NEW YORK (CNNfn) - "Isabella" owed the Internal Revenue Service more than $175,000 by the time she sought out a tax negotiator.
The little brown letters had been arriving from the IRS for years. She paid what she could until three years of back taxes piled up, heaped over with penalties and interest.
"It was beginning to look like they might take my house," she remembers. "I was pretty frightened."
Isabella, who doesn't want her real name used because she has personal-injury litigation pending, ran into trouble after a divorce. She had drawn against $250,000 in her ex-husband's retirement account.
But she lost her job as a psychology professor and started her own business. It didn't go well. By 1992, she couldn't pay the taxes on her income from the retirement money. Adding injury to insult, in 1996, a Ford pickup hit her while she was driving to church. The crash left her with spinal damage, brain trauma and a limited capacity to work.
Her IRS debts mounted, and her accountant proved inept. Finally, a lawyer friend pointed her to Louis Arthur, a former IRS collection agent who specializes as a tax negotiator in Durham, N.C.
"I didn't know that they existed," Isabella said.
Arthur went with her to meet an IRS agent in March 1998. By May, thanks to Arthur meeting the agent again and Isabella's lack of future income, the IRS wrote off her debts as uncollectable, meaning she was temporarily off the hook.
If she does earn money, she will likely file an offer in compromise. The offer is Arthur's specialty, as it is with many tax negotiators. It's a deal where a tax debtor agrees to pay part of the debt and the IRS dismisses the rest and removes any liens. But for now Isabella's house is safe, and she credits Arthur.
"I'm no longer harassed with their little brown envelopes and the threat of another lien," she said. "He accomplished quite a lot for me."
Some people like talking to the IRS
Arthur isn't alone. Scan the sports pages, and you'll find ads, often from former IRS agents, promising cents on the dollar for what debtors owe. Numerous accountants, lawyers, enrolled agents -- licensed to represent clients before the IRS -- and unqualified "tax professionals" specialize as tax negotiators.
There is no doubt they can help. The IRS has shifted a hard-line stance on collecting bad debt and is more open to compromise. Last year it accepted 25,000 offers, around one in four, taking $290 million on $1.9 billion in debt.
The IRS plans to increase its acceptance ratio. Earlier this year, it introduced a deferred-payment offer in compromise, an installment version. The standard "cash" offer has to be paid within 90 days at the most. On July 19, the IRS issued new regulations making the stringent offer a little easier to qualify for.
These changes and a more-approachable IRS in general mean tax negotiators have a good pitch. And with more people preparing their own taxes by computer, work-starved tax preparers are moving into the negotiation field.
Tax negotiators aren't strictly regulated, however. That makes it impossible to know how many there are, and they don't always leave their clients as content as Isabella.
"They prey on people who are in serious debt problems," said Fred Daily, author of Stand Up to the IRS. "If you want to get a business card, print it up and call yourself a tax expert, you're not regulated."
Many charge up-front fees for work delinquent taxpayers could do on their own. Some enroll anyone that walks through the door, whether the client is suitable or not. To some degree, "it's a growth industry where no industry needed to be grown," tax author Robin Leonard said.
Linda Snow-Pickard had a big problem compounded when she tried to get it resolved. She didn't pay any taxes for six years on her income from baby-sitting and selling crystal from home because she felt she couldn't afford to, raising five kids on her own. But Snow-Pickard, who lives in Garner, N.C., decided to come clean when she remarried.
She paid $1,500 to a tax-problem specialist who sold himself as a small-business man.
"He was in the phone book and I was trying to keep it quiet," she recalled. She ended up with $25,000 in penalties against her. "All he did was fill out the papers. He kept saying he couldn't reach the IRS."
Snow-Pickard later arranged an offer in compromise of $3,000, through Arthur. Most unhappy tax-negotiation customers simply walk away, never to be heard from again.
"It's like a mill. As long as people keep stepping through the door and they pay $2,500 or $3,000 for a 'package' offer in compromise, the mill keeps on working. Whether or not [the offer] is eligible," said attorney Chuck Rettig, incoming chairman of the taxation section of the state bar in California, a state that's a hotbed of the tax-negotiation business.
What tax debtors ought to know
It's very difficult to avoid paying debts back to the IRS, so watch out for anyone promising an easy solution.
"If it sounds too good to be true, it clearly is," Rettig said. Firms "that basically wear on their sleeve 'I can get this package accepted for you' can't," he said.
The "pennies on the dollar" claims mean the negotiator specializes in offers in compromise, which really only work for people with very few assets and limited future income. People who have equity in their home or a 401 (k) will likely have to liquidate those.
If a negotiator only talks offer in compromise, walk away, Daily said. Only around 20 percent of cases qualify. Bankruptcy is often better, Daily explained. It protects some assets, and income taxes that are more than three years old are typically dischargeable.
People who owe less than $25,000 can deal directly with the IRS and set up a plan to pay the money back over five years.
"If you owe $25,000 and you can pay $500 a month, there's nothing you need to hire me for," said Steve Kassel, an enrolled agent who runs IRSTaxes.com.
Ignore hard sells, Kassel said. Ask for a free consultation. Walk if the tax pro doesn't explain your case and options to your satisfaction.
"I spend half an hour going over every case. By the time I do that, I have a pretty good idea what they qualify for or not," Kassel said.
Many negotiation companies use salesmen and pressure tactics. Other companies just refer clients to a local enrolled agent or accountant for a cut of the fee. The National Association of Enrolled Agents has a free 800-number referral service for local agents.
"Unless you're talking to the person that's going to be representing you, don't give them any money," Kassel said.
If you get unqualified help, make sure you know what you're using it for.
"We are a form-filling-out company," Gary Philips, owner of Nationwide Tax Negotiators, conceded. It charges $295 to prepare basic offers, something he admitted people can do on their own.
Debtors can download IRS Form 656, the offer in compromise form, from the IRS Web site. IRS Publication 594 explains offers in compromise and repayment programs. Daily's Stand Up to the IRS is a self-help book available at Nolo.com.
Philips says he is a cheap alternative for clients who aren't do-it-yourself types. He says he's no mill, turning away two-thirds of the people that come to him for an offer in compromise.
If they persist in looking for someone to fill out forms and relieve them of $1,000 or $2,000, promising cents on the dollar, they'll find them.
"This is a flaky industry," he said. "I tell them that on the phone."