TaxMasters Files for Bankruptcy

The well-known and controversial tax advisory firm, TaxMasters Inc., filed for bankruptcy this morning, just as it was preparing to head to court to defend itself from charges of deceptive practices leveled by the Texas attorney general.

The Houston-based company, best known for a national advertising campaign that made company's bearded, red-haired founder Patrick Cox a recognizable figure, was the subject of an ABC News investigation in April, in which customers had alleged that the company persuaded them to pay large upfront fees, but never delivered on promises of helping them resolve their tax problems. The commercials boast that the company's staff of former IRS agents and tax professionals "have helped many good people just like you."

But Texas Attorney General Greg Abbott said the ads have been misleading. He filed a multi-count civil case against TaxMasters, accusing it of deceiving its customers and violating the state's debt collection laws.

"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."

ABC News made repeated attempts to contact the company and its founder last week, as word began circulating that it was in financial distress. TaxMasters' customers had reported to KTRK, the owned-and-operated ABC News station in Houston, that they were not able to get responses when calling about their tax filings, and one described visiting the company's office, only to find the doors locked. A telephone sales agent told an ABC News reporter that the company "was not taking any new sales," but would not discuss the company's dire finances any further.

Within the past month, the landlord that owns the building where the company is headquartered sued alleging that Taxmasters failed to pay its January rent. A contracting firm handling construction work at the office also sued the company alleging it had not been paying its bills. Videos on the company's website displaying the well known TaxMasters advertisements featuring Cox were no longer working. Recent filings with the Securities and Exchange Commission carry a warning that the company's earlier financial statements are being amended and should no longer be relied upon.

A spokesman for the Texas Attorney General told ABC News the state was preparing to head to court this morning in its civil case, but had not heard anything specific about TaxMasters' financial status. Court papers filed Monday morning indicate that TaxMasters has filed for bankruptcy with between $1 million and $10 million in liabilities.

The TaxMasters ad blitz has been a driving force in the company's soaring corporate revenues. The company, which went public in 2010, brought in $45.7 million, a three-fold increase in two years, according to filings with the Securities and Exchange Commission. The company linked "an increase in advertising expense" to "increased sales volume" in its year-end filing.

The Minnesota attorney general's office, which has also been investigating the firm, told ABC News that many of the company's employees are skilled tele-marketers who have little knowledge of the complicated tax issues faced by people who have fallen behind in filing their returns or making tax payments.

"This is a company which is taking advantage of people, and unfortunately when people see it on TV, they do believe in it," Minnesota Attorney General Lori Swanson told ABC News. "When you call, you think you're talking to a tax professional. You're really talking to just a salesperson who's trying to get you to sign up."

Cox declined to be interviewed by ABC News, and in a written statement he did not address the specific allegations in the two states' lawsuits. TaxMasters has denied the allegations in the lawsuits and Cox said the company "prides itself on honest customer service, a transparent process with our customer, and seeking fair treatment from the IRS."

At the heart of the problem, says Attorney General Swanson, is a requirement that customers pay an upfront fee ranging between $2000 and $8000.

"When you pay these upfront, advanced fees, now you're signed up, you're stuck, and the promised help doesn't materialize," she told ABC News.

Audio tapes of some sales calls, turned over to the attorney general by TaxMasters, prove the point, she says.

Salespeople tell potential customers TaxMasters is 97 or 98 percent successful in reducing the amount of taxes owed.

"You're owing $19,000," the TaxMasters salesman tells a customer on a recording provided to ABC News by the attorney general.

"I mean we can get you down to basically next to nothing," he continues. "I think we are the most successful tax resolution company. We're 97 percent successful," the salesman says.

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"Not true," said Attorney General Swanson. "It's another falsehood of this company. These salesmen tell people that to sign them up, but they don't deliver on those promises."

The IRS says only a small number of taxpayers ever qualify for such a substantial reduction in taxes owed.