In 2010, Texas Attorney General Greg Abbott filed a lawsuit against TaxMasters and CEO Patrick Cox, stating that some of the company's claims were false. In his television ads, Cox fraudulently promised consumers that TaxMasters could walk clients through audits, settle tax disputes, and recover property seized by the IRS.
On March 30, after an eight-day trial, TaxMasters was ordered by a Texas jury to pay $195 million – $113 million in customer restitution, $81 million in civil penalties, and $1 million in attorney fees.
TaxMasters led clients to believe the firm would start working on their cases immediately. In reality, no work was done until clients' fees were paid in full. This often resulted in clients missing IRS deadlines, according to Abbott.
The company also hid policy terms, according to Abbott, who reported receiving more than 1,000 customer complaints.
"While the TaxMasters' CEO made hollow promises about fighting for taxpayers and their pocketbooks in television ads, the evidence proved that the firm didn't even bother to show up when it came time to fulfill those promises, but instead, misled and defrauded customers", Abbott said in a statement on March 30.
Abbott also criticized the company for attempting to delay the Travis County trial by filing for Chapter 11 bankruptcy just a day before the trial was due to begin.
On March 19, TaxMasters lodged its Chapter 11 bankruptcy petition in US Bankruptcy Court in Houston, listing assets of less than $50,000 and liabilities between $1 million and $10 million. The company said its unsecured creditors can expect to see some recovery.