Prospective clients often ask, “Why should I pay up front fees for tax resolution services? These callers often take the position that fees should be paid once all of the work has been performed.

Turned off by the overwhelming number of commission based, sales driven tax resolution companies that charge high “fixed” fees and make grandiose promises for the outcome, taxpayers owing back taxes often ask this question with more than a hint of skepticism when deciding to hire The Law Office of Elizabeth Gonsalves for professional tax resolution services.

While I would be among the first to vehemently agree that salespeople pitching “their ability to cut your tax debt in half” should be formally banned from involvement in this area of law altogether, there are actually legitimate reasons for charging upfront legal fees for tax resolution services. Below are the five primary reasons licensed tax resolution professionals only offer upfront fee agreements to their clients.

  1. TAX RESOLUTION INVOLVES LEGAL REPRESENTATION OF A TAXPAYER FOR SETTLING A SECURED DEBTOnce a licensed tax professional is hired to engage in legal representation of a taxpayer, most of the work conducted by the licensed individual involves preparing financial disclosure forms for provision to a revenue agency to negotiate a settlement agreement based on the taxpayer’s disposable income after accounting for necessary living expenses. While attorney’s fees, or legal fees for tax resolution services generally, are honored by most industries, a federal or state tax liability is a first position debt that often is only superseded by a Purchase Money Mortgage.Liens filed by attorneys to secure attorney’s fees are most often discussed in relationship to family law cases whereby an attorney is permitted to file a lien against the family home in representing clients engaged in dissolution of marriage. This rule is primarily in place to incentivize attorneys to take the cases of disenfranchised homemaker spouses needing professional representation during a divorce. Liens filed by attorneys against former clients for tax resolution legal services rendered in other matters are not a clear cut way to secure a tax professional’s interest in being successfully compensated. Most tax professionals in tax resolution are not interested in taking on a client only to become yet another creditor in what is often a long list of secured and unsecured creditors vying for funds owed to them by a taxpayer.The bottom line is, tax professionals do not want to start off representation by getting in line to be paid.
  2. PUBLIC REVENUE AGENCIES SEEK TO PERMIT ONLY NECESSARY LIVING EXPENSESWhen preparing financial disclosure forms for purposes of establishing a resolution for repaying taxes owed to a revenue agency, it is contemplated that only current necessary expenses will be permitted as allowable expenses. As public agencies, state revenue agencies and the IRS, are usually not seeking to put a taxpayer out of house and home to recover unpaid taxes. Ultimately, continuous seizure of all assets belonging to a delinquent taxpayer over the long term and without recourse for medical expenses, shelter expenses, food and car expenses, will only render a taxpayer unemployable and dependent on state or federal assistance. Generally speaking, this is not the circumstance most public revenue agencies wish to pursue. Revenue agencies want delinquent taxpayers to work and earn income to pay their delinquent tax liabilities.This is not to say making a case for necessary living expenses is an easy task. In fact it can be quite challenging and frustrating to negotiate with agents of revenue agencies. It can at times be disheartening finding oneself arguing the very rules associated with allowing necessary living expenses with an inexperienced agent new to the rules.When advising clients about how to prioritize financial obligations going forward to avoid defaulting on a settlement once established and to circumvent accruals of new liabilities in future years, they are encouraged to eliminate frivolous expenses, luxuries and unsecured debt obligations, when necessary, to stay in good standing with their secure debt obligations. An ongoing payment towards a retainer fee agreement can become counter intuitive for both client and tax professional. Further, the likelihood that payment plans for tax professional fees will continue to be honored by a taxpayer who has already received the benefit of such representation is incredibly low. A licensed professional who expends valuable resources such as their time and expertise would be better off servicing a paying client, rather than a nonpaying client.

    The bottom line is, clients are not going to keep paying for a service already rendered when they are faced with staying current with the IRS.

  3. TAXPAYERS OWING TAX LIABILITIES HAVE LOW CREDIT SCORESTaxpayers having delinquent tax liabilities also tend to experience adverse scores on their credit reports. These low credit scores affect taxpayers’ ability to purchase a home, rent a car, or to establish utility accounts, among a variety of other challenges. The reason is because low credit scores tend to provide insight into a given creditor’s ability to receive payment for goods or services purchased. Credit scores show a pattern of behavior with regard to an individual’s or business’s approach to meeting financial obligations in a timely manner.Rather than charge an additional fee to take on the risk of receiving less than their full fee as some vendors do, (i.e., utility accounts, prepaid credit cards, etc.), tax resolution professionals seek to recover their fee upfront or over short payment plans to minimize their risk since their client base is a group that historically struggles to meet its financial obligations.The bottom line is, our client base is being represented to negotiate and resolve the matter of having poor credit. It is not appropriate to establish compensation for services on a credit basis.
  4. RETAINER FEES ARE USED IN THE PRACTICE OF OTHER AREAS OF LAWUnder California Rules of Professional Conduct, and the Model Rules generally, there are several legitimate methods for paying legal fees. The arrangement tends to vary by area and type of case. Contingency fees are often charged in cases involving personal injuries, or insurance coverage. Billable fees are often charged for ongoing litigation, or high-end representation having high stakes. Fixed fees are often charged in the areas of estate planning and contract law. The reasoning often has to do with the situation the client is in when seeking representation and how best to account for the attorney’s fee.With personal injury cases, the client is injured and rushed to the hospital where they receive medical treatment whether they have insurance coverage or not. Hospital bills must be paid and the accident causing the injury may very well be insured; therefore, the attorney takes the case and is willing to be paid contingent upon recovering a settlement. Most legal fees are paid out of the insurance policy settlement.With ongoing litigation, involved research into a variety of obscure areas of law may be required. Long days and nights must be forfeited in preparation for a hearing or trial on docket. Often clients engaged in litigation are suing for the “principal of it,” or for remedies beyond that of compensatory damages, or monetary gain. In situations like these, attorneys will only pour over the matter day in and day out on a billable hour basis. In other words, the client either has got to have a good case for recovery or funds to pay for fees whether they win or lose.

    Fixed fees are prevalent for representation that involves an element of repetition with regular modifications by case. These payment arrangements are also common when the taxpayer has limited access to funds for paying their legal fees. Prospective clients must make necessary arrangements to pay the fee in order to acquire professional representation. Examples of areas of law include estate planning services, such as having a will or trust document prepared. Traffic citations, such as DUI’s are often charged on a fixed fee basis. Tax resolution fees are likewise charged as a fixed fee based on estimations for the time required derived from having processed thousands of cases with similar issues.  After spending years in the industry, I believe it is a mistake to charge a fixed fee in tax resolution, as some cases take countless hours to resolve, some resolve quickly and do not justify charging the client to pay such a high fee after the hours expended are complete.

    The bottom line is, fixed fees are a legitimate form of payment for legal services, but fixed fees are not appropriate for most tax resolution cases.

  5. RETAINER FEES ARE IN THE BEST INTEREST OF THE TAXPAYERIn the majority of tax resolution cases, taxpayer clients receive countless hours of legal representation that they would not be able to afford in a billable hour context.  For this reason, The Law Office of Elizabeth Gonsalves charges lesser fees for client communications. Taxpayer clients enjoy countless conversations with the licensed professional, including letters, emails and faxes. Clients benefit from the numerous hours the licensee must spend to review their financial portfolio for submission, the attorney’s time negotiating the case with the revenue agencies. However, it is not appropriate for the licensee to absorb the risk and hit when bureaucratic inefficiencies cause undue delay or error in processing resolution cases requiring resubmission of materials or duplication of work.The bottom line is, retainer fees are fair in that they protect both the client’s interest and the attorney’s investment of time in resolving the tax problem based on time spent.  Fixed fees lead to circumstances where the taxpayer pays for work that was never performed and/or the attorney works long hours without receiving reasonable pay.