The Truth About Tax Resolution Fees

Within the tax resolution industry, there are a variety of fee models that you should be aware of. Different fee models have different potentials for abuse by the firm offering the services, and it is important to do your due diligence and fully understand what you are paying for, how much, and when, before ever paying a single dime to a tax resolution firm.

One of the most common fee models is a retainer model, which is a carryover from the world of legal and CPA firms from which many tax practitioners come. Under this model, you pay an up front amount, which the firm holds on to and then bills against on an hourly basis. Close to the time when the retainer is all used up, you will (or, actually, SHOULD) get a bill showing what was done, how long it took, and the hourly rate it was billed at. This bill will usually also include a request for additional retainer. The key thing to remember here is that if you don’t keep paying, they don’t keep working.

If you’ve been researching particular companies online, you may already have come across BBB, forum, Attorney General, and other complaints against some firms that aggressively bill down retainers, and are constantly asking their clients for more money, without making much significant progress on a client’s actual tax case. It is important that you thoroughly vet a company before giving them money, in order to avoid becoming another victim of a devious company.

Another common fee model is a flat fee-for-service model. This fee model has a large number of variations, from a flat fee for a specific package of quoted services, to a “menu of services” model where each service you can order off the menu has a specific fee. This latter method is very akin to the most common pricing model used in tax return preparation, where each specific tax form has a particular fee for preparing it. You’ll see this fee model used at just about any CPA firm or retail tax preparation outfit (including Jackson Hewitt, H&R Block, etc.).

When you are speaking with a sales person regarding a package of services, it is very, very important that you understand exactly what services you are being quoted for, and what the company’s policy is regarding fees for additional services. When it comes to tax matters, it is not uncommon for additional services to be required, which will require additional fees if they are not covered in the quotation you are already working under. Ideally, the sales person you speak with will have conducted a thorough analysis of your situation and will have included everything in the proposal sent to you.

When comparing proposals between multiple companies, keep in mind that you probably aren’t comparing apples and apples, but rather apples and oranges. Here are things to consider when comparing proposals between firms that are competing for your business:

  • Is any tax return preparation included in the quote?
  • Does the fee include all appeals necessary for handling your case?
  • For business owners, is Trust Fund Recovery Penalty representation included?
  • How many quarters or years of tax issues are covered by the fee quote?
  • Is a penalty abatement application included, or is that extra?
  • What specific resolution option does the fee cover, and what happens if the resolution strategy changes?

This last question is particularly important. There are some tax resolution firms that will try to sell everybody an Offer in Compromise, because they charge a higher fee for this service. However, it is critical for anybody and everybody to understand that most individuals and small businesses DO NOT QUALIFY for an Offer in Compromise. In fact, the IRS accepts less than 20% of all Offers that are ever submitted, and the only reason this number is so low is because of the high number of ineligible offers that get submitted in the first place. It is also important to understand that the average processing time for an Offer in Compromise exceeds 10 months.

What does this mean for your fee? Well, a reputable firm will conduct a thorough financial analysis, and tell you whether or not you are an Offer candidate. If you are not, then they will negotiate another resolution option for you within the same fee. If a firm tells you they will charge an additional fee for negotiating an Installment Agreement (monthly payment plan) after you’ve already paid a higher fee for an Offer in Compromise, then you should seriously question this.

You should also beware the firm that tells you that, yes, you are an Offer candidate, even when you own assets in excess of your tax liability. Simply put, if you have assets that exceed your tax debt, then the IRS will never accept your Offer. There is an incredibly rare exception to this rule, but it’s so rare that it only happens once or twice per year (literally). This exception is called the “Effective Tax Administration” rule, and if a firm tells you that you can qualify under this rule, then chances are you are being straight up lied to. You practically have to be on your death bed in order to qualify for this exception.

Another big thing to consider when discussing fees is the issue of what’s an appropriate fee, and what is too much. The cost of a service obviously varies based on geographical location, but in general fees for tax resolution services across the country do fall into a line of what’s appropriate and what’s not. Here are some examples of what would be considered standard fee ranges for certain services:

  • Negotiating an IRS Installment Agreement, penalty abatement, and all appeals on a $40,000 personal income tax debt: $2500
  • Same as above, but on a $200,000 business employment tax debt: $5,000 to $7,000
  • Trust Fund Recovery Penalty representation: from $1,000 to $2,500, depending on the nature of the case
  • Preparing a basic personal income tax return, married filing jointly, a home, two jobs, couple kids: $300-$500
  • Preparing a small corporate income tax return with less than $250,000 per year in revenue and no significant assets: $500-$800
  • Preparing a more advanced corporate tax return with multiple shareholders, assets, high revenues, etc: $1,200-$2,500
  • Negotiating an Offer in Compromise on a $150,000 personal tax debt: $3500 to $5000
  • Negotiating the release of a wage garnishment, and nothing else: $400 to $1,000

These are just examples of the types of fees you may see when it comes to working out tax problems. There are numerous factors that go into properly quoting a tax resolution fee, but when comparing proposals, these numbers can give you a good idea of what is considered reasonable.