The founder and CEO of Tax Resolution Services, Co., talks with the Opportunist’s Managing Editor Leslie Stone about his company’s tax negotiation and mediation services, his consumer protection coalition and what the IRS doesn’t want taxpayers to know.
Tax season is upon us and, particularly for those who owe back-taxes, the looming April 15 deadline brings stomach-churning stress and fear. “One in six Americans has a tax problem,” says Michael Rozbruch, founder and CEO of Tax Resolution Services, Co. “In 2010 there were 141 million 1040s filed, plus another 40 million entities, mostly business returns. About 17% (24 million) of all taxpayers in this country owe at least $1 or more to the IRS at any given time. It’s a huge problem, and as the U.S. heads into its fifth year of recession that number is continually growing.
One of the nation’s leading experts on solving individual and small business IRS tax problems, Rozbruch has represented thousands of taxpayers who owe Uncle Sam but simply cannot afford to pay. He has successfully settled hundreds of Offers in Compromise (IRS settlements), usually saving clients, on average, 83% of their outstanding tax bill. His success rate is one of the highest in the industry. During the last 14 years he and his firm of over 100 employees have saved his clients in excess of $82 million.
Opportunist: Michael, how did you get into the business of solving tax problems?
Michael: I’m a CPA by training, and I worked in the corporate world for the first 18 years of my career. I was always the chosen one whenever there was an IRS audit, sales tax audit or what have you. In my last corporate position in early ‘98, I was handling an IRS audit on behalf of my employer. I was successful in knocking about $12 million off the audit, which included the principal of around $9 million plus penalties and interest.
Opportunist: How did you do that?
Michael: I researched the IRS regulations, Internal Revenue Code, Internal Revenue Manual and their protocols, which I used in representing or defending the company. At first, they didn’t want to give in but I knew I was right. So, I took it up the ladder to the IRS’s territory manager. During our meeting, he looked at the auditor and said “Mr. Rozbruch is correct.” [Laughs]
Opportunist: That was quite an accomplishment.
Michael: Yes, it was. Before this (Tax Reform and Restructuring Act of 1998), taxpayers didn’t have rights. If the IRS came after you and demanded money you must have owed it. President Clinton signed historical legislation, nicknamed the “Taxpayer Bill of Rights,” in July 1998 that gave taxpayers appeals rights. Just like the Miranda rights that are given when someone is arrested by a police officer, taxpayers have the right to representation. The IRS doesn’t tell you that. It’s written in tiny print on Publications 1 and 594, that you can only see with a magnifying glass. [Laughs]
Opportunist: How do you win with the IRS?
Michael: Persistence. The IRS exists on this planet to assess and collect taxes. At the first level of defense with the IRS, the answer you’re going to hear is “no, no, and no.” That’s how they’re trained. Second, you’re dealing with GS level 4 and 5 employees making between $13-$14 an hour. Some may be college graduates, but you’re lucky if they have a high school GED. And yet they have your financial fate in their hands! That’s why the American consumer needs professional representation when it comes to the IRS. You can represent yourself in a court of law, which is called pro se, but in dealing with the IRS you’ve got your financial life in your hands. Most people might go to a CPA or tax preparer or tax attorney who mucked things up because dealing with collection matters and representing taxpayers is a whole different animal.
Opportunist: Has there been a recent surge in IRS enforcement?
Michael: Yes, in 2010 they collected almost $55 billion through enforced collection such as levies, seizures, frozen bank accounts, garnished wages, etc. That number has been steadily on the rise, as is the number of levies.
Opportunist: Why is that?
Michael: The recession has a lot to do with it. If you lost your job or your spouse lost their job, for example, and you needed to keep a roof over your head and food on the table you might go with nine exemptions on your W2s to cover necessary living expenses. Or, take independent contractors—men and women in the trades—who work with no taxes withheld. They’ve had some good years in the past and all of a sudden the recession hits and they don’t have enough to make quarterly estimated tax payments.
Let’s say a business owner has been filing his taxes and everything is hunky-dory. Then he has a heart attack and drops dead. His grieving widow is in a state of shock for months. She’s not worried about paying taxes. Two years go by and she hasn’t heard from the IRS. She doesn’t want to wake up sleeping dogs, so to speak, so she doesn’t file and hopes the IRS will forget. On the third year it’s the same thing, but by the fourth year the IRS prepares dummy returns establishing a huge assessed liability much higher and sends a levy notice to her last known address. That’s an average scenario. The IRS only notifies you at your last known address—and being in the same place for four years is probably 50/50 these days.
Most people raided their 401K or retirement plans during the recession. That’s also a huge tax implication with not only the 10% penalty to the feds but to the state as well. It also bumps the taxpayer into a new, higher tax bracket.
Opportunist: Who is your target demographic?
Michael: Taxpayers in their early to mid-30s all the way up to 65, with an annual income of $40,000 to $45,000. And married couples making $65,000 to $85,000 yearly. They can also be small business owners and self-employed independent contractors. A huge part of our clientele is self-employed. They seem to get into tax trouble more than anyone else, but we get it resolved for them. There is a solution to every problem—it may not be the solution that one is hoping for but it’s a solution.
At a seminar once, a speaker asked what kind of clientele everyone had. Most specialized in high net worth individuals. When I said 99% of my clientele was low net worth individuals everybody kind of laughed. What can I say? I found a niche.
Most law firms don’t want this kind of business. They sell hours and hours are a commodity. We sell a very valuable service. We preserve people’s lifestyle to the extent that it is possible by using the IRS manual and protocols and the law to represent our clients.
Opportunist: What steps do you take each of your clients through?
Michael: Once a prospect becomes a client there are three phases. First is discovery or investigation, which means we basically get—on behalf of our client—all the records and transcripts the IRS or state agencies have. This includes W-2s, 1099s mortgage interest and so forth. We also look at record of accounts to see what else is going on with them. These records are used in the second phase, which is tax return preparation or compliance. Once in a while these records may reflect that the client may be close to a 10-year expiration statute of collection on a delinquent year(s) that’s going to expire. If they come to us owing 100 grand from years ago and it’s been about eight or nine years from the date they filed their return, more than likely we can strategize with the taxpayer and wait it out until the 10-year collection statute runs out and they are home free.
Getting people into current filing compliance is next on the list because the IRS won’t deal with anyone who’s not in compliance. Half of our clients come to us as non-filers with an average of four to 11 years of unfiled returns. You can have huge tax liabilities, that the IRS “estimated” but just by filing your real, original and accurate return you can significantly reduce it, wipe it out altogether or even get a refund if the year in question is not older than three years.
Opportunist: No kidding?
Michael: Thinking I’m not going to file and I’m going to let them catch me is the wrong attitude. By raising your hand and going to the IRS with representation and saying, “You know what, I’ve been a bad boy or girl but I realize the errors of my past” and getting in compliance and working out a payment plan, that’s all the IRS wants to hear.
Opportunist: How do you get them in compliance?
Michael: We bring them into current filing status by preparing any back returns and getting them current to whatever year we are in. If they are self-employed, we advise them that they must be making quarterly estimates now. We ensure their withholding exemptions are correct.
Let’s say Joe Taxpayer hasn’t filed for five years. The IRS says he owes 40 grand and they cannot work out a resolution until he files the original returns. There is no debtor’s prison in this country, but it is a misdemeanor not to file a tax return. It can even be a felony if you haven’t filed for a number of years and the amount is substantial.
Opportunist: What’s an IRS audit like?
Michael: In 14 years, I have never taken a client to an audit with me.
Why? Because I don’t want my client there to answer any questions. You can prepare as much as possible and a question is asked and the client may start babbling and incriminate themselves. The IRS asks 54 survey questions in every audit. If the taxpayer doesn’t know how to answer the questions properly, you can bet that pleasant, smiling auditor sitting across from them will submit a referral to the criminal investigation division (CID). Fifty percent of referrals to CID come from the audit division of the IRS.
Opportunist: What’s a typical question?
Michael: Do you have any cash at home? Most people think the correct answer is no, but the correct answer is “Of course, in my wallet, etc., and taxes were paid on it in prior years.”
Opportunist: How common is an audit?
Michael: The audit rate in the United States for people making under $200,000 is about 1% out of 141 million returns filed. About 1.1% of the taxpaying population got audited in 2011. Those were W-2 wage earner audits. For Schedule C taxpayers, the audit rate is five times greater. If you earned a million or more, you are 12 ½ times likely to get audited than if you were a wage earner earning $200,000 or less.
Opportunist: Without naming names, what cases are you most proud of?
Michael: One in particular was a big dollar amount. In the early 2000s, a corporation with hundreds of employees went belly up and owed nearly $13 million in payroll taxes. In situations like that the IRS will pierce the corporate veil and go after the individual (shareholder) business owner, which they did and assessed him with close to $7 million. It’s called the Trust Fund Recovery Penalty assessment. He came to me and we deemed him qualified for an offer and compromise until we went through the discovery phase (IRS transcript investigation) and saw that most of his tax liabilities would expire in about eight months. He wasn’t receiving aggressive enforcement notices, and we were able to wait out the rest of the collection statute expiration date or CSED and 100% of his liability was dropped and written down to zero by the IRS. I still have the IRS letter saying his account was reduced to zero.
Today we just settled a case for someone who owed money for 2004, 2005, and 2006. We persuaded the IRS to accept about five cents on the dollar. We do this all day long.
Opportunist: How do you make money?
Michael: We don’t sell hours. We charge our clients on a flat-fee basis. After 14 years, all our experience and historical knowledge helps us know exactly how long it takes us to handle a case from start to finish. We ascribe labor figures and come up with a flat fee for discovery, compliance and resolution. We require 1/3 for the down payment and then, based on how long we think the case is going to take, we “carry” the remaining value of the retainer for six to eight months. On a $5,000 case, for example, we get $2,000 to start and $3,000 is divided into six payments of $500 per month.
If a client cannot keep their end of the contract we would have to stop providing services. Only about 10% to 12 % do not fulfill their end. That number has grown during the recession, though, because it used to be closer to 6% to 8 % just a few years ago.
Opportunist: Who are your competitors?
Michael: We feel we don’t have any competitors of comparable size or with the national reach that we have. Quite a few companies came into existence during the recession, but they were over-promising results without seeing if the client was eligible in the first place. We, on the other hand, actually do the work. [Laughs] Through a lengthy, in-depth financial consultation with each prospect, we look at income, expenses, liabilities and assets and determine what program we should enroll them in—if they are eligible at all.
Many so-called competitors have closed. The “Tax Lady” Roni Deutch in Sacramento and American Tax Relief in Beverly Hills are gone. Recently, JK Harris in South Carolina filed for bankruptcy and is now in liquidation. “Nightline” aired an exposé on ABC about TaxMasters, another competitor out of Houston, which is a house of cards ready to fall.
Opportunist: Tell us about a typical day on the job.
Michael: Meeting clients and prospects, bringing new business into the firm. I do a lot of the firm’s marketing and I’m the one who negotiates the marketing contracts with the vendor, the radio, and the TV and Internet campaigns. We are also calling the IRS and trying to negotiate positive, favorable settlements for our clients.
Opportunist: We understand you have a brand-new TV show in the works.
Michael: Yes, I have my own show. It’s called “Tax Man” and it’s going to start airing in mid-February. We just taped two episodes and the network ordered 18 in total. Next week we are going to tape another four or five shows.
Opportunist: Please tell us more.
Michael: It’s an informative and educational show. We do current IRS events for the week. We have a tax team, where we Skype in members of the firm and banter back and forth on viewer questions. We spotlight trends that are emerging and continue to take viewer questions. There is also a Tax Rants segment, where I rant for about six minutes. [Laughs] We will be in 35 million cable TV households on the Business Television Network. It’s not mainstream in terms of CNBC or Spike, but that will probably come later in the year and we will be on a bunch of channels.
Opportunist: What do you hope to accomplish in 2012?
Michael: We are hoping state attorneys general and federal regulators will adopt our proposed 21-page draft legislation on how to regulate this industry. We want to be the poster child, if you will, for how to promote and ensure the protection of consumers from unfair and deceptive advertising claims. People pay us and we work on their case and do what they pay us for. We are the proud founding members of the Tax Problem Resolution Services Coalition. If regulators adopt our business model, it would basically do away with all the scammers. We are also creating an association this May—to garner more credibility and visibility and strength—and speakers from the IRS will come and address the audience.
Opportunist: Where do you see the company in five years?
Michael: As the dominant player in the United States. We already have strategic partnerships with Rush Limbaugh, Glen Beck and Sean Hannity. We are thinking of broadening our business development plans in 2012 and are looking to partner with businesses that are involved in providing tax services to businesses and their employees. We can offer our tax problem resolution services to this market, including audit defense and representation. We are continually finding different markets to help people with tax problems. The company should at least double in size within five years.
Opportunist: What do you enjoy most about your work?
Michael: The reason I get up and come to work every day is the reward factor. It’s very rewarding to save somebody’s financial life—whether it’s through an audit in their favor or a settlement with a payment plan they can live with that won’t adversely affect their lifestyle. When they’re happy, we’re happy…and the IRS is happy.
Tax Resolution Services
Tax Problem Resolution Services Coalition
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.