National Tax Services Company Found Liable for Fraud

TaxMasters, a tax consulting company based in Texas with a national clientele, has encountered multiple legal problems related to its marketing practices. A Texas jury recently ruled against it in a deceptive trade practices trial, and the company has sought bankruptcy protection. It has reportedly left numerous creditors, including several New York media companies, with little recourse to collect unpaid bills. The case demonstrates how new businesses with useful, possibly novel services can run afoul of consumer protection laws.

The company started as a small business in Houston, Texas, when certified public accountant Patrick Cox began offering consulting services to negotiate tax bills with the Internal Revenue Service (IRS). It grew to the point that it had a nationwide reach. TaxMasters ran advertisements on cable television channels around the country. It offered “tax resolution” services to people facing enormous tax bills and the prospect of losing their homes and other assets.

Attorneys general in Minnesota and Texas initiated investigations against the company for deceptive trade practices. The state of Texas filed suit against TaxMasters in 2010, alleging multiple violations of the state’s deceptive trade practice laws. The company allegedly allowed clients to pay its fee in installments, but did not inform them that the company would not begin work on their case until their payments were complete. This potentially meant missing important filing deadlines, putting the clients in even worse positions. Sales staff for the company, whom investigators alleged would implicitly pose as tax experts, would allegedly tell clients and prospective clients that they could reduce the client’s tax bill to near zero and had a success rate approaching one hundred percent. Neither statement was necessarily true, according to investigators.

While state investigations were ongoing, TaxMasters filed for bankruptcy in March 2012. It reported up to $10 million in debts and only $50,000 in assets. Among its creditors are several New York companies that TaxMaster used for advertising, including CNN, News Corp., ESPN, and the radio network Westwood One.

A Texas jury found TaxMasters liable for 110,000 violations of the state’s deceptive trade practices act, which included violations against consumers living outside of Texas. It imposed a judgment of $195 million on TaxMasters and Cox, a penalty of roughly $1,772 per violation. The court reportedly designated $113 million of the total for defrauded customers. Among the deceptive acts the jury found were misleading statements about contract terms, failure to disclose a “no-refunds policy,” and failure to disclose the fact that the company might not immediately begin work on a case. They also found that the company failed to communicate with the IRS about some clients’ cases.

The TaxMasters case is instructive for New York and New Jersey small businesses that might seek to provide services to beleaguered consumers in a bad economy. The laws in both New York and New Jersey deal very seriously with services that can affect consumers’ finances. Candor and honesty with customers is extremely important, as is keeping detailed and accurate records of business transactions.

The New York and New Jersey business attorneys at Samuel C. Berger, PC offer fixed-fee packages of legal services to businesses and entrepreneurs who want to do business in New York and northern New Jersey. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.

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