JK HARRIS' TAX TROUBLES
Fighting the IRS fueled big growth at tax firm, but it now faces legal,
regulatory trouble of its own
Published on 03/06/05
BY MATTHEW MOGUL
Of The Post and Courier Staff
JK Harris & Co., a North Charleston firm that helps delinquent taxpayers resolve
disputes with the IRS, has come under state and federal scrutiny and faces lawsuits
across the country for allegedly failing to work out the negotiated settlements it
promised clients.
The allegations against JK Harris on its promises and didn't adequately
include predatory business practices, respond to customers' problems. Some
unfair and deceptive business former clients claim the firm took their
practices, breaches of contract and money even though it knew there was
fiduciary duty, and putting out no chance of a successful deal with the
marketing messages that are false and IRS.
likely to mislead.
John K. Harris, the company's founder
The company, which bills itself as the and namesake, acknowledged that his
nation's biggest tax-resolution firm, firm has had some difficulty adapting
has drawn the attention of 12 states' to its rapid growth, especially when
attorneys general, including South coping with complaints.
Carolina's. The attorneys general
"We're not lily-white by any means. I
began to band together about a year
know my lawyer is going to hate me
ago to address mounting complaints
saying this ... we did the best we could
against the company. Two of them, in
with the rate of growth we had, and I
Connecticut and Kansas, have filed
think we did a darn good job," said
lawsuits against JK Harris.
Harris, adding that his firm is
In addition, the U.S. Department of negotiating with the attorneys general
the Treasury has confirmed that an to implement suggested changes.
investigation it started in tandem with
However, Harris also attributes a
the IRS is continuing. That probe
portion of his troubles to the fact that
included a July 2000 raid by the
his firm is the biggest in what is
agencies at the company's
largely an unregulated industry. The
headquarters near Mall Drive.
authorities, he said, want to "tighten
Also, individuals in at least four states the rules" and figure that other smaller
have filed lawsuits seeking class-action firms will see what's happening to JK
status against JK Harris, including an Harris and take notice.
Alabama couple represented by Mount
Harris also said the IRS is to blame for
Pleasant-based Motley Rice, one of the
most of his company's problems
biggest plaintiffs' litigation firms in the
because the agency constantly
country.
changes its rules. "Doing business with
What the lawsuits and consumer the IRS is like doing business with a
complaints generally allege is that JK moving target," he said. "They're the
Harris used aggressive sales tactics to ones giving us a lot of our headaches."
sign up clients, then failed to deliver
Although a report by an IRS Demand for such services apparently
ombudsman concluded that the has been high. In just under eight
agency has been less than helpful in years, JK Harris has opened 475
administering its tax-relief program, offices in 46 states and now employs
prosecutors and plaintiffs' lawyers 640 people nationwide. More than half
contend JK Harris must be held of them work at the firm's North
responsible for its business practices. Charleston headquarters, a former IRS
office converted into a honeycomb of
TOO MUCH TOO FAST?
tightly packed cubicles.
Harris, a certified public accountant
turned millionaire entrepreneur, The gargantuan growth spurt helped
carved out a niche for himself in 1997 JK Harris grab a significant chunk of
when he began offering advice to what's estimated to be as much as a
taxpayers on how to settle debts with $1 billion-a-year industry. The
the IRS, typically for less than company brings in revenue of roughly
originally owed. a $100 million a year and says it has
served about 130,000 customers since
The IRS offers a variety of programs
opening its doors.
for reducing and paying off tax bills.
The idea is that the government can But as the company grew, so did the
recoup some of its money, while allegations against it.
taxpayers buried deep in arrears get a
The South Carolina Department of
chance to square their accounts with
Consumer Affairs says it has received
the government.
roughly 180 complaints — the highest
JK Harris started off marketing itself as tally for any company doing business
an intermediary for a specific IRS in the state — against JK Harris in the
program called an Offer in past three years, the time limit for
Compromise. Anyone who thinks he or keeping records. The bulk of the
she is eligible for the OIC plan can deal complaints are from out of state.
directly with the IRS, without paying
"Most of the complaints have to do
extra for the service. IRS records from
with disputes that people give them
last year show that about 18 percent
money for this (OIC) program and
of all offers made to the OIC program
aren't satisfied that JK Harris said it
were accepted.
would do as it promised," said Donna
For delinquent taxpayers who want DeMichael, an attorney in the
help navigating the system, department's services division. "They
middlemen like JK Harris offer special say the company gives bogus reasons
expertise to help guide taxpayers why it's not giving the money back ...
through the process. The firm's Web people sign up, they pay and then the
site, like those of its competitors, company finds excuses."
boasts a staff of veteran ex-IRS
Because DeMichael's office can act
agents, CPAs and others who
only as a mediator — it has no
specialize in tax issues.
authority to enforce issues — the
The company, which offers a range of department has been "extremely
financial services, has also marketed a frustrated" trying to work with JK
similar middleman role in working out Harris, she said.
deals between nongovernment
In response, Harris said his firm will
creditors and debtors. As with its debt
not dole out refunds it deems
deals with the government, JK Harris
unwarranted.
obtains a power of attorney from the
debtor and negotiates new terms of "If we screwed up, give them their
repayment with the creditor. money back and don't ask any
questions," he said of his firm's JK Harris also has been asked to tone
policies. "But if we did our job and did down some of the language it uses in
it right, then we fight them (the its print and TV ads. For instance, the
customers) to the death." firm stopped saying it could settle tax
debt for "pennies on the dollar" after
Harris said his firm maintains a
the IRS put out a warning a year ago
complaint database, which shows
saying that many "unscrupulous
about 7.5 percent to 8 percent of its
promoters" were making the same
customers have some sort of problem
pitch.
with the service. Though he'd like to
do better, he feels that the figure is An IRS spokeswoman said that
well within industry norms. warning wasn't targeting any one
company.
Many of the complaints, Harris said,
stem from clients who didn't get the Harris said he first learned of the
results they wanted, even though his attorney general working group last
firm did the work it promised. "We tell year, around the time he got a
them (customers) that there's no such surprise visit from South Carolina
thing as a guarantee, but they still Attorney General Henry McMaster.
come back to us and say they want
"The reason for our visit was to
their money back."
attempt to determine whether what we
Still, the legal battles have apparently were hearing was just a case of
made him less "hard-headed" than he shoddy customer service or whether it
once was, Harris said. was an attempt to defraud
consumers," said Trey Walker, a
"If they (the customers) want a refund
spokesman for McMaster's office.
at this point, I say they can have it,"
Walker added that the spot inspection
he said. "It's just not worth it
was the first and only time the
sometimes."
attorney general has showed up
LEGAL SCRAPES unannounced at a facility.
Following a suggestion from the 12-
"If we were to characterize our
member attorney general working
thoughts from our tour and
group, the firm recently began
conversations with workers there, we'd
including disclosure forms with its
say on its face it did not appear to be
marketing packets that spell out the
a large-scale fraudulent effort," Walker
company's refund policy and provide
said. "That being said, the volume of
details about the likelihood of getting
complaints necessitates that this office
IRS approval for the OIC plan.
continue to review JK Harris, along
JK Harris hired Charlie Condon, a with the other attorneys general."
former South Carolina attorney
Britt Beemer, a former JK Harris board
general, as legal counsel to come to a
member, offered a similar perspective
comprehensive agreement with the
on why the firm has run into trouble.
attorney general working group. Harris
called the decision to bring Condon on "I'm sure their problems are
board "the best legal money I have unintentional ones," said Beemer,
spent," and said he expects to wrap up founder of Charleston-based America's
negotiations with the group in coming Research Group, a consumer
months. marketing research firm.
Part of the deal likely will be that his "I'd say they probably got
firm must share with the attorneys overwhelmed with all the business and
general all complaints leveled against couldn't ramp up their services fast
the company over the next decade. enough," he said. "They are honorable
people over there and have helped a JK Harris was trying to rustle up
lot of people with their service." business by notifying people that it
could help them resolve outstanding
Even so, the firm's business practices
debts with their creditors. The problem
have led to other run-ins with the law.
was that many of the recipients of the
About five years ago, armed IRS and unsolicited mass mailings didn't have
Treasury agents wearing bullet-proof any judgments against them.
vests entered JK Harris headquarters
JK Harris bought the list of names
and carted away reams of documents.
from ChoicePoint, a third-party data
The government has said very little warehouser that trawls public records
about the reason for the raid. "The for information. It seems that the list
issues that arose from the 2000 JK Harris bought included nonexistent
investigation are as of yet unresolved," cases.
said Luis D. Garcia, spokesman for the
ChoicePoint has made news lately for
Treasury Inspector General for Tax
unwittingly selling sensitive
Administration.
THE ALLEGATIONS
Harris said he has heard otherwise.
The Connecticut and Kansas attorney
"The government always says a case is general offices are suing JK Harris,
'still open'," he said. "But as far as I while individuals in at least four states
know, from what my lawyer told me, - California, Connecticut, South
the last time we spoke to the Justice Carolina and Washington - have filed
Department was in November 2003. lawsuits seeking class-action status
And we were told the case was closed against it. Here's a look at some of the
and they were taking no further allegations against the North
action." Charleston tax-resolution firm:
FINGER-POINTING -- Kansas is seeking refunds for
Harris points out he has never been victims and $560,000 in fines and
successfully sued, except when he penalties. Its December 2004 suit
decided not to show up in small claims alleges JK Harris' business practices
court. Records, however, do show that are deceptive, misleading, false, in
his firm has settled a number of cases violation of the Kansas Consumer
out of court. Protection Act and amount to the
unauthorized practice of law.
Harris said his defense in a number of
upcoming cases, if they make it to -- Connecticut's lawsuit includes many
trial, will be to point the blame at of the same claims, alleging that JK
others that he believes are Harris' business practices are "unfair
responsible. or deceptive." The lawsuit filed by its
attorney general's office in February
A Connecticut court is one place Harris
2004 levels four allegations against
may employ this defense in response
the firm, including making the false
to a lawsuit by that state's Attorney
promise of being able to "re-establish
General's Office.
your credit."
In December 2003, JK Harris mailed
-- An Alabama couple represented by
letters to "numerous Connecticut
Mount Pleasant law firm Motley Rice
consumers" telling them a "judgment
and Columbia-based Strom Law Firm
had been filed against them ... for
filed suit against JK Harris in January
nonpayment of debt," according to a
and is waiting to see whether the court
press release from the Connecticut
will grant it class-action status. The
Attorney General's Office.
lawsuit seeks to stop JK Harris from
continuing what it claims are
"unacceptable business practices," proceedings or be missing any tax
including "breach of fiduciary duty and returns from past years. Last year,
breach of contract." just 19,546 OIC bids were accepted
out of 106,025 submitted.
WHAT'S AN 'OFFER IN
COMPROMISE?' A tax debt can be adjusted for one of
These agreements between a taxpayer the following reasons:
and the IRS effectively resolve the -- Doubt exists that the assessed tax
taxpayer's obligation to the is correct
government. The IRS has the authority -- Doubt exists that a person could
to settle federal tax liabilities by ever pay the full amount of tax owed
accepting less than full payment under -- The taxpayer can demonstrate that
certain circumstances. the collection of the tax would create
an economic hardship or would be
Not everyone is eligible, however, as
unfair and inequitable.
an OIC is a last resort settlement. Source: IRS
Applicants also can't be in bankruptcy
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