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