With tax day on the horizon, cable television stations have been inundated with commercials for tax resolution companies offering to help Americans settle their tax debts for less than they owe. But one of the major players in the tax resolution industry, TaxMasters, is under investigation in two states for allegedly defrauding and deceiving customers.
TaxMasters' television commercials feature the company's red-bearded founder and CEO, Patrick Cox, who claims his company's staff of former IRS agents and tax professionals "have helped many good people just like you."
The TaxMasters ad blitz has been a driving force in the company's soaring corporate revenues. The company, which went public last year, brought in $45.7 million in 2010, a three-fold increase in two years, according to filings with the Securities and Exchange Commission.
But the attorneys general in Minnesota and Texas have filed separate but similar civil suits against TaxMasters. Minnesota's Attorney General, Lori Swanson, said the company "is taking advantage of people, and unfortunately when people see it on TV, they do believe it."
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."
According to Nina Olson of the IRS' Taxpayer Advocate Service, taxpayers with tax debt should vet any tax resolution companies carefully or simply contact the IRS directly to get on a path to settle up.
"Taxpayers can certainly be afraid of approaching the IRS," she said. "They don't know the rules, they don't know what to say to the IRS and they don't know what the IRS wants from them... I think there is a need for someone to come in and help the taxpayers solve their problems."
But back taxes aren't the only tax problems. Many common mistakes can land a taxpayer in the midst of the dreaded IRS audit.
Though some audits are unavoidable (the IRS says it does some completely randomly), there are steps taxpayers can take to reduce their chances of inflicting one on themselves.
Report everything you're supposed to, no matter how small. If you're required to report a financial asset -- even if it's just a few dollars -- report it. The IRS is not looking at the dollar amount necessarily, but it is looking to make sure their documents match yours. Any discrepancies, no matter how small, could send up red flags.
Don't go overboard with deductions. Is that flat screen TV you put in your home office deductible as a business expense? Rather than saying "yes" and hoping for the best, check any questions you might have about deductions against the IRS's guide to deductions, Publication 587.