JK Harris Closes Doors, Creates Market Opportunity

The largest tax resolution firm in the United States, JK Harris, has closed it’s doors.

They had filed for Chapter 11 protection back in October, but their largest creditor opposed the reorganization plan, and seized assets on Friday.

What does this mean for you? With the single largest national competitor gone, there is suddenly a tremendous vacuum in the tax resolution marketplace. You, as a local tax professional, can step in to fill that void.

JK Harris had thousands of clients across the country, and those clients are suddenly left without any representation. that means now is a great time to step up your marketing and take advantage of the situation.

Update on Individual (1040) Lien Leads

For those of you that specialize in assisting individual taxpayers instead of businesses, you may have noticed some recent upsets in the leads world. Due to increasing regulation and pressure from the Federal Trade Commission, it’s getting harder and harder to access individual taxpayers through the telephone. One of the largest list brokers in the country recently quit offering tax liens at all due to these issues.

Here at Tax Liens HQ, we are still offering 1040 tax lien leads, but we recently made the decision to no longer offer phone numbers on those leads, and I’d like to explain why that is and what your options are instead.

If you are calling individual consumers at all, the FTC requires that you have what is called a SAN number. This is a subscription number to the national Do Not Call list registry. Even if you purchase phone numbers from a list broker, you are still required to have your own SAN number and remove numbers from your list that are on the Do Not Call List, even if the list broker says they do it for you.

Subscribing to the Do Not Call list is not inconsequential. A SAN number that covers the entire United States costs around $15,000. However, this is nothing compared to the FTC fines for telemarketing to consumers without a SAN number. The fines can be as high as $11,000 PER PHONE CALL.

So what does this have to do with us no longer offering phone numbers? The FTC has recently begun to hold list brokers accountable for the actions of their customers. There is pending civil litigation around this issue, since depending on who you ask, the law doesn’t allow for this, but the FTC is doing it anyway. Since we are a fairly small “mom and pop” business, we simply cannot afford the liability exposure if the FTC were to make an issue with us providing phone numbers to our customers and our customers failed to obtain SAN numbers and comply with the Do Not Call List rules and the Telemarketing Sales Rule. So, long story short, our attorney told us to stop.

So where does this leave you for obtaining phone numbers? Check out various phone append services that exist online, and pick one that meets your needs.

Alternatively, have you considered direct mail? For the cost of a SAN number for the entire United States, you could pay postage and printing for between 60,000 and 70,000 postcards to go out. At a 1% response rate, you should be able to sell nearly half a million dollars worth of tax resolution services through direct mail and taking inbound phone calls, not to mention hundreds of thousands of dollars worth of tax prep, Quickbooks, and other accounting and tax services.

Marketing Expectations & Metrics

When a tax professional first enters the world of lists, dials, prospecting, return rates, disconnected numbers, and the like, they are often confused and dismayed by the results. Setting realistic expectations for your results as a marketer is very important to do, but also one of the most difficult concepts for new marketers to grasp.

Let’s begin with direct mail. If you send out a mailing, any mailing, and receive a response rate of 2%, you are kicking butt! If you hit 1%, you’re still doing really well. In the tax resolution sector, breaking 1/2 of 1% is a good target to shoot for. Once you have a mailing piece that can hit that rate, then you have something to tweak.

Before becoming shocked or dismayed at such “low” numbers, bear in mind that these exact number levels have generated billions and billions of dollars in sales for all kinds of products and services from direct mail over the past several decades.

Now let’s look at telemarketing. We are proud to have the most robust telephone number system that we can, combining the best of both automated AND manual phone number lookup and verification. However, the reality is that phone numbers are constantly changing, people move every day, and companies go out of business every single day. In telemarketing, regardless of list source or target industry, you should expect a 75% or less penetration rate when dialing business-to-business. This means that 25% of your phone numbers will be wrong, disconnected, or simply never answered.

Despite the fact that tax debtors are a higher risk population for going out of business, are proud of the fact that our disconnect rate averages less than 20%. Yes, you may order a batch of 100 tax liens and be dismayed that 20 of them are bad numbers, but this is normal and should be your expectation, regardless of where you order leads and numbers from.

What about response rates to telemarketing? If you have somebody dialing full time, you should expect 6 to 8 solid contacts per hour on the phone. For you, that most likely equates somehow to consultations for tax services — that’s a lot of consultations. You’re likely going to need to make 40 to 60 dials per hour in order to reach that level, and you’re going to leave a lot of voicemails.

One final note on telemarketing: If you’re not trying to call each lead at least 7 times before giving up on it, you’re wasting money on leads.

Hopefully this post has given you some insight into understanding marketing numbers, and will help you manage your expectations. Again, these numbers apply to ALL industries, ALL lead sources — this is marketing 101 in it’s most generic sense, not specific to tax. When it comes to marketing, all industries are equal, and the numbers are the same throughout.

Can Tax Debtors Actually Afford Your Tax Services?

This is probably the most common question I get from CPA’s in
particular. The key is collecting your retainer up front. If I
know that a situation is going to take, say, $3,000 to resolve, then I
tell the client that up front. I’ll let them pay on a retainer basis
like a lawyer does in installments, but I insist on an up-front
minimum of either 1/3 of what I expect the total to be, or $1,000,
whichever is greater.

The next question that usually follows is this: These people and
businesses owe back taxes, which implies they’re broke, so how do they
pay you?

This comes down to selecting those businesses and individuals with a
high cash flow, so they CAN pay you. There’s a little trick for
selecting the best leads to start with, actually. It’s a obviously a
formula that hurts my business, because we end up not selling lower
tax debt level leads, but it’s important for you to know this for
running your practice. Here’s the trick: The average 1040 tax debtor
owes for 3 or 4 years worth, and the average business lien will cover
a median of 4 quarters worth of 941 taxes. Knowing that, and knowing
the tax rates, you can work backwards from the tax debt amount, make
an assumption regarding the ratio of penalties/interest to tax, and
arrive at roughly how much their AGI or quarterly payroll is.

Based on what you’re comfortable with, you can then set a criteria for
whom to work with. If you are comfortable bringing on clients with a
$40,000 per year income, then you can find the liens to do that. If
you’d rather work with clients that have a minimum six figure income,
and therefore are more likely to be able to afford your services, then
you select the appropriate tax debt minimum. A lot of $100k to $150k
earners with insufficient withholding or estimated tax payments will
accrue roughly $10k to $15k per year, plus maxing out penalties, then
multiply by 3 years, gives you a minimum lien amount of about $40,000
if you want six figure earners.

The same applies to payroll tax debtors. The higher their payroll,
obviously the greater the business cash flow. I have found 8 to 10
percent to be a good number to use as a rough average for withholding
across employees, plus of course Social Security and Medicare, so I
tend to just take the estimated bottom line 941 number and divide by
.25 to get a quarterly payroll. Then, you need to divide that by
whatever percentage of revenue payroll should be for what you consider
a functional, profitable business — because that’s the business you
want as a client for tax resolution. Many franchised restaurant
operations, for example, are told by the franchising company that
payroll shouldn’t exceed 20 or 25 percent of gross revenue. A small
business broker once told me that a company whose payroll exceeds 50%
of revenue is going down the tubes, and that 30 to 35 percent is a
reasonable range to be in.

So the bottom line is to select leads with a minimum lien amount —
that is the best indicator from the get go for finding clients with
enough cash flow to pay you. It’s counterintuitive to a lot of folks,
even those of us that run numbers for a living, but the higher the tax
debt is, the better client they end up being. If they have a high tax
debt and are in deep, deep financial trouble, chances are you won’t
reach them at all, because they already went out of business. If you
do reach them, they will tell you up front that they’re broke and
can’t hire you. If they are still operating and have a high cash flow,
then they’ll be able to pay your retainer or service fee.