The tax debt relief industry is searching for loopholes in a Federal Trade Commission rule that could eliminate its main source of revenue.

Earlier this month, the FTC closed down American Tax Relief, claiming the company bilked consumers out of more than $60 million by falsely claiming it could reduce their tax debts (see FTC Puts American Tax Relief Out of Business).

Under a new Telemarketing Sales Rule, starting October 27, the FTC will ban tax debt resolution firms from collecting advance fees that keep many of them afloat. The legislation also cracks down on deceptive practices, such as making false promises about debt reduction, and requires firms to adhere to strict disclosure standards.

Sources interviewed by easyIRS.com, a provider of technology for dealing with IRS debts, agree that promoters of “pennies on the dollar” IRS settlements are facing an uphill battle if they try to ignore or skirt the FTC ruling.

Law firm Loeb & Loeb LLP represents companies affected by FTC actions. The firm argued in a recent article that the FTC didn’t have power to create the new rules, but it urged industry compliance—and warned strongly against exploiting loopholes.

“While we understand the desire of industry members to find enticing ‘loopholes’ that may exist in the TSR, these should be viewed as potential traps for the companies that attempt to exploit them,” wrote Michael Mallow and Michael Thurman in an article for Loeb & Loeb. “There is no doubt that these loopholes will soon be the ‘test cases’ for the FTC’s TSR regulatory enforcement efforts. ... That loop may turn out to be a noose.”

Companies in the industry may try to use several loopholes to change their business models, Mallow and Thurman said in the article.

Because the FTC rule doesn’t regulate legitimate nonprofit agencies, some debt relief firms may try to change their for-profit status to become exempt from the advance-fee ban, Mallow and Thurman said. But simply changing status to a nonprofit, without changing fundamental operations and goals, would likely only attract FTC enforcement, they said.

Because the FTC rule covers only interstate telemarketing, some firms may try to limit their calls to within their state, limit customer interaction to face to face or online, or partner with attorneys who meet in person with their clients, Mallow and Thurman said. But questions that will arise from exploiting these types of loopholes would likely be decided by the courts, they said.

“The FTC wields a broad range of enforcement powers under Section 5 of the FTC Act, which directs the agency to prevent ‘unfair or deceptive acts or practices,’” Mallow and Thurman wrote. “It is important to recognize that the FTC will scrutinize such efforts very closely and will likely focus its early regulatory enforcement efforts on these issues.”

The FTC spells out its interpretations in the TSR ruling itself and in guidance documents for businesses covered under the rules.

The agency is also aware of several more nuanced attempts to find loopholes using language in the legislation, said Jim Buttonow, a 19-year IRS veteran and cofounder of tax software firm easyIRS.com. Buttonow said easyIRS’s legal team spoke with an FTC attorney about the rules.

“The FTC is well alerted to the tactics of these tax resolution firms,” Buttonow said. “It seems clear that the actions of the seller—such as providing representation to change, alter or renegotiate the terms of the tax debt—are going to be the deciding factors on whether a company is subject to the TSR.”

Tax debt relief companies are scrambling to find a way out.

The National Policy Group, a lobbying firm that is representing some tax debt relief companies, is trying to pull together an industry effort to challenge the TSR ruling. The group announced its upcoming “Super-Advanced Tax Problem Resolution Seminar” in Las Vegas from Thursday to Saturday—just days before the advance-fee ban becomes effective, according to an e-mail announcement from Ron Perrino, marketing director for the American Society of Tax Problem Solvers.

The announcement touched on industry worries: “Here are just a few of the many questions that are on many practitioners’ minds: Who is and isn't covered? Will you be able to collect upfront fees? Are you exempt because you meet clients face to face?”

Because of the legislation, industry insiders think that taxpayers with IRS problems will turn away from tax debt relief firms in favor of more reliable alternatives, such as the IRS, local tax professionals or online tax software providers.

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