Minnesota Sues 'Tax Relief' Firm

TaxMasters, a Houston-based "tax relief" company that advertises heavily on television, radio and the Internet promising to help taxpayers settle with the government, finds itself the defendant in a lawsuit.

Minnesota Attorney General Lori Swanson filed the action, saying TaxMasters overstates the tax help it will provide to citizens who are required to pay the company advance fees of up to $8,000.

"The company gets worried people to pay thousands of dollars by overstating the help it will provide with their tax bills," Swanson said. "This is the latest type of company we have seen target the misfortunes of people who are facing tough sledding in the bad economy."

The lawsuit alleges that in some cases, the company claimed it could substantially reduce people's tax bills by up to 90 percent, but then delivered little or no help. In other cases, the company falsely promised that it could stop Internal Revenue Service (IRS) collection efforts against consumers who hired it.

Most people don't qualify

Contrary to TaxMasters' promises, most citizens do not qualify for special IRS programs that reduce a person's tax debt. Swanson said that while the IRS won't reduce most people's tax bills, it will work with them on repayment plans, something people can do on their own without paying a tax relief company thousands of dollars.

TaxMasters heavily advertises on late-night television. In 2009 the company spent nearly $14 million on its TV, radio and Internet advertising campaigns, Swanson says.

Consumers who call TaxMasters talk to a "tax consultant," who is actually a salesperson. Swanson says a job ad for this position states: "Previous tax knowledge is not required, but a firm understanding of the sales process and of selling services ... is a strong plus."

Salespeople often make unrealistic promises of the company's ability to help in order to dupe consumers into paying thousands of dollars in advance fees, according to the suit. The company also falsely told some consumers it could put an immediate stop to collection efforts, such as wage garnishments, levies, or liens.

Left consumers in worse shape

The lawsuit alleges that TaxMasters sometimes left people in worse financial shape after paying the company's advance fees, failing to respond to important deadlines or requests of tax authorities.

The lawsuit alleges that TaxMasters salespeople told consumers things like:

• "... based upon our success rate and our experience, on average, our clients see a savings of anywhere between 80 and 90 percent of what the IRS claims they owe."
• "We're highly successful; we are the most successful tax resolution company. We're 97 percent successful."
• "We'll save you anywhere from 65 to 90 percent is our goal on ... savings off the total tax debt. Ninety-seven percent of the time we reach that goal, the other three percent are the people who just flat out lie to us."

Swanson says that among other things, TaxMasters:

• Overstated its ability to reduce or settle peoples' tax obligations.
  
• Charged consumers thousands of dollars in advance fees for help in reducing tax bills that the company knew or should have known would not be negotiated by the IRS.
  
• Failed to deliver on its promises and sometimes even failed to meaningfully contact the IRS.
  
• Failed to make refunds to consumers who complained that the company did not take the promised action.

TaxMasters, a publicly-traded company, has seen explosive growth in the last few years. In an April 21, 2010, letter to shareholders, the company attributed this growth in part to "the recession and rising unemployment" which have "increased the number of at-risk Americans, those who are most likely to have the severe financial difficulty that causes problems meeting IRS obligations."

In 2007, TaxMasters reported revenue of $6.5 million. By 2009, its revenue was $36.8 million -- up 466 percent from 2007. For the first three quarters of 2010, TaxMasters' revenue was ahead of 2009 figures for the same period by 21.8 percent, according to Swanson.

Swanson said that "tax relief" companies are the latest type of firms that target citizens who are facing tough times in the bad economy. In recent months, her office has filed lawsuits against mortgage assistance companies that charge thousands of dollars in advance fees to modify peoples' home mortgage but don't; debt negotiation companies that charge thousands of dollars in advance fees then fail to negotiate with creditors; and health discount companies that offer people struggling with high premiums affordable health insurance coverage that fails to provide financial protection.