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TaxMasters Files for Bankruptcy, Dogged by Fraud Suits

TaxMasters Inc., the tax-resolution firm known for its television commercials featuring Chief Executive Officer Patrick Cox, sought bankruptcy protection after coming under fire from multiple states’ attorneys general.

The company listed debt of more than $1 million and assets of less than $50,000 in Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in Houston, where it’s based.

Johnie Patterson, a lawyer for the company, didn’t immediately return a voice-mail message seeking comment on the filing.

TaxMasters, which claims to “solve your tax problems” in its commercials, was sued in 2010 for deceptive trade practices by Texas and Minnesota attorneys general, Greg Abbott and Lori Swanson, according to statements on their websites.

“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 in a May 2010 statement. “A state investigation and nearly 1,000 customer complaints indicate that the defendants routinely misled customers.”

Deceiving Information

The commercials, which have been satirized on NBC’s “Saturday Night Live,” duped unsuspecting citizens into believing that their calls to the tax-relief firm would be answered by one of its “former IRS agents” or tax specialists, according to the attorneys general. Instead of speaking with a highly qualified tax consultant, customers’ calls are answered by a salesperson providing deceiving information, the attorneys general contend.

Tax-burdened citizens are misled about the service contract terms, and are talked into paying thousands of dollars up front for a tax “solution,” while TaxMasters doesn’t disclose its no-refund policy, according to the attorneys general statements. The company also falsely claimed to begin immediately working on the case, which doesn’t occur until TaxMasters is paid in full, the AGs said.

“The company gets worried people to pay thousands of dollars by overstating the help it will provide with their tax bills,” said Attorney General Swanson in her December 2010 statement.

‘Little or No Help’

Swanson said TaxMasters got customers to pay advance fees of as much as $8,000, claiming to be able to reduce their tax load by 90 percent in some cases, “but delivered little or no help.” The company spent about $14 million in advertising in 2009, according to the attorneys general statement.

Swanson is seeking restitution for the customers, and civil penalties against TaxMasters. Texas Attorney General Abbott is also seeking restitution and civil penalties of as much as $20,000 for each violation of the Texas Deceptive Trade Practices Act.

Two customers sued the company in September 2010 in Houston seeking authority to represent U.S. customers on a “nationwide basis.” The customers seek damages over “TaxMasters’ explicit and implicit misrepresentations” and violation of consumer-protection laws and breach of contract, according to the complaint.

TaxMasters said it has between 1,000 and 5,000 creditors. The company estimates that funds will be available for distribution to unsecured creditors. Three affiliates also filed for bankruptcy, two of which will liquidate under chapter 7 of the U.S. Bankruptcy Code. The publicly traded company hit an all time low of 1 cent today.

The case is In re TaxMasters Inc., 12-32065, U.S. Bankruptcy Court, Southern District of Texas (Houston).

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