Tricounty News

Tax schemes prey on cash-strapped consumers

The continuing downturn in the economy means that many cash-strapped Americans are anxiously looking forward to receiving a tax refund check from Uncle Sam. During this tax season, the Better Business Bureau of Minnesota and North Dakota advises taxpayers to be on the lookout for schemes and scams that plague families struggling to make ends meet. Jobless claims in January reached the highest level since 1982 in the U.S. as more than 2.6 million jobs were cut in 2008. In Minnesota alone, unemployment rose to 6.4 percent in November 2008, up from 5.9 percent in October. With more families facing financial hardship, the promise of a tax refund is a welcome sight. Unfortunately, some schemes tied to the tax season will leave consumers even worse off in these tough economic times. "In a declining economy, a tax refund can provide much-needed cash for families enduring financial hardship," said Barb Grieman, interim president of the BBB. "As Benjamin Franklin said, 'In this world nothing is certain but death and taxes,' but consumers can also be certain that where there are taxes there will be tax scams, and the BBB is advising people to be extremely wary of tax-related schemes that will cost them unnecessarily at a time when they can least afford it." Beware of tax-reduction schemes Some companies claim that they can help consumers reduce the amount of money they owe in taxes or fines to the government. These claims often sound too good to be true and TV ads might include endorsements from customers who state the company worked with the IRS on their behalf and was able to reduce the amount owed to pennies on the dollar. Unfortunately, the BBB has heard from consumers who paid thousands of dollars to such companies and were devastated to learn that the company didn't keep its promise to reduce the amount owed and, in some cases, never even contacted the IRS. The BBB Advises: For consumers who have a tax debt with the IRS, the BBB suggests first seeking the advice of an IRS enrolled agent, Certified Public Accountant (CPA), or a tax attorney to determine if they qualify to file for an offer in compromise, or some other type of payment arrangement. While the IRS will work directly with the taxpayer and negotiate an offer in compromise-which essentially reduces the taxpayer's debt-the taxpayer has to demonstrate that he or she is in extreme financial hardship. The Web site, , has more information on the IRS's rules for an offer in compromise. Another option is to create an installment plan for paying off the debt-which can be set up between the taxpayer and the IRS without the need to pay a company thousands of dollars. Each year, the IRS accepts about three million installment agreements. If a taxpayer does decide to enlist outside help when dealing with the IRS, he or she should be wary of exaggerated claims and large up-front fees, and always check out the business's report with the BBB at Just say "no" to refund-anticipation loans Refund-anticipation loans (RALs) are cash advances offered by a tax preparer based on a taxpayer's anticipated refund. Anyone who relies on an RAL is essentially paying to borrow their own money. Despite the fact that the loan is extremely low-risk for the tax preparer, the rates can be extremely high for the borrower. The National Consumer Law Center (NCLC) found that the effective annualized rate for an RAL can range from about 50 percent to nearly 500 percent. The BBB Advises: The fastest and most secure way for consumers to get their refund is to file their taxes online and then allow a direct deposit of the refund into their bank account. Taxpayers can have the money in as little as 8 to 15 days. If a consumer absolutely must take out an RAL, the BBB advises shopping around because rates and restrictions vary by preparer.