The tax of desperation

WASHINGTON - Once April 15 has come and gone, most people put away their tax files and breathe a sigh of relief that they don't have to think about their taxes for another year.

But for many others, the tax filing date is a reminder either that they are still tax scofflaws or that they are now new members of this group.

Some, so desperate to get their federal tax debt reduced, consider turning to firms that promise they can get the Internal Revenue Service to settle their debts for pennies on the dollar. If you are one of these folks, you need to read the case file of Roni Deutch.

Deutch operated a tax debt resolution firm that heavily advertised it could help people resolve their back-tax liability. She called herself the "Tax Lady." She's given tax advice on one of Oprah's Sirius XM radio programs, and appeared on NBC, CNN and other networks. But, according to the California attorney general's office, she is alleged to have swindled thousands of people by taking large upfront payments while providing little or no help in lowering clients' tax bills. The attorney general filed a $34 million lawsuit against Deutch.

Deutch has since closed her law practice and voluntarily turned in her law license to the California State Bar. In a news conference last month, she denied the allegations, adding that she was "totally and completely broke."

As Deutch concluded the news conference, she said: "I want to also say how sorry I am to any client who over the past 20 years did not feel like they got the representation they deserved. That was never my intention and never the intention of any of my employees."

Now here's what I want you to do. If you know someone who is thinking about responding to a firm that claims it can significantly reduce a tax liability, tell him or her to first read the complaint filed against Deutch. If you are thinking about hiring a tax debt resolution company, go to the website of the California attorney general at oag.ca.gov and search for "Roni Deutch." You will find a press release with a link to the complaint.

Here's how the Deutch practice worked, according to the attorney general's office. When people would call the toll-free number for Deutch's firm, they would first talk to a sales agent who generally didn't have familiarity with federal tax law or the IRS.

During the phone call, which typically took 20 minutes or less, consumers were asked a series of questions about their incomes, expenses, assets and tax debt. The complaint alleges that prospective clients were promised that their debts could be settled for a small fraction of what they owed. They were also told the interest and penalties could be eliminated.

However, the sales agents weren't in a position to make such promises because only the IRS can confirm that a taxpayer has been approved for a debt resolution program or that penalties or interest can be reduced.

Once the sale was completed, customers were transferred to a "legal verifier," another employee who was supposed to make sure that certain promises or guarantees about the outcome of the person's case were not made. If customers protested that they were made promises, they were transferred back to the sales agent who would tell them that in order to retain the firm, they would have to say they weren't guaranteed a certain outcome.

Clients paid fees that ranged from $1,600 to $4,700. And what did people get for that money? Not much, according to the attorney general's office.

People were told they would talk to a lawyer, yet some clients said they never talked to one the entire time the firm represented them. The complaint says that backlogs developed because legal assistants were typically handling about 300 clients. Attorneys could be responsible for 600 to 700 clients.

When frustrated clients eventually contacted the IRS themselves, they typically discovered that the only filing the firm had made on their behalf was submission of IRS Form 2848 Power of Attorney and Declaration of Representative, which authorizes an individual to represent someone before the IRS.

In a majority of their clients' cases, Deutch's firm never submitted a request for tax debt relief, the complaint alleged.

"People can take away from the Roni Deutch case that if it sounds too good to be true, it probably is," said Beverly Winstead, a tax attorney practicing in Maryland. "People need to be aware of firms that advertise wholesale that they can settle your tax liabilities with the IRS for pennies on the dollar. Be careful of firms that request standard fees without knowing your specific tax situation."

People in financial trouble often want to believe there's an easier way out of their predicament. And there are firms that will capitalize on their desperation.