TaxMasters Accused of Fraud and Deception

PHOTO: The tax resolution firm TaxMasters, founded by Patrick Cox, pictured here, makes big promises to people with tax troubles in commercials which flood cable television. Now the company is accused of deceiving the people it says it can help.
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Despite accusations in two states of deceptive business practices, the Houston-based tax resolution company TaxMasters continues to spend millions saturating CNN, Fox News and other cable channels with commercials promising to help Americans facing problems with the IRS.

"This is a company which is taking advantage of people, and unfortunately when people see it on TV, they do believe in it," said Minnesota Attorney General Lori Swanson, who has accused the company of fraud and deception in a civil action.

The Texas attorney general has filed a similar lawsuit, alleging the company unlawfully "engaged in false, misleading, and deceptive acts and practices."

An investigation airing tonight on World News with Diane Sawyer and Nightline will examine whether TaxMasters' promises are too good to be true.

In a statement, CNN said the network was "aware of pending legal activity" and had been told by TaxMasters that it was working to address the claims with the state authorities. "We continue to monitor any activity for developments or resolution, and will further evaluate our relationship as it becomes necessary," the network said in the statement.

Fox News acknowledged receiving viewer complaints. "Anytime we have received a complaint about TaxMasters we forward it to them and tell them they have five working days to resolve the complaint," said a Fox News spokeswoman. While the spokeswoman did not disclose the number or nature of the complaints, she said they have all been resolved.

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The television commercials feature TaxMasters' 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.

The company linked "an increase in advertising expense" to "increased sales volume" in its year-end filing.

The Minnesota attorney general says 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.

"When you call, you think you're talking to a tax professional," said Swanson. "You're really talking to just a salesperson who's trying to get you to sign up."

TaxMasters Seeks Talented Closers

A posting on the TaxMasters' website last year sought "tax consultant-inside sales representatives" who were strong closers.

"Are you a talented closer ready to move into the next income bracket?" the ad stated.

"Previous tax knowledge is not required," stated the employment ad, which TaxMasters says has since been modified.

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 per cent 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.

Click Here To Listen To The TaxMasters Sales Call

"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 per cent successful," the salesman says.

"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.

On another tape, a salesperson promises that IRS collection action will cease once the customer signs up and pays a fee to TaxMasters.

"It's automatic, that's what the IRS consultation does, it pulls your name, it pulls your number out of the collection process," the salesman said on the tape.

Click Here To Listen To The TaxMasters Sales Call

IRS Adds Tax Penalties

IRS officials say it is not "automatic" that the collection process stops if someone hires TaxMasters. The company has to file a variety of documents with the government to do so.

"In fact, when you hire this company, sometimes the situation even gets worse," said Attorney General Swanson. "They may garnish you, they may put down liens," she told ABC News.

Charlene Lee of Plymouth, Minnesota says she ended up owing more in penalties and interest after she paid TaxMasters $4800 to help her with a tax bill she could not pay.

Lee says it took TaxMasters months to get to her case, only to have the IRS reject the settlement offer submitted by the company. The IRS continued to add thousands of dollars in interest and penalties during the time TaxMasters was supposedly helping her.

"Isn't that wonderful," said Lee, a mother of two who says she feels victimized by TaxMasters and Cox.

"Shame on you, for doing this to families," she said in a comment she hoped Cox would hear.

Authorities in Minnesota and Texas say they have received hundreds of complaints from former TaxMasters customers.

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In his statement, TaxMasters president Cox said, "It is not surprising that ABC News dug through the tens of thousands of taxpayers we have spoken with over the years and found a few individuals willing to complain on camera."

Cox said he could not comment on specific cases cited to him by ABC News, but said they "are not a fair representation of TaxMasters' client base or business practice."

What You Should Do If You Owe Back Taxes

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