May 14, 2010
A company that purports to help consumers who are having tax problems has problems of its own in Texas.

Houston-based TaxMasters, Inc., and its chief executive officer, Patrick Cox, are facing multiple violations of the state's Deceptive Trade Practices Act and Debt Collection Act.

According to the enforcement action filed by Attorney General Greg Abbott, the defendants unlawfully misled customers about their service contract terms, failed to disclose its no-refunds policy, and falsely claimed that the firm's employees would immediately begin work on a case -- despite the fact that TaxMasters did not actually start to work on a case until its customers paid in full for services, even if that delayed response meant taxpayers missed significant IRS deadlines.

"In the midst of a national economic downturn, TaxMasters used a nationwide marketing campaign to offer services for distressed taxpayers who needed help dealing with the IRS," Abbott said. "A state investigation and nearly 1,000 customer complaints indicate that the defendants routinely misled customers about the nature of their tax resolution service agreements -- and worse, attempted to enforce those improper agreements through unlawful debt collection tactics. The state's enforcement action seeks to prohibit the defendants from continuing to violate the law and seeks restitution for the financially struggling taxpayers who were harmed by the defendants' unlawful conduct."

TaxMasters advertises a tax resolution service for federal taxpayers who have received notice from the IRS of an audit, garnishment, lien, levy or tax deficiency. Citing a self-styled "national advertising campaign" and high-profile "endorsements," the company claims to have "one of the most effective tax relief teams in the tax representation business."

However, a state investigation -- and nearly 1,000 complaints submitted to the Office of the Attorney General and the Better Business Bureau of Houston -- indicate the defendants have unlawfully misled their customers and failed to disclose material facts about their service agreements.

'Free' coonsultation

TaxMasters' ads encourage taxpayers to call its toll-free number for a "free consultation" with a "tax consultant." Court documents indicate callers are not connected to an employee qualified to give tax advice, but rather with a TaxMasters sales representative who recommends a "solution" for between $1,500 and $9,000 or more.

According to court documents, many callers were offered an installment plan so that they could pay the defendants' fee over a specified period of time. However, callers who asked to see written terms and conditions prior to making a payment were informed that a credit card or bank account number is necessary to generate a written TaxMasters service contract.

As a result, TaxMasters customers were unaware -- and the defendants' personnel did not have a practice of disclosing -- multiple aspects of the TaxMasters service agreement that were harmful to taxpayers.

For example, the company did not disclose that all customer payments submitted to TaxMasters are non-refundable. Because customers were not provided written contracts and sales personnel did not reveal the no-refunds policy, customers did not know that they would not be able to recover any installment payments they submitted to TaxMasters -- even if they ultimately decide to cancel before TaxMasters actually did any work on their tax case.

The state's enforcement action also cites TaxMasters for failing to reveal that it would not begin work on a case until all installment payments had been remitted and the entire fee was paid. Multiple complaints indicate that customers entered into an installment agreement with the understanding that TaxMasters would immediately begin work on their case -- only to discover later that no action was taken.

Customers often learned there was a problem when they received a notice from the IRS indicating that an important deadline had been missed or that additional fees and penalties had accrued.

Court documents also indicate the defendants failed to disclose TaxMasters' requirement that customers pay the entire service fee -- even if they opt to cancel their contract. Because customers are not provided a written contract, they were not properly informed that agreeing to make a single payment over the telephone obligated them to pay the entire fee quoted by sales personnel.

Further, not only did TaxMasters attempt to obligate its customers to a fee in the absence of a signed contract, the defendants used unlawful debt collection tactics to enforce the unauthorized obligation.

Failure to disclose

According to the state's enforcement action, the defendants not only failed to disclose material terms and conditions governing its services, but also failed to properly provide the "tax resolution" services that were advertised.

Customer complaints obtained by the AG's office cite TaxMasters for failing to contact and consult with the IRS on the client's behalf; failing to appear on the client's behalf at an IRS audit or hearing; failing to postpone or stop a wage or bank account garnishment; and failing to stop a levy or lien against a client's property.

When customers who were unhappy with the defendants' services sought refunds, TaxMasters refused to return the customers' money. Court documents indicate TaxMasters not only refused to honor refund requests, it also pursued debt collection efforts against clients who cancelled their contracts.

The state's enforcement action also charges TaxMasters with unlawfully threatening to pursue customers in Harris County courts, even if those customers did not reside in the county. Under Texas law, entities seeking to enforce a consumer contract can only do so in a county where the agreement was executed or where the consumer resides.

The AG is seeking restitution for each TaxMasters customer who was financially harmed by the defendants' unlawful conduct. In addition, it is asking for civil penalties of up to $20,000 for each violation of the Texas Deceptive Trade Practices Act.