Published: Monday, 29 Dec 2008 | 1:07 PM ET

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By: Tracy Coenen
On The Money Contributor

I called one of the companies that sends a postcard, “Tax Laws will Change on January 20th, You many quality for an immediate reduction in your current tax liability”. After a series of questions, they informed me that they could arrange a settlement for around 10 cents on the dollar.

First, are these companies that offer tax settlement legitimate or are they just a boiler room operations? Second, if some company can arrange for a settlement offer, why can’t the individual tax payer to this?  --Terry, CA

Consumers are right to be suspicious of companies advertising tax settlement services. The results they advertise are not typical, and consumers often find themselves out of hundreds or thousands of dollars in fees, with large tax bills still hanging over their heads afterward.

The Internal Revenue Services has very strict guidelines for reducing tax liabilities. Taxpayers must go through a process called an Offer in Compromise. The IRS looks very carefully at a taxpayer’s financial situation - - from their assets and liabilities, to their current budget and expenses - - and determines how much the taxpayer can truly afford to pay toward the tax liabilities.

Less than 25% of taxpayers who go through this process actually receive a reduction in their tax liabilities. So hiring one of these companies isn’t likely to increase your chances of qualifying.

If you wish to pursue an Offer in Compromise but think you can’t do the paperwork on your own, the best bet is to find a professional tax preparer who can help you with the paperwork for a small fee. Ask people you trust for referrals so that you find a tax preparer who is competent and recommended.

Tracy Coenen is an On The Money contributor, fraud investigator and forensic accountant, and is the author of Essentials of Corporate Fraud.

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