect Foul Play … What Should You Do?
The recent IRS scandal of 2013 was not the first time the IRS has been involved in a scandal. It has been accused of corruption ever since the institution of the income tax in order to raise funds for the Civil War. The IRS also faced similar scrutiny during the hearings of the 1990s that led to the Tax Reform and Restructuring Act of 1998, which changed the rules on how IRS employees identified themselves and conducted audits. It is important to understand the Internal Revenue Manual1 so you may be aware of what information the IRS employees are entitled to ask for and under what circumstances. It provides the procedures and guidelines for which IRS employees must act or conduct various tasks.
The IRS cannot arbitrarily select certain taxpayers or organizations for review. It must apply the same standard to all, a standard which would be outlined in the IRM.
Taxpayers have rights as outlined in the Taxpayer Bill of Rights.2 So take some time to read the Taxpayer Bill of Rights and know when those rights are violated by an IRS employee. Generally, the IRS may request any information that is related to the tax matter at hand. However, it must provide you with a reason for why the information is being requested and what it is to be used for.
Generally, the IRS cannot:
• Discriminate against taxpayers or organizations because of your color, race, sex, religion, national origin, disability, or age, or political party affiliation.
• Disclose your information to unauthorized third parties—your information should be kept private and confidential by the IRS.
• Be unprofessional—IRS must provide professional and courteous service.
There may be times when you encounter an IRS agent that is overzealous in their collection efforts, goes beyond the scope of their authority, or does not follow the Internal Revenue Manual. When this occurs, you should first contact the manager of the IRS employee. If you are unable to resolve the issue with the manager, you may then contact the Taxpayer Advocate Service (TAS) for assistance. If the TAS is not able to assist in the matter, you may then consider writing a letter to the IRS director for your area or the center where the return was filed. You also have the right to appeal the IRS decision, or file suit against the IRS in a court of law.
Endnotes
1. IRS.gov/irm/index.html
2. IRS.gov/pub/irs-pdf/p1.pdf
This is an excerpt from Tax Relief and Resolution by Steven Melnick, CPA. Melnick is a licensed attorney, LLM in Taxation. He is also a professor of tax law, and a Chairman of Continuing Education Programs for Tax Professionals at the City University of New York.
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