Will I Get a Rebate if I Owe Money?

In a simple word: no. I believe the rebate is acting like a refund and when a refund is due, it's usually applied to the any remaining balances first. However, TaxGirl is less sure of this statement.

So, the bottom line is the jury's still out. But I'd urge, as TaxGirl says, for you to ask your tax preparer.

The Real Price of Tax Debt Resolution

That Basic Question
If you're like me the first question you want to ask after hearing about a product or service is "How much does it cost?" And it's a very good question. The last thing you want to do is waste your time learning about a service that's great but you cannot afford. It's human nature. So of course "How much will this cost?" is one of the first questions that get asked when those in tax debt hell finally break down and call a tax resolution firm.

The Lie
Unfortunately, however, the debt resolution industry as a whole markets itself as a quick fix to big problems. People expect a low $29.99 fee and a miracle a lot like they expect tiny pills to melt away years of unhealthy eating and sedentary lifestyle. It just isn't that easy.

So of course those in trouble with the IRS and dealing with the resulting financial crisis contact a firm and have unrealistic expectations right off the bat. Well, let me pop your bubble and let you know there is no "quick fix" to tax problems and if someone offers you a miracle with a low fee you should RUN.

The Truth
Whether you're problem is from years of dodging the tax man or a one-time mistake that has had catastrophic effects, the end result is the same... someone must negotiate with perhaps one of the biggest, slowest, most complex and bureaucratically bogged down institutions known to man. Think this is easy? Think this is quick? I think not.

The greater thing to realize is not how much the resolution service will cost you, but how much not resolving the problem will cost in the end. I bet you like your home and car. If you don't pay, the IRS will like them too--as your form of payment. And that's not the worst part. Your paycheck, your credit score, savings, 401K's... all within the scope of the IRS. Still think a "large" payment up front is a lot to pay to protect these things? I think not. You must put fees in perspective.

Now, I bet you were thinking that this post would give you a list of fees. Sorry to disappoint. Depending on the severity of your debt, fees can vary widely. I can say though that don't come to a firm expecting to pay $30, $50, or even $100 for a fix. But do come with an open mind and a willingness to try to make fees work. Research your firm. Make sure you know who you are buying from. And then give the fees a once over again. But do prepare yourself, for if you don't the sticker shock may seem worse than it actually is and prevent you from fixing something that MUST be fixed.

You Walk Away…But Taxes Can Bring You Back

Most taxpayers are totally unaware of the potential tax bill left behind when they foreclose on their home. In many cases, a homeowner believes that foreclosure might somehow end the financial misery associated with owning a home, but that is just not true. Nine times out of ten, the tax problem associated with a foreclosure results from the the lender forgiving some of the loan. This happens when the lender forecloses on the property and sells it for less than the outstanding mortgage. If there is a $100,000 mortgage and the home is only sold for $90,000, guess who is responsible for paying the tax on the $10,000 that was forgiven…that’s right: the borrower. The difference for which the borrower is no longer responsible is considered “cancellation-of-debt income” and is taxable income. Even though you aren't selling the house and the bank is, the IRS views the transaction as if you were the seller. That means in the end, you could owe taxes on the sale. I’m afraid this bad news comes directly from the IRS, via Publication 544:

"If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. ... You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized."

Another simplified example: You borrow $35,000 and default on the loan after paying back only $15,000. If the lender is unable to collect the remaining debt from you, there is a cancellation-of-debt of $20,000, which is generally taxable income to you. Bottom line: you can walk away but taxes bring you right back.

If you wind up owing additional tax and cannot pay it in full, the IRS urges that you request an installment agreement with the agency. Often this process can be difficult and time-consuming. If you need assistance with this process, a tax resolution firm may be your best bet.
-Taxus