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
Under a new
Sources interviewed by
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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
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 doesnt 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
The agency is also aware of several more nuanced attempts to find loopholes using language in the legislation, said
The FTC is well alerted to the tactics of these tax resolution firms, Buttonow said. It seems clear that the actions of the sellersuch as providing representation to change, alter or renegotiate the terms of the tax debtare 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
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.