Is it Worth it to Use a Debt Consolidation Company for Tax Relief?

There are many ways in which a person can fall into debt. Economic struggles, the loss of a job, the recession '" all play into a juggling game of outstanding bills verse necessary living expenses.

Not to be overlooked are permissive lenders who are eager to float unqualified individuals exorbitant lines of credit with even heftier interest rates.

When IRS tax debt gets added into the mix, many do not know where to turn. Debt consolidation companies and tax relief '‹Å"specialists' have a strong presence on the TV, radio and internet. All would seem enthusiastically willing to engage the IRS on your behalf, and for a price.

So is it worth it to use a debt consolidation company to attempt to settle your tax debt?

Possibly, but the answer to many individuals is a resonant '‹Å"NO.' Why do we say so?

In the strictest sense, a company that has the ability to negotiate and consolidate debt has no sway when it comes to federal tax obligations. While lenders that hold unsecured debts, like consumer credit card companies, are willing to negotiate their balances with third party debt agencies, the IRS does not compromise a tax debt unless their own internal procedures allow for it.

IRS debt is often secured with the filing of a Notice of Federal Tax Lien. The lien is a legal claim on an individual's property for payment or satisfaction of a tax debt. It attaches to all property or rights to property an individual has or acquires.

Among other things, this notice ensures a claim priority is established on property, in the event of a sale or foreclosure.

The IRS will only lift a lien once the tax balance has been paid in full. This could be accomplished different ways, such as through an installment agreement, or if the IRS allows the debt to be compromised for less than full-payment. The IRS may also withdraw, subordinate or discharge property from the lien under certain circumstances.

No third party agency or individual, whether they are a CPA, tax lawyer, Enrolled Agent or otherwise, has any ability to reduce or remove a lien outside of IRS procedures, no matter what they initial promise may be.

Many tax debt companies will employ the "pennies on the dollar" approach. This phrase and any other related "settlement" offers mentioned all refer to one thing only: The IRS Offer in Compromise (OIC) program.

The OIC is a way for taxpayers who have unmanageable debt to settle the amount for less than is legally owed. A detailed financial analysis is made before the IRS agrees to reduce the debt. If a taxpayer has equity in assets or the ability to pay the balance off over a reasonable amount of time, the IRS will not accept the offer.

An OIC can also be filed if a taxpayer can demonstrate that they are not liable for the amount due. An example of this may be an additional assessment made by the IRS for stock and bond income that was not reported on the original return, but the taxpayer can show they actually took a loss once their cost basis is factored in.

Be cautious about the OIC program. Offers are designed for taxpayer to do themselves. IRS representatives will be happy to assist you with technical questions about an OIC. The IRS web site has an enormous amount of helpful information as well. Go to irs.gov and do a search for '‹Å"OIC.'

Check out what the IRS had to say about these penny-on-the-dollar hawkers:
Check Carefully Before Applying for Offers in Compromise

More from this Contributor:

Representation before the IRS - What you need to know

How to think and act like a tax lawyer

10 things you didn't know about the IRS Offer in Compromise program