John Wanamaker is famously quoted as saying “Half of the money I spend on advertising is wasted; the trouble is I don’t know which half.”

In the case of recent tax resolution services that have gone belly up, they apparently only spent the wrong half. There’s also the question of whether the money spent on advertising was ill-spent, or the business model simply didn’t work.

“There are still lots of tax resolution services out there, but the three that filed for bankruptcy—TaxMasters, Roni Deutch and JK Harris—were the ones that engaged in heavy duty advertising on a national scale,” said Bob McKenzie, a tax partner at Arnstein & Lehr. 

While there are some reputable people involved, the companies that failed budgeted huge amounts for advertising, according to McKenzie. “Moreover, the intake interviews are done not by tax professionals, but by sales people working on commission, and thus making unrealistic promises,” he said. 

“They’re not telling people the whole story,” he said. “TaxMasters advertised a free consultation with a tax professional, but when you called you were talking to a sales person. That’s the model of the heavily advertised companies.”

“It’s like going to a used car lot and dealing with a salesperson who tells you, ‘Don’t worry, we can work something out.’ Would you believe him?”

Without the enormous amount of ad spending on late-night cable, there might not have been as many potential customers aware of the IRS’s eagerness to settle cases with deadbeat taxpayers for “pennies on the dollar.” It’s clear that much of the business was generated by the ads promising a way out to taxpayers drowning in debt. Yet the misleading nature of the ads themselves caused the businesses to run afoul of a number of state attorney generals, the Better Business Bureau, and, recently, the Federal Trade Commission. And they couldn’t have helped with the general reputation of the firms at the IRS, despite being staffed by “IRS experts.”

There are other ways to focus advertising, McKenzie indicated. For example, “As soon as a tax lien is filed against a taxpayer, most receive 10 to 20 letters offering to represent them. It’s much more efficient when you think of how many people have to watch Patrick Cox on late-night TV when they didn’t have tax problems.”

For those who are curious, Roni Deutch was an attorney (she surrendered her law license to the California bar last year), while J.K. Harris and Patrick Cox, former chief executive of TaxMasters, were CPAs.

The following is an actual post from one of the Web sites describing these tax resolution services. It is fairly representative of scores of other postings: “I was told my case was resolved and three years and $3000 later I am being bank levied again. Worst mistake of my life hiring ___.” Because of results like this, all three services entered into expensive settlements with various states attorney generals. It seems that the huge advertising expenses on top of the settlements produced disastrous bottom lines.

And in what may be a first, the Federal Trade Commission has filed a lawsuit against a fourth service, American Tax Relief LLC, alleging that “it has engaged in deceptive practices relating to the advertising, marketing, promotion, offering for sale, or sale of tax relief services.” The United States District Court for the Northern District of Illinois has issued a preliminary injunction prohibiting the alleged practices.

So where did they go wrong? Did they start out with the best of intentions, or did they decide at the beginning to mislead the public, take the money and run? It seems obvious that the huge interest sparked by the initial advertising generated a sufficient number of prospects, but only if they became paying customers. And in order to lure them, outlandish promises—promises that couldn’t be kept—had to be made. In hindsight, it seems so inevitable.

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