TaxMasters slapped with $195M fraud judgment

NEW YORK (CNNMoney) -- TaxMasters, the Houston-based tax consultation firm whose ads had been a TV fixture in recent years, has been ordered along with its founder to pay $195 million on charges that it defrauded customers nationwide.

A jury in Texas' Travis County handed down the verdict in the civil trial Friday, finding that TaxMasters, its predecessor companies, and founder Patrick Cox had committed over 110,000 violations of the state's Deceptive Trade Practices Act.

"Today's decision marks a significant victory for the Texans and TaxMasters customers nationwide who sought help from TaxMasters with their income tax debts and were taken advantage of in the midst of a national economic downturn," Texas Attorney General Greg Abbott said in a statement.

The state said TaxMasters misled customers about contract terms, failed to disclose its no-refunds policy, and falsely claimed that its employees would immediately begin work on a case, sometimes causing customers to miss IRS deadlines.

Beware of tax scams

TaxMasters also failed to consult with the IRS on its clients' behalf and prevent liens on their property.

The firm and its predecessors were ordered to pay $149 million, including penalties and restitution, while Cox was ordered to pay $46 million. Of the $195 million in total, $113 million has been earmarked for defrauded consumers.

A lawyer for Cox and TaxMasters did not immediately respond to a request for comment.

TaxMasters filed for bankruptcy earlier this month, a move the Texas attorney general's office called "an apparent effort to avoid the state's enforcement action." It's therefore not clear how much of the judgment can be collected.

The bankruptcy filing said TaxMasters (TAXS) owes creditors between $1 million and $10 million, and that its assets total just $50,000 or less. The firm did not list its creditors, but said it owes money to between 1,000 and 5,000 people and businesses.

The Texas Attorney General's office said it would "actively participate in the bankruptcy case to seek to recover restitution for customers."

Tax breaks for the unemployed

TaxMasters' most recent financial reports show it spent nearly $16 million on advertising in 2010, eating up about 37% of its revenue. Among the networks on which TaxMasters has advertised is CNN.

The company recently restated results to show a $4.7 million loss in 2010 and essentially break-even results for the first quarter of 2011, the most recent quarter for which it has reported.