Halloween is coming four days early for the tax debt relief industry-and the result will not be a treat for firms who make false promises to distressed taxpayers, according to independent Web site easyIRS.com.
On Oct. 27, debt resolution companies covered under new Federal Trade Commission (FTC) legislation won’t be allowed to collect advance fees-a nightmare for many “pennies on the dollar” tax firms that rely on upfront money to stay afloat.
In fact, under the new rule, firms will not be allowed to collect a penny until they’ve successfully negotiated a reduction in the customer’s tax debt, and until the customer has made at least one payment toward the settlement.
The FTC has also ruled that tax debt relief firms have a special duty to back up any claims in their advertising. For example, a company that makes attention grabbing claims of huge savings would be required to disclose the probability of success, how much services cost, and how long people will have to wait to see results.
The FTC ruling (case number 3:2010cv02063) in the California Southern District Court reinforced its hard-line position Oct. 6 by shutting down American Tax Relief, alleging deceptive practices and false claims. In a separate matter, Roni Deutch, a California-based tax debt firm, is facing a $34 million lawsuit (case number 2010-00085933) filed by state Attorney General Jerry Brown in Sacramento County Superior Court.
The state is claiming that Deutch advertises a success rate for IRS settlements of up to 99%, yet successfully reduces the amount of money her clients owe in taxes in just 10% of cases.
With the start of FTC enforcement, some tax resolution firms are shaking in their boots.
“Many of (the legislation’s) conditions would significantly impair our practices. Some members have indicated that under this rule, they might actually abandon tax problem resolution work altogether,” said Lawrence Lawler, national director of the American Society of Tax Problem Solvers (ASTPS), in the society newsletter.
But the solution is simple: comply with the FTC, wrote Michael Mallow and Michael Thurman in an article for law firm Loeb & Loeb LLP, which represents companies affected by FTC actions. They wrote that the debt relief industry should accept the regulations and collect fees after clients’ debts are settled-and that the firms might benefit in the end.
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“Economic modeling and firsthand reports by some companies that have tried settlement-based fee models indicate that benefits include higher conversions, lower marketing costs, higher retention, earlier settlements and improved consumer satisfaction (translating into lower regulatory and legal complaint rates),” they wrote.
But for many tax debt relief firms, it’s not that simple to change.
Jim Buttonow, a 19-year IRS veteran and co-founder of tax software company easyIRS.com, who audited the credit and debt relief industry as an IRS official, said the problem is in the business model.
The upfront cost of acquiring a customer with tax debt is extremely high. For example, TaxMasters, Inc., a tax debt relief firm that advertises heavily on radio, TV and the Web, disclosed in its recent Securities and Exchange Commission filings that it spends roughly 40% of its revenue in advertising and promotion to acquire customers. These costs necessitate collecting large upfront payments from clients. To convince cash-strapped prospects to commit to the large fees, tax debt firms often must exaggerate the money savings that a customer might receive from an IRS settlement, Buttonow said.
Because of the legislation, Buttonow said customers will more likely work directly with the IRS, without professional representation, or work with local tax practitioners.
“Most problems just require that you understand your facts, the applicable law, and know how to navigate the IRS,” Buttonow said. “The best way to solve any IRS problem is to do it yourself or ask a trusted tax professional if your problem is serious. The FTC reiterated this position in their recent consumer alert.” – Source
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