TaxMasters Files For Bankruptcy; Hit with $195 Million Judgment

TaxMasters, the tax firm known for late night commercials featuring Patrick Cox, its red-bearded founder, has filed for bankruptcy and lost a huge civil suit, all in the span of nine days!

On March 19, TaxMasters filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court in Houston, citing assets of less than $50,000 and liabilities of between $1 million and $10 million.  Nine days later, on March 27, a Texas jury voted to hit both the Company, as well as its founder and CEO with $195 million in civil penalties, including $113 million for customer restitution, $81 million for civil penalties, and $1 million for attorneys’ fees, all for defrauding consumers.

According to Texas Attorney General Greg Abbott, TaxMasters led customers to believe it would begin working on their case immediately.  However, the truth was that the company would delay work until a client’s account was fully settled, even if that meant missing IRS deadlines.  The company also hid its policy terms from customers.  “While the TaxMasters CEO made hollow promises about fighting for taxpayers and their pocketbooks in television ads, the evidence proved that the firm didn’t even bother to show up when it came time to fulfill those promises, but instead misled and defrauded their customers,” Abbott said in a statement on Friday.  Abbott also criticized the company for attempting to delay the trial by filing for Chapter 11 bankruptcy just a day before it was to begin.

TaxMasters recent problems are the next in what appears to be an ever-increasing line of serious legal issues arising from heavily advertised “tax resolution” companies.  JK Harris & Company, a South Carolina-based firm, which often appeared on late night and early morning television, filed for bankruptcy in October of 2011 after being sued by several states as well as hordes of unhappy customers.  On March 11, 2012, company founder John K. Harris was arrested for contempt of court for failure to obey a court order in a separate case that pre-dates the bankruptcy.  Likewise, in 2010, the State of California sued Roni Deutch, who also maintained a large TV persona, claiming she “engaged in a scheme to swindle taxpayers” by overstating the ability of her firm to gain concessions from the IRS.  Deutch initially called the charges “politically motivated,” however, last year she filed for bankruptcy and  surrendered her law license.

Both the IRS and this blog have warned taxpayers that offers in compromise, the so-called “pennies on the dollar” IRS settlement strategy, are difficult to achieve.  However, this does not stop opportunistic firms with plenty of advertising dollars from pushing them on the public.  If you are in trouble with the IRS, the best strategy is to consult with an experienced tax attorney who is local and licensed to practice before the IRS.  The truth is that most people will not get out of paying their IRS debt, however, they can get help in settling the matter on payment terms that are appropriate for their situation.