TaxMasters bankruptcy leaves clients in the lurch

(MoneyWatch) A few days ago, I wrote about how to settle your tax debts using an Offer in Compromise, or OIC. This is an agreement where the IRS and the taxpayer settle the tax liability for less than the full amount owed. In closing, I also wrote, "And don't go for those pitchmen claiming their services will settle your tax debts for 'pennies on the dollar!'"

Well, it looks like there will be one less tax settlement firm making these pitches.

TaxMasters, the Houston, Texas-based company that held itself out to provide services to settle taxpayers' debts for less and recover property seized by the IRS, has filed for bankruptcy. According to reports, the company filed for Chapter 11, listing assets of less than $5,000 and up to 5,000 creditors after it failed to secure capital funding

The firm, famous for its national advertising campaign, is also being sued by the State of Texas for allegedly violating the Texas Deceptive Trade Practices Act. Texas claims that TaxMasters TV commercials encourage people to call for a free consultation with a tax specialist but the calls are answered by salespeople unqualified to provide tax advice. They also allege TaxMasters delays providing its services until it collects all of its fees, even if it causes the taxpayer to miss important IRS deadlines.

There are several very important lessons to be learned from this event. First, for folks who are struggling to pay their tax debts, the IRS offers the option to pay their tax debts over time. Making a partial payment of what you owe and filing an Online Payment Agreement Application is better than not filing and not paying at all. And if there is any doubt as to the liability or ability to pay, then taxpayers should file the Offer in Compromise, which is something you can do yourself or with the help of your tax preparer. If you are in serious tax trouble and need professional help, then consider hiring a tax lawyer, a CPA or an enrolled agent, who is licensed to practice before the IRS.

Also, if you receive a notice in regard to your taxes, always respond by the notice date. And if a payment is requested, make it on time. Even sending a partial payment on time with a request for a payment plan is better than sending nothing at all. Doing so will help to reduce penalties for not responding and paying on time.

Lastly, folks who paid fees to TaxMasters upfront using a check or a debit card will have to file a claim as a creditor and wait for the return of their money. If they are unsecured creditors, they may only receive some of their money. If instead they paid the fees using a credit card, then all they would need to do is to contact their credit card company and dispute the credit card charge, stating that the services were never delivered as agreed. In this situation, the disputed charges on a credit card would be credited back to their card account and the credit card company would have to file its claim against the bankrupt firm. Once again, this is another example of why paying with credit cards can be more secure than paying with checks or debit cards.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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