UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-K




(Mark One)


[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended December 31, 2010




or




[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from ______________  to ______________





Commission File Number 33-11986-LA





TAXMASTERS, INC.


(Name of small business issuer in its Charter)





Nevada
91-2008803(State of Other Jurisdiction of

Incorporation or Organization)
(IRS EmployerIdentification

No.)





900 Town & Country Lane, Suite 400, Houston, TX  77024


(Address of Principal Executive Offices and Zip Code)





(281) 497-5937


(Registrant’s telephone number, including area code)





Securities registered under Section 12 (b) of the Act:   None





Securities registered under Section 12 (g) of the Act:





Common Stock, $0.001 par value


(Title of Class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes    [   ]
No [X]




Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes   [   ]
No [X]




Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes   [X]
No [   ]







Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes   [   ]
No [   ]




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
[   ]
Accelerated filer
[   ]Non-accelerated filer
[   ]
Smaller reporting company
[X](Do not check if smaller reporting company)




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes   [   ]
No [X]





As of June 30, 2010, the aggregate market value of voting common stock held by non-affiliates of the Registrant (6,697,105 shares) was approximately $421,806.  The aggregate market value was computed by reference to the last sale price of such common equity as of that date.





As of April 11, 2011, the issuer had 140,700,105 shares of Common Stock outstanding and 1,000 shares of Control Series Preferred stock outstanding.





Documents Incorporated by Reference:  None






















INDEX





PagePART IItem 1.
Business
4Item 1A.
Risk factors
11Item 1B.
Unresolved Staff Comments
14Item 2.
Properties
14Item 3.
Legal Proceedings
15Item 4.
[Reserved]
15PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15Item 6.
Selected Financial Data
16Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of  Operations
16Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
22Item 8.
Financial Statements and Supplementary Data
F-1Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
23Item 9A.
Controls and Procedures
23Item 9B.
Other Information
24PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
24Item 11.
Executive Compensation
27Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
31Item 13.
Certain Relationships and Related Transactions, and Director Independence
33Item 14.
Principal Accounting fees and Services
33PART IVItem 15.
Exhibits, Financial Statement Schedules
34SIGNATURES

36CERTIFICATIONS











PART I





This Form 10-K contains forward-looking statements.  For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements.  You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms.  In evaluating these forward-looking statements, you should consider various factors, including those listed below under the heading “Item 1A.  Risk factors”.  The Company’s actual results may differ significantly from the results projected in the forward-looking statements.  The Company assumes no obligation to update forward-looking statements.





As used in this Form 10-K, references to the “Company,” the “Registrant,” “we,” “our,” or “us” refer to TaxMasters, Inc. (formerly known as Crown Partners, Inc.) unless the context otherwise indicates.





ITEM 1.  BUSINESS





Our Background





On August 4, 2009, we acquired all of the outstanding shares of common stock of TaxMasters, Inc., ("TaxMasters"), a Nevada corporation, in an exchange of shares of our common stock and certain Preferred Stock for all of the issued and outstanding shares of TaxMasters, Inc. under Section 368(a)(1)(B) of the Internal Revenue Code (the “Share Exchange”).   TaxMasters is a Nevada corporation, with headquarters at 900 Town & Country Lane, Suite 400, Houston, Texas 77024.





TaxMasters was originally formed in 2001 as a sole proprietorship in Texas until January 2004.  On January 9, 2004, TaxMasters was organized as a Texas limited partnership, TMIRS Enterprises Ltd., which did business as TaxMasters.  TM GP Services, LLC, a Texas limited liability company wholly-owned by Patrick R. Cox, was also formed as a general partner of TMIRS.   On April 6, 2009 TMIRS Enterprises entered into a 351 Contribution Agreement with TaxMasters, pursuant to which TMIRS assigned to TaxMasters, then a newly formed Nevada corporation, all of the assets of TMIRS Enterprises’ tax solutions business in exchange 100,000 shares of common stock of TaxMasters.





As a result of our acquisition of TaxMasters, we are a tax resolution company engaged in the business of assisting taxpayers with matters at the U.S. Internal Revenue Service (“IRS”), especially the resolution of disputes and assessments and the settlement of tax liabilities.  We are a firm of experienced tax professionals that help our clients solve their Federal tax problems, ranging from filing delinquent tax returns to settling tax debts.  Our tax professionals include tax attorneys, Certified Public Accountants, Former IRS agents, Licensed Tax Preparers and other tax professionals who are authorized to practice before the IRS.  Our tax professionals are experienced in analyzing and providing solutions to even the most complicated tax problems and guiding clients through the bureaucracy of the IRS.





Our Business





Our tax professionals have the skill and knowledge to reduce our client’s tax liabilities and solve their IRS tax problems.  We use the rules established by the Internal Revenue Code and IRS regulations to help our clients resolve matters at the IRS.  Our tax professionals help our clients reduce taxes, eliminate penalties, and get representation before the IRS.  We help our clients understand how they wound up with the tax problems they have and help them fix the entire problem that caused their tax debt.  We can often reduce the tax our clients owe even before attempting to settle tax strategies with the IRS.





Through our tax professionals, we offer the following services:





·
Get our clients into compliance with their obligation to file income tax returns and pay back taxes due;





·
Reduce taxes by reducing penalties and interest on tax debts;





·
Settle our client’s tax debt for the lowest amount possible under the law;





·
Stop IRS wage garnishments;





·
Stop IRS property seizure;





·
Defend our client in an IRS audit or IRS criminal investigation;





·
Recover seized funds; and





·
Remove an IRS levy or lien.





-4-


Delinquent Tax Returns and Back Taxes





In an effort to improve efficiency and to collect more money, the IRS has improved its database of income transactions and increased its ability to identify people who have not filed tax returns. The IRS hires Revenue Agents to find people who may owe them money.  The IRS has a wide range of civil and criminal penalties available that it can impose on individuals or businesses who fail to file tax returns, which penalties along with interest will drastically increase the amount owed to the IRS.  It is estimated that 15% of all taxpayers have unfiled tax returns or owe back taxes, or delinquent taxes.





We help those individuals and businesses with delinquent returns, back taxes or delinquent taxes minimize the penalties and interest they would otherwise have to pay to the IRS by assisting them file all past-due returns before the IRS notifies them of delinquent returns or back taxes.





Our proactive approach is important for our clients for many reasons:





·
Failure to file and pay back taxes may result in a federal prison sentence and/or seizure of assets.  Our proactive approach will take away the IRS’ ability to seek criminal prosecution in most cases.





·
Failure to file tax returns can affect the ability of our clients to get credit from most lenders and credit card companies until their delinquent taxes are paid.





·
Certain federal and state benefits are based on amounts reported in filed tax returns. Social Security and Medicare are computed based on a person's lifetime earnings, some of which is only reported to the IRS on a tax return. State benefits (such as unemployment compensation) are also based on reported income.





·
To claim any refunds due, all current and back tax returns have to be filed.





·
Income tax refund money for a given year may be lost if a delinquent tax return for such year is filed more than three years from the due date of such tax return.





·
Waiting for the IRS to seek you out before you file your delinquent tax returns increases the likelihood of criminal prosecution.





We also assist our clients who have delinquent tax returns in overcoming a substitute return filed by the IRS.  By law, the IRS may file a “substitute return” for people who have not filed a tax return.  The IRS will estimate the person’s income for the substitute return based on information it is able to gather.  The IRS generally sends a letter to the person notifying him or her of the substitute return and then proceeds with filing the substitute tax return on such person’s behalf.  Additionally, because the substitute return is filed in the best interest of the U.S. government, the IRS assumes the person has no deductions or expenses other than the standard deduction and one personal exemption.  Consequently, the tax owed under the substitute return will generally be greater than the person would otherwise owe as a result of other deductions for which the IRS will not give credit in the substitute return (such as exemptions for spouses, children, interest and taxes on your home, cost of any stock or real estate sales and business expenses).  We assist our clients in overcoming the substitute returns by filing the delinquent tax returns with deductions to which our clients are entitled and obtaining any refunds that may be due to them.





Settle Taxes and Offer in Compromise





A significant portion of our business is to help our clients settle their tax debt for the lowest amount possible.  Prior to entering into a settlement with the IRS for the tax liability in dispute, we look at all of our client’s options that may be available to him or her to reduce the tax liability at issue.  These options often include submitting or resubmitting corrected tax returns (such as filing delinquent returns or filing amended returns to claim overlooked deductions) and even establishing favorable monthly installment agreements.  Once we have determined that a client’s specific tax problems have been addressed and tax penalties minimized, and all other settlement offers have been exhausted, we submit an offer in compromise.





An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt.  The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances.  IRS statistics show that the average offer in compromise results in the taxpayer paying thirteen cents on the dollar to settle an IRS tax debt.  That does not mean every offer submitted is accepted.  The majority of offers are rejected and the client’s problem is resolved in the appeal process.


-5-


While an offer in compromise is the most talked about method to settle IRS tax debts, it can be an extremely complicated, difficult and lengthy process.





The IRS process of reviewing an offer in compromise can take up to two years to complete, and penalties and interest continue to accumulate during this time.  As part of the offer in compromise process, our clients must provide full financial disclosure to the IRS of their finances and tax returns, which may trigger an audit or other investigations.  Because of these and other complexities of the offer in compromise tax settlement process, taxpayers should hire qualified tax professionals to prepare their offer in compromise and negotiate with the IRS.  We have a team of seasoned tax professionals to submit an offer in compromise for our clients, to guide them through the settlement process.





Cease IRS wage garnishments and other IRS Levies





One of the more aggressive methods the IRS uses to collect back taxes is to levy wages, commonly referred to as “wage garnishment”.  The IRS can notify a person’s employer that such person has a back tax debt.  The employer is then required by law to send a significant portion of each of that person’s paychecks directly to the IRS to offset the debt.  The dollar amount sent to the IRS for the wage garnishment depends on the person’s filing status, the number of exemptions the person claims and how often the person gets paid.





In the IRS’ fiscal year 2007 (October 1, 2006 through September 30, 2007), the IRS issued approximately 3.8 million wage garnishments and levies, combined, against taxpayers, which is a 38.5% increase over the wage garnishments and levies issued by the IRS in its fiscal year 2005 (October 1, 2004 through September 30, 2005) and a 1,700% increase over the number of wage garnishments and levies issued by the IRS in its fiscal year 2000 (October 1, 1999 through September 30, 2000), according to the Fiscal Year 2007 and 2006 IRS Enforcement and Service Statistics.





Salary garnishment can lead to serious problems in a person’s personal and financial life.  If the IRS is garnishing wages, they typically also have filed a Federal tax lien.  The IRS will not stop salary garnishment unless a client takes action to settle what he or she owes, because the IRS usually levies wages to force a person to take action or after all other attempts by the IRS to collect the delinquent tax have failed.





We assist our clients in stopping wage garnishment by getting our clients back in compliance with the requirement to file their tax returns and negotiate a release of their wages from levy.  Our tax professionals have been successful in securing a release or reduction in wage levy through (i) an Installment Agreement for the client to pay the tax debt in monthly installments over a given period of time, or (ii) an Offer in Compromise to settle the client’s tax debt for less than the actual amount originally owed.





Recover Property Seized by the IRS





The IRS has the power to seize assets and place liens on property to satisfy unpaid and delinquent taxes.  Since the IRS’ fiscal year ended September 30, 2000, IRS property seizures have increased nine fold to 676 seizures for the year ended September 30, 2007.  Similarly, the IRS has filed a significant number more liens since the year ended September 30, 2000 (when the IRS filed approximately 287,000 liens).  In the year ended September 30, 2007, the IRS filed approximately 683,000 liens against taxpayers, an increase of 238% from the number of IRS liens filed in 2000.




When an IRS levy is issued, the bank is legally obligated to immediately freeze any and all of the person’s accounts. The bank must then hold those funds for 21 days, giving the person time to resolve the debt.  If the person has not resolved the debt in those 21 days, the bank must send those funds to the IRS.





The IRS can take and sell any property, such as a boat, car of even a house.  We address liens and property seizures by various approaches.  Depending on the client’s situation, we may request a Stay of Collections with the IRS for up to a 90-day period.  If the Stay of Collections is granted, the IRS will not contact our client about his or her back taxes. During the Stay of Collection, our tax professionals use that period to resolve the tax debt with the IRS, whether by an installment plan or an Offer in Compromise or some alternative settlement.





-6-


IRS audit





When a client has received a notice from the IRS that they will be subject to an audit or that the IRS will be adjusting a client’s taxes, we act a “tax representative” for the client and appear before the IRS on the client’s behalf to provide the tax audit help that preserves the client’s rights.  We represent clients in normal audits, audit letters, and even fraud audits and criminal investigations.  Advantages of using a tax representative for an audit, tax adjustment or criminal investigation are:





1.
The client does not have to be present at the audit. This means that the IRS agent does not get to question the client in person regarding the small details of their return in order to explore other areas and expand the scope of the audit.





2.
Even the playing field.If a client represents himself in a tax audit, the IRS auditor assumes that the client knows the tax laws and regulations as well as a tax lawyer. The IRS agent will also assume the client knows the Internal Revenue Manual (IRM) as well as the agent does.





Our tax representative services in audits and audit appeals include





(i) Acting as an intermediary between the IRS and the client,





(ii) Rescheduling the audit if necessary,





(iii) Requesting specific information from the IRS related to the matter under investigation,





(iv) Defending the client’s tax return at the audit (to the extent of any legal position taken by the client), and





(v) Receiving any findings from the IRS and negotiating to reduce any proposed settlement.





In the event of an audit appeal, we will





(a) Prepare and file a protest of the IRS examiner’s determination,





(b) Plan the appeal and coordinate with the assigned appeals division, and





(c) Confer with the IRS to discuss why the examiner’s findings were erroneous and attempt to negotiate a resolution.





If an appeal is not successful and the client wants to pursue the appeal further, we work with the client and an attorney who can file a tax court petition on the client’s behalf. TaxMasters does not advocate or defend any illegal position at an audit or audit appeal.





Our Industry





We are in the tax resolution business.  We offer comprehensive tax representation services, from audit representation to settling outstanding tax debt, to suspending levies, liens, and wage garnishment.  We help individuals and small business owners solve their tax problems with the IRS that stem from unpaid taxes or IRS action.





According to the IRS, in the 2006 calendar year there were approximately 179.4 million tax returns filed by individuals, estates, and various entities and approximately 1.5 million returns were audited by the IRS, which is less than one percent of all filed tax returns.  However, of the 134.5 million tax returns filed by individuals, approximately 1.345 million returns were audited, which is approximately one percent (1%) of all returns filed by individuals.  With changes in the tax laws looming, it is expected that the number of individual returns that are audited will increase.  Since 2000, the IRS has doubled the number of individual tax returns that they have audited, from approximately 617,000 returns audited in fiscal 2000 to 1.38 million returns audited in fiscal 2007, according to the 2008 report of the National Taxpayer Advocate.





The amount of back taxes owed to the U.S. government is sizable and it is expected that the U.S. government will step up its collection efforts.  In 2001, the IRS estimated that the amount of taxes still owed to the U.S. government by individual and corporate taxpayers was about $345 billion.  The IRS has stated publicly in 2008 that it believes that the $345 billion in back taxes is a “low ball estimate.”  A 2006 IRS study on the back taxes owed to the U.S. government showed the approximately $197 billion came from individuals who underreported their taxes on their individual returns, $80 billion came from corporations that underreported their taxes and the remainder, $60 billion, came from persons who did not file any tax returns.





-7-


Most of the underreporting of income by individuals was from the self-employed, who reported only about 68% of their actual income.  However, self-employed individuals who are paid on a cash basis are estimated to only report about 19% of their actual income.  In contrast, individuals subject to withholding from their employers report 99% of their income.





In March 2009, the IRS announced that it was not renewing the contracts with private debt collection firms that were hired to collect back taxes.  Instead the IRS will be handling the collection of back taxes and has announced that it will hire 1,000 new collection agents.  With the Federal deficit for the 2010 Federal budget to be approximately $1.75 trillion dollars and many Americans facing economic hardship which will make it more difficult for them to pay taxes owed, the IRS will be increasing its collection efforts and using the wide range of options available to them in attempting to resolve difficult collection cases that, by law, the private contractors do not have.





Since 2000, the IRS has taken various steps to increase the collection of uncollected taxes, penalties and interest.  According to the 2008 report of the National Taxpayer Advocate, the number of levies (including wage garnishments) issued by the IRS has increased 1,608% since 2000 (from 220,000 levies to 3.76 million levies issued in 2007).





The IRS collection of back taxes involve options are often complex and difficult to process.  It is anticipated there will be an increase in the number of Americans who are unable to pay the taxes they owe or pay outstanding tax liabilities as a result of the current recession.





Additionally, we anticipate that in the coming tax years, many individual tax payers who lost their homes to foreclosure, defaulted on their credit cards or car loans or had their mortgages reformed under Federal law will be facing notices from the IRS for “Cancellation of Debt Income”.  In general, the Internal Revenue Code treats cancelled debt as taxable income.  Although there are some Federal exceptions to Cancellation of Debt Income, you are required to file a form with the IRS to secure the exemption.  This filing requirement is not widely known by the public.  The National Taxpayer Advocate in its 2008 annual report expressed concerned that because of the severe economic downturn tens of thousands of taxpayers (and possibly hundreds of thousands of taxpayers) who qualify for the exemption from Cancellation of Debt Income may not file the proper form to secure the exemption.





Marketing of our services to potential clients





Our clients come from a broad demographic cross section.  Because tax troubles do not follow one particular segment of the population – the IRS can go after anyone -- our clients come from all walks of life, from doctors and lawyers to mechanics, truck drivers, soldiers, school teachers, and retired persons.  We have served politicians, medical professionals, school board presidents, oil executives, mail carriers, and preachers.





We market our services primarily on local TV stations and cable TV.  We advertise only on national radio programs where the program host provides a personal read of our company.  Television and radio advertising account for about 80% of our annual advertising budget.  The remaining 20% of our advertising is spent on advertising on the Internet (such as banner advertising, links, and search tags for our website on the Internet).  We also maintain a website at  www.txmstr.com  on which we maintain links to some of our radio advertisements.  In 2010 we increased our advertising  efforts by increasing spending by $2,157,492, to a yearly total of $15,995,244 versus $13,837,752 spent in 2009.  Our advertising efforts are made through out the year as our business is not seasonal.  Unlike tax preparation firms, our business does not drop off after April 15 of each year.





Advantages of Using TaxMasters Tax Resolution Services





The benefits of using our tax resolution services can be demonstrated through our successful track record in





·
Stopping and reducing IRS penalties and interest;





·
Using our client’s lawful rights to fight the IRS; and





·
Settling our client’s IRS tax liability for little as legally possible.





We are dedicated to providing quality, consistent tax representationservices designed to bring clients back into compliance with the IRS, fight the IRS audit findings or appeal audit findings, assure that our clients are treated fairly, and, when appropriate, to allow us to negotiate with the IRS the best possible payment options for our clients.  We have a high customer satisfaction rate from our clients.  To maintain that satisfaction level, we employ a Quality Assurance team dedicated to make sure we treat our clients fairly and provide quality, consistent services.  Our Quality Assurance team works with and monitors our sales consultants and tax professionals to ensure that clients are properly qualified and that all services purchased are completed efficiently and in a timely manner.


-8-


We believe that the advantages to our clients of using TaxMasters to address tax debt problems as compared to other tax solution firms is that we:





·
Help our clients understand how their tax problems arose and how to avoid actions that can lead to tax problems in the future;





·
Help fix the entire problem that caused tax debt and can often reduce the tax owed even before attempting to settle taxes with an Offer in Compromise or other negotiated settlement solution.





·
Understand the intricate IRS procedures, policies and practices to fight for the rights and fair treatment of clients.





·
Have a track record of success because we understand the IRS, pay attention to trends and changes at the IRS, and use what we know to help our clients avoid  or stem aggressive IRS collections actions.





How we provide our services to our clients




We offer our clients a no-charge initial consultation regarding their tax problems.  The free initial consultation enables our consultants to get information from the potential client about his or her tax problem and understand the nature of the problem.  From the initial consultation, we can determine what services and forms the client will need and we can present a cost estimate for the client.  We provide our services on a “pay-as-you-go” basis.  Those clients that pay our fee in the installment plan will tend to have their tax problems resolved slower as we limit the scope of our services to match the installment payments.





After we give the cost estimate to the client, if the client decides to use our services, we have the client sign an engagement agreement.  After we receive the signed engagement agreement, we send to the client the various required IRS forms, such as the IRS Power of Attorney Form (that allows us to act on the client’s behalf with the IRS) and various TaxMasters forms.  When we receive the signed forms from the client, we follow up with the client to present the details and the process of how we will address the client’s tax problems.  The next step is that our tax consultant contacts the IRS to identify all of the client’s problems, including details about our client that the IRS has in its official file on the client, and our tax consultant prepares and sends a findings letter to the client.  Our customer service department calls to follow up with the client about the findings letter and to explain in details the next steps we will be taking on the client’s behalf.  If needed, we may need to have the client update or fill out and sign new IRS and TaxMasters forms.  We then proceed to help the client re-establish tax compliance (unfiled returns, defend in audit, appeal audit decision, and so forth).  We then negotiate with the IRS to minimize or reverse the IRS tax problem (which may involve settlement analysis, negotiation of a settlement agreement, recover seized property or funds, cessation of wage garnishment or appeal or release of a lien or levy).  During the entire process, our customer service department provides our clients with periodic updates on their matter.





What we charge for our services





The amount we charge a client will depend on the type of tax problem we are addressing and the service we are providing, such as:  (i) handling an IRS collection matter, (ii) preparing or amending tax returns (including schedules), (iii) negotiating a settlement and/or (iv) defending a client in an audit.  In addition, some of our rates will vary depending on whether our client is an individual or a business.  Built into all of our fees are the initial consultation we have with the IRS to determine all of the client’s problems and the preparation by us of a findings letter outlining the tax problems.





Collections:  For IRS collection case involving wage garnishment, Federal tax liens, IRS levies and related IRS proceedings, we charge our clients a flat fee depending on the dollar amount of the tax liability.





Tax Filing Preparations:  We often prepare tax returns for clients for a variety of reasons – such as getting clients into compliance for delinquent filings or reducing a client’s tax liability by filing an amended return to advantage of deductions and adjustments that the client may have missed.  We charge our clients a minimum flat rate retainer amount for the tax filing preparation for each tax year for which we are filing a return.  We charge different rates for business clients and individual clients in regard to tax filing preparation.  In addition to the retainer, we charge our clients an hourly rate for consultation on the preparation of the tax filing (such as advice on deductions, adjustments, documentation, etc.).





Negotiated Settlements:  Negotiated settlements include installment agreements (paying tax debt over time), offers in compromise, requests for uncollectible status and requests for abatement of penalties.  We handle both state and Federal negotiated settlement agreements for businesses and for individuals.  We charge a flat fee based on the dollar amount of the tax debt being settled.  In addition to our flat rates, negotiated settlements invariably require consultation with the IRS by our in-house tax experts.  Offers in compromise also require a 20% down payment to the IRS and a $150 IRS processing fee.


-9-


Audits/Investigations:  Acting as a tax representative for an IRS audit or audit appeal, we charge a flat rate based on various factors:  (i) whether we are representing a business or an individual, (ii) how long ago the tax year being audited occurred (the longer the period the higher the rate), (iii) whether the audit is the initial proceeding or an appeal of a prior decision and (iv) in the case of the individual whether his or her return has a Schedule C being audited (report income or loss from a business operated by the client).





How we make our profit





We earn revenues from both the flat rate fees that we charge our clients for the preparation of tax returns, handling IRS collection cases, handling IRS audits and acting as a tax representative in negotiated settlements.  We also earn fees for consultations with the IRS that are not built into the flat fees that we charge our clients.  Our clients pay the flat rate fee on a pay-as-you-go basis.  Our expenses during such period included:  (i) salaries and consultant fees of our tax experts, customer service department and administrative department, (ii) fixed overhead expenses such as rent, utilities and telecommunications, (iii) information services to keep abreast of the latest tax law developments and (iv) marketing expenses.  We expect those expenses will remain approximately the same percentage of revenue in the current and subsequent fiscal years.  However, we will incur additional legal and accounting expenses in connection with becoming a public company.  Though we expect our public company expenses to be significant, we do not expect such expenses to have a material adverse impact on our profitability.





How our business is organized





TaxMasters was founded by Patrick Cox, our President, Chief Executive Officer and majority stockholder, in 2001 and we operated as a sole proprietorship until January 2004.  From January 9, 2004 through April 6, 2009, we were organized as a Texas limited partnership, TMIRS Enterprises, Ltd., which did business as TaxMasters.  The sole limited partner of TMIRS Enterprises was Patrick Cox.  The general partner of TMIRS Enterprises was TM GP Services, LLC, a Texas limited liability company wholly-owned by Mr. Cox.  In April 2009, TMIRS Enterprises, Ltd. entered into a Section 351 Contribution Agreement with TaxMasters, pursuant to which TMIRS assigned to TaxMasters, Inc., a newly formed Nevada corporation, all of the assets of TMIRS Enterprises’ tax solutions business in exchange for 100,000 shares of common stock of TaxMasters, Inc.  On August 4, 2009, TaxMasters, Inc. entered into a Share Exchange Agreement with us (at which time we had already changed our name to TaxMasters, Inc. on July 16, 2009 in anticipation of the closing).  Pursuant to the Share Exchange Agreement, Patrick Cox, the sole shareholder of TaxMasters, Inc., agreed to transfer to us all of his shares in TaxMasters, Inc. in exchange for 301,000,000 shares of our common stock and 1,000 shares of our Control Series Preferred Stock (plus the right to receive up to an additional 299,000,000 shares over the next five years based on our financial performance).  As a result of the Share Exchange Agreement, TaxMasters, Inc. became our wholly-owned subsidiary and Patrick Cox became the owner of 99.1% of the outstanding shares of our common stock.





On July 1, 2010, we entered into a voluntary Financial Reorganization Agreement with Patrick R. Cox, our Chief Executive Officer and majority and controlling shareholder, and Olde Monmouth Stock Transfer Co., Inc., our transfer agent (“Olde Monmouth”).





Pursuant to the Financial Reorganization Agreement, Mr. Cox transferred 200 million shares of common stock owned by him to Olde Monmouth, which will hold such shares in escrow until June 30, 2015.  Such escrowed shares were originally issued to Mr. Cox in the “B” reorganization under the Internal Revenue Code of 1986 (as described above).  While the escrowed shares are held by Olde Monmouth in escrow, Mr. Cox shall not have the right to vote such escrowed shares nor receive any dividend or other distributions in respect of such escrowed shares.  After each of our fiscal years completed prior to June 30, 2015, Mr. Cox shall be entitled to claw back the number of such escrowed shares based upon a formula tied to our financial performance for such fiscal year.  Such formula is set forth in the Financial Reorganization Agreement.  At June 30, 2015, any escrowed shares not released to Mr. Cox pursuant to the Financial Reorganization Agreement shall be cancelled.





We entered into the Financial Reorganization Agreement at the request of Mr. Cox for the business purpose of bringing our valuation and market capitalization, based upon our underlying profitability, into a proper range for the direct benefit of our existing and future shareholders (other than Mr. Cox).





Notwithstanding the conditional “claw back” of the escrowed shares by Mr. Cox under the Financial Reorganization Agreement, Mr. Cox continues to hold the “Control Series” of preferred stock and thus remains our controlling shareholder and, by virtue of his ownership of approximately 98 million shares of the Registrant’s common stock, Mr. Cox remains our majority common shareholder.





Our Intellectual Property





We own the registered trademark “TaxMasters We Solve Your Tax Problems” which includes a design (a half completed oval that is shaded and a half completed rectangle that is shaded).  We do not own any patents and we have not filed any patent applications or other trademark applications.  Other than licenses for commercially available software and the copyrighted material that is on our website, we do not own any other intellectual property.


-10-


We own seven websites that are hosted by a third party. The URLs for these sites are http//:www.txmstr.com, http//:www.besttaxmasters.com, http//:www.taxmasterscareers.com, http//:www.taxmasterscharities.com, http//:www.taxmastersracing.com, http//:www.taxmastersunfiledreturns.com, and http//:www.go-taxmasters.com.





Our competitors





The tax solutions business is highly competitive. There are a substantial number of tax solution firms as well as accounting and law firms that offer tax resolution services and/or tax preparation services.  Because our tax resolution services involve tax return preparation, we do compete with some of the largest tax return preparation firms even though such firms do not specialize in or provide tax representation services or tax resolution services.  We draw our clients from across the country and, therefore, our competitors are located through the United States.  Our largest competitors are JK Harris & Company, which is based in Charleston, South Carolina, and Roni Lynn Deutch, A Professional Tax Corporation, which is based in North Highlands, California.  JK Harris is privately held and has 325 offices in 43 states.  JK Harris offers tax resolution services as well as debt management and financial planning services.  Roni Lynn Deutch is a tax law firm that specializes in tax resolution matters.  Overall the tax resolution market is highly fragmented with many firms and is highly competitive with regard to price and service.  There are a number of smaller privately-held tax resolution firms with whom we compete, including Effecteur, Inc., based in Greensboro, North Carolina, Allied Tax Solutions, Inc., based in Dallas, Texas, American Tax Relief, based in Los Angeles, California, Freedom Tax Relief, based in San Mateo, California, 411 Tax Relief, based in Culver City, California, and eTaxes.com, based in Burlingame, California.  In terms of the number of cases successfully handled and the high quality of customer services, we believe that we are one of the leading firms in our industry.





Employees





As of April 11, 2011, we had 306 full-time employees.  None of our employees are covered by a collective bargaining agreement and we believe all relations with our employees are satisfactory.





ITEM 1A.  RISK FACTORS





Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed in other parts of this Annual Report on Form 10-K.  You should consider carefully the following risk factors, together with all of the other information included in this Annual Report on Form 10-K.  Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of our common stock.





Risk Factors Regarding Our Company





All of the services offered by us face a wide range of competition that could adversely affect our future results of operations.





We operate in an intensely competitive and highly fragmented industry.  Our tax resolution services compete with a number of different companies, both large and small, that provide tax resolution services, tax filing preparation services, tax representation services and negotiation settlement services to individuals and small businesses.  We compete directly with both regional tax law firms and accounting firms in the same communities we serve and with large national firms that offer some or all of the same tax resolution services we offer.  Our larger competitors may be able to offer their services at lower rates than we do.  Our smaller competitors may be able to offer their services at lower rates because of lower overhead.  Our business and results of operations could be adversely affected if we do not compete effectively.





If we lose the services of Patrick Cox, our founder and Chief Executive Officer, we may not be able to execute our business or growth strategy effectively and our results of operations may be harmed.





We are highly dependent on Patrick Cox, our founder and Chief Executive Officer, for our business and growth strategies and the delivery of high quality services for tax resolution matters.  Our future success depends in large part upon the continued service of Mr. Cox, who is critical to our overall management as well as the growth of business, our corporate culture, and our strategic direction.  We have not purchased any “Key Man” insurance policy on Mr. Cox.  The loss of Mr. Cox’s services, whether due to death, disability or retirement, would have a material adverse effect on business operations, and would harm our growth in revenue and profitability.


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We rely on personnel with highly specialized skills and knowledge regarding the IRS, and if we are unable to retain or motivate key personnel or hire additional qualified personnel, we may not be able to grow effectively.





Our performance is largely dependent on the talents and efforts of our personnel who have extensive experience with the IRS, from which they have an outstanding knowledge of IRS practice, procedures and policies as well as specialized skill in navigating the IRS bureaucracy.  Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain such highly skilled personnel for our organization.  Competition in our industry for such qualified employees is intense, and it is likely that certain of our competitors will directly target certain of our employees.  Our continued ability to compete effectively depends on our ability to retain and motivate our existing employees.  As our business grows, we will need to hire additional qualified personnel with expertise regarding the IRS and its practices, procedures and policies.  We compete for such qualified individuals with numerous tax resolution firms and large tax preparation companies, as well as law firms and accounting firms.  Competition for such individuals is intense, and we may not be able to successfully recruit or retain such personnel. Attracting and retaining qualified personnel will be critical to our ability to grow our business effectively.





We may not successfully manage any growth that we may experience.





During 2010, we hired 96  new employees, an 11% increase, and we secured over 100,000 square feet of new office space that could accommodate up to 650 employees.  We secured this larger office space because we expect our operations to growth.  Our success will depend not only upon this expansion of our operations but the effective management of any such growth, which will place a significant strain on our management and on our administrative, operational, and financial resources. To manage any such growth, we have acquired larger office space; however, we must also augment our operational, financial and management systems, and hire and train additional qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.





Our officers have limited experience in managing a public company, which increases the risk that we will be unable to establish and maintain all disclosure controls and procedures and internal controls over financial reporting and meet the public disclosure and the financial reporting requirements for our business, which may create a negative perception of our stock in the market and cause our stock price to drop.





We are highly dependent on our officers to develop and operate and manage our business. Although our officers have substantial business experience, they have little experience in managing a public company. They have limited experience in establishing and maintaining disclosure controls and procedures in compliance with the securities laws, including the requirements mandated by the Sarbanes-Oxley Act of 2002.  This lack of experience with regard to public company disclosure controls and procedures may result in our Securities Act filings and/or our periodic reports under the Securities Exchange Act not containing all of the information required to be contained therein.  We would be required to disclose in our periodic reports any deficiencies in our disclosure controls and procedures, such as the lack of experience in management in establishing and maintaining disclosure controls and procedures.  Such assessments by our management may cause negative perception by investors of our common stock and result in a decrease in the price and/or liquidity of our stock.  Additionally, to remedy such a deficiency, such as hiring and training of personnel, engagement of special securities counsel and implementation of multiple-party-review of our filings, would result in a material increase in our operating expenses and would result in lower earnings.  The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting.  In addition, the attestation process by our independent registered public accounting firm is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accounting firm.  If we cannot assess our internal control over financial reporting as effective, or our independent registered public accounting firm is unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.





Government initiatives that simplify tax return preparation could reduce the need for our tax resolution services for compliance with tax return filing requirements.





Many taxpayers who have not been in compliance with their tax filing requirements seek assistance from paid tax return preparers or tax resolution firms such as us because of the level of complexity involved in the tax return preparation and filing process. From time to time, government officials propose measures seeking to simplify the preparation and filing of tax returns or to provide additional assistance with respect to preparing and filing such tax returns.  The passage of any measures that significantly simplify tax return preparation or otherwise reduce the need for a third party tax return preparer could reduce demand for our services for tax return compliance filings, causing our revenues or profitability to decline.





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Our insurance coverage may not cover all risks associated with our business, which may harm our financial results.





We have various insurance policies related to the risks associated with our business.  However, in the event of a claim there can be no assurance that our insurance coverage will be sufficient or that our insurance companies will cover the matters claimed.  The failure of adequate insurance coverage or recovery could have a material adverse effect on our business, financial condition and results of operations.





Failure to comply with laws and regulations that protect our customers’ personal and financial information could result in significant fines, harm our brand and reputation and expose us to litigation defense and resolution costs.





Privacy concerns relating to the disclosure of customers’ personal and financial information have drawn increased attention from federal and state governments.  The IRS generally prohibits the use and disclosure by tax return preparers of tax return information without the prior written consent of the taxpayer.  In addition, the Gramm-Leach-Bliley Act and other FTC regulations require us to adopt and disclose customer privacy policies and provide customers with a reasonable opportunity to opt out of having personal information disclosed to unaffiliated third parties for marketing purposes.  Federal and state law also requires us to safeguard our customers’ financial information.  Although we have established security procedures to protect against identity theft and the theft of our customers’ financial information, breaches of our customers’ privacy may occur. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our brand and reputation.  In addition, changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change business practices, including how client information is stored and/or disclosed. These changes could have a material adverse effect on our business, financial condition and results of operations.





We charge our clients a flat fee that is paid on a “Pay-As-You-Go” basis.  The current recession and high unemployment rate may affect our clients’ ability to pay our fees or our client may decide to stop using our services, which would decrease our revenue, harm our results of operation and could have a negative effect on our stock price.





We charge our clients a flat fee based on the services provided.  We collect those flat fees on a “pay-as-you-go” basis, which means that our clients’ pay in installments at various stages of the service we provide.  To the extent that our clients’ are affected by unemployment and/or the current deep recession which may impinge on their ability to pay our fee, our revenue may decrease.  Additionally, because our clients do not pay the entire fee upfront, they may decide to stop using our services in the middle of the process, which could also negatively affect our revenue.  If our revenue decreases from these factors, our results of operations will be harmed and our stock price would likely decrease.





Risk Factors About Our Common Stock





Our common stock is considered “a penny stock.”





The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock has always been less than $5.00 per share and is likely to remain so for the foreseeable future and therefore may be a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares. In addition, our common stock is traded on the OTC Bulletin Board and investors may find it difficult to obtain accurate quotations of the stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price.





Our Control Series Preferred Stock is held by our Chairman and CEO, Patrick Cox, who has the right to elect a majority of our board of directors until August 4, 2014 and, therefore, has considerable influence over our management.





Mr. Patrick R. Cox, our President, CEO and Chairman, owns 1,000 shares of our Control Series Preferred Stock.  The “Control Series Preferred Stock” gives Mr. Cox the right to elect a majority of our board of directors for the five (5) year period ending August 4, 2014.  Each share of Control Series Preferred Stock has one (1) vote, voting as a single class with our common stock.  The shares of the Control Series Preferred Stock are not convertible into our common stock and at the end of the five year period (August 14, 2014) such share of preferred stock will terminate. During the five years he holds the Control Series Preferred Stock, Mr. Cox will receive such dividends on the Control Series Preferred Stock as may be declared by the board of directors.  As a result of his ownership of the Control Series Preferred Stock, Mr. Cox will have influence over our board of directors and, therefore, the management of our company.





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There is a significant risk of our common stockholders being diluted as a result of Patrick Cox earn out right and the large number of shares that may be issued to him in the future may depress the price of our common stock.





Mr. Patrick Cox, our largest shareholder, currently owns 98,100,000 shares of our common stock and he may receive up to 299,000,000 additional shares of common stock as an earn out based on our net income for the year ended December 31, 2010 and for the years ending December 31, 2011, 2012 and 2013 and for the quarters ending March 31, 2014 and June 30, 2014.  Although as of April 12, 2011, we had 140,700,105 shares of common stock issued and outstanding, if Mr. Cox earns the full 299,000,000 earn out shares, we would have 439,700,105 shares of common stock issued and outstanding.  In addition, under the Financial Reorganization Agreement, Mr. Cox may claw back up to 200,000,000 shares of our common stock.  Accordingly, for the next five years a common shareholder has a significant risk of having its interest in us being significantly diluted.





Our principal shareholder has significant voting power and may take actions that may not be in the best interest of our other shareholders, who will have no influence over shareholder decisions.





Patrick Cox, our Chief Executive Officer, President and our Chairman, beneficially own approximately 70.0% of our outstanding common stock.  In addition, Mr. Cox may receive up to (x) 299,000,000 additional shares of our common stock as a result of an earn out based on our annual net income for the year ended December 31, 2009 and for the years ending December 31, 2010, 2011, 2012 and 2013 and for the quarters ending March 31, 2014 and June 30, 2014 and (y) 200,000,000 additional shares of our common stock as a result of the Financial Reorganization Agreement based on a formula tied to our financial performance for our fiscal years completed prior to June 30, 2015.  As a result, Mr. Cox has the ability to exert virtual control over all matters requiring approval of our shareholders, including the election and removal of directors and the approval of mergers or other business combinations.  This concentration of control could be disadvantageous to other shareholders whose interests are different from those of Mr. Cox.  This concentration of ownership may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover, or other business combination involving us, or discouraging a potential acquirer from making a tender offer, or otherwise attempting to obtain control of us or our business, even if such a transaction would benefit other shareholders.





ITEM 1B.  UNRESOLVED STAFF COMMENTS





Not applicable.





ITEM 2.  PROPERTIES








Presently, we lease approximately 19,947 square feet of office space located at 900 Town & Country Lane, Houston, Texas 77024.  This lease expires on February 28, 2014 as to 14,469 square feet and on May 31, 2014 as to the remaining 5,478 square feet.  The rent is $25,162 per month, which will increase to $26,066 on March 1, 2011 and it will increase again to $26,669 on March 1, 2012.  On March 1, 2014 through May 31, 2014, we will pay $7,075 per month.  However, we have an option to extend the lease on the 14,469 square feet for an additional five years at the then-prevailing market rates.





On July 31, 2009, we entered into a lease agreement for approximately 107,000 square feet of office space located at 2020 Dairy Ashford Road, Houston, Texas.  In February 2010, we moved our operations staff, including our tax preparers, financial analysts, enrolled agents, resolution experts, case managers and client service representatives, into this new office space.  We expect to move our remaining employees, including tax consultants, quality control staff and corporate management, into the new office space by the end of the third  quarter of 2011.  Under this lease, upon the commencement date (June 1, 2010) we will not pay any rent for the first six months (through September 30, 2010), then we will pay a monthly rent of $74,804 for months 7 to 26, which will increase to $83,795 for the next 20 months.  During the last 20 months of the lease our monthly rent will be $92,785.  We have an option to extend the lease for a five year period.





Upon moving all of our operations and staff to our Ashford Road location, we expect either to sublease our space at the 900 Town & Country Lane location or assign such lease to a third party.





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ITEM 3.  LEGAL PROCEEDINGS





On May 13, 2010, the Texas Attorney General’s (AG) office filed a suit against the Company and its Chief Executive Officer in state district court for Travis County, Texas.  In the suit, styled as The State of Texas v. TaxMasters, Inc., TMIRS Enterprises, Ltd., GP Services, LLC, d/b/a TaxMasters, and Patrick R. Cox, the AG  alleges, the Company violated certain provisions of the Texas Deceptive Trade Practices Act (“DTPA”) and the Texas Debt Collection Act and is seeking (i) injunctions against the Company from further violations of the applicable Texas statutes, (ii) restitution, and (iii) civil penalties of up to $20,000 per violation for each violation of the DTPA. The Company denies the allegations and is vigorously defending the AG’s claims.





On May 25, 2010, as part of the same proceeding, the court granted and agreed temporary injunction which requires the Company to more clearly and conspicuously disclose to potential customers prior to their purchase of tax resolution services from the Company that (i) the Company’s contract provides that the Company is entitled to its full fee regardless of the Company’s success or failure in resolving the customer’s tax issues, (ii) the Company’s contract provides that the Company is not obligated to perform services for the customer until the Company’s fee has been paid in full, (iii) if the customer is paying in installments, the Company may not be working on the customer’s tax issues until the Company has received its entire fee and (iv) the Company’s contract provides that any and all fees paid to the Company for its services are non-refundable.





Management believes that the Company has complied with all the requests from the Texas Attorney General’s office and has made appropriate changes to its current business model.  The Company is vigorously defending itself against these allegations.




On December 16, 2010, the Minnesota Attorney General’s (AG) office filed a suit against the Company in state district court for the Fourth Judicial District of Hennepin County, Texas.  In the suit, styled as State of Minnesota by its Attorney General, Lori Swanson vs. TaxMasters, Inc. a Nevada corporation, d/b/a TaxMasters, the AG alleges, the Company violated certain provisions of the Minnesota Consumer Fraud Act and the Uniform Deceptive Trade Practices Act.  The AG further alleges that the Company was unjustly enriched.  The AG is seeking to have the court (i) enjoin the Company from engaging in deceptive practices or making false or misleading statements, (ii) award civil penalties, (iii) award restitution for all persons injured by Company’s acts; and (iv) award costs, including costs of investigation and attorneys’ fees.  The Company denies the allegations and is vigorously defending the AG’s claims.





ITEM 4.  [RESERVED]


PART II





ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market Information





Our common stock has been traded on the OTC Electronic Bulletin Board since 1996.  From the Spring, 1996 until April 1999, our common stock traded under the symbol “TELM.” From April 1999 until January 2002, our common stock traded under the symbol “SNHS”.  From January, 2002 until August 2009, our common stock traded under the symbol “CRWP”.  Since August 2009, our common stock has traded under the symbol of “TAXS.”





The following table reflects the high and low quarterly bid prices for the fiscal years ended December 31, 2009 and 2010.  This information was provided to us by the Financial Industry Regulatory Authority and the Internet. These quotations reflect inter-dealer prices, without retail mark-up or mark-down or commissions. These quotations may not necessarily reflect actual transactions.   These quotations through the second quarter of 2009 do not give effect to the 1-for-20 reverse stock split that took place on July 27, 2009.





Period

High Bid


Low Bid1st Qtr 2010


1.01



0.682nd Qtr 2010


0.89



0..63rd Qtr 2010


0.63



0.384th Qtr 2010


0.48



0.151st Qtr 2009


.013



0.002nd Qtr 2009


.007



0.003rd Qtr 2009


2.00



0.004th Qtr 2010


1.90



0.25





As of April 11, 2011, we had 140,700,105 shares of our common stock issued and outstanding, of which 6,588,105 shares were held by non-affiliates.  We also have 1,000 shares of our Control Series Preferred Stock issued and outstanding, all of which are held by Patrick Cox, our Chief Executive Officer, President and Chairman.





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Holders





As of April 11, 2011, the approximate number of holders of record of our common stock is 495.  In addition we estimate that we have in excess of 300 shareholders whose holdings are in street name.  There is one holder of record of our Control Series Preferred Stock and no such shares are held in street name.





Dividends





We have not paid any cash dividends on our common stock, and our Board of Directors has no present intention of declaring any dividends, as we expect to re-invest all profits in the business for additional working capital for continuity and growth.  The declaration and payment of dividends in the future will be determined by our Board of Directors considering the conditions then existing, including our earnings, financial condition, capital requirements, and other factors.





Unregistered sales of securities





During the three year period ended December 31, 2010, we issued or sold the following securities without registration under the Securities Act:





In July 2010, the Company issued 1,000,000 shares of common stock to a consultant in payment for public relations services.  In August 2010, the Company issued to AGS Capital Group, LLC (“AGS”) 24,000 shares of common stock as a due diligence fee paid to AGS pursuant to a term sheet for financing entered into by the Company and AGS.





No underwriter or underwriting discount or commission was involved in any of the transactions set forth above.





The offer and sale of the Company’s shares of common stock summarized above were made to accredited investors (as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”)) and were made without any publicity or advertising, and thus subject to an exemption from registration under Section 4(2) of the Securities Act as a transaction by the issuer not involving a public offering.




Additionally, on August 4, 2009, we also issued an aggregate of 500,000 shares of our common stock to our five directors for their service on our board of directors.  The issuance of the shares to the directors was an exempt transaction under Section 4(2) of the Securities Act of 1933 as a sale of securities not involving a public offering in that the directors are accredited investors as defined under Rule 501(a)(4) (director of the issuer), there was no public solicitation or advertisement and we had a reasonable basis to believe that the directors were acquiring their shares for investment purposes and not with a view to resale or distribution.





On August 4, 2009, we issued 1,870,000 shares of common stock to various non-executive employees of the Company to reward them for their service to the Company.  Such issuances were an exempt transaction under Section 2(a)(3) as a transaction not involving an offer or sale of securities in that no consideration was given by any of the employees for the receipt of their shares.





The following unregistered sales were made by Company prior to its acquisition of TaxMasters pursuant to the Share Exchange that closed on August 4, 2009:





In March of 2008, we (i) sold 4,500,000 shares of common stock at $.005 for total proceeds of $22,500, (ii) issued 9,774,692 shares of our common stock, valued at $127,071, for accounts payable, (iii) issued 15,003,383 shares of our common stock, valued at $195,044, for services and (iv) we issued 1,221,925 shares of our common stock, valued at $15,885, for advances from related parties.  These issuances of the shares were an exempt transaction under Section 4(2) of the Securities Act of 1933 as a sale of securities not involving a public offering in that there was no public solicitation or advertisement and we had a reasonable basis to believe that the purchasers were acquiring their shares for investment purposes and not with a view to resale or distribution.




ITEM 6.  SELECTED FINANCIAL DATA





Not applicable.





ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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OPERATIONS




Statements used in this Form 10-K, in filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, or made orally with the approval of an authorized executive officer of the Company that utilize the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions speaking to anticipated actions, results or projections in the future speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur, and which involve various risks and uncertainties, such as those set forth above under “Risk Factors”.  The Company cautions readers not to place undue reliance on any such statements and that the Company's actual results for future periods could differ materially from those anticipated or projected.





Unless otherwise required by applicable law, the Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.





The following discussion should be read in conjunction with our consolidated financial statements and related notes included as part of this report.





Overview





History





We are TaxMasters, Inc., a Nevada corporation formerly known as Crown Partners, Inc. (the “Company” or “we”, “our” or “us”).  On August 4, 2009, the Company acquired all of the outstanding shares of common stock of TaxMasters, Inc., (the "Target"), a Nevada corporation, in an exchange of shares of its common stock and certain preferred stock for all of the issued and outstanding shares of the Target under Section 368(a)(1)(B) of the Internal Revenue Code (the “Share Exchange”).  As a result of the Share Exchange the sole stockholder of the Target acquired control of the Company through the receipt of approximately 99.1% of the Company’s 303,712,899 then-issued and outstanding shares of common stock.  As a result of the Share Exchange, the Target became a wholly-owned subsidiary of the Company.








Our Company





We are a tax resolution company engaged in the business of assisting taxpayers with matters at the Internal Revenue Service (“IRS”), especially the resolution of disputes and assessments and the settlement of tax liabilities.  We are a firm of experienced tax professionals that help our clients solve their Federal tax problems, ranging from filing delinquent tax returns to settling tax debts.  Our tax professionals include tax attorneys, Certified Public Accountants, Former IRS agents, Licensed Tax Preparers and other tax professionals who are authorized to practice before the IRS.  Our tax professionals are experienced in analyzing and providing solutions to even the most complicated tax problems and guiding clients through the bureaucracy of the IRS.





Our tax professionals have the skill and knowledge to reduce our client’s tax liabilities and solve their IRS tax problems.  We use the rules established by the Internal Revenue Code and IRS regulations to help our clients resolve matters at the IRS.  Our tax professionals help our clients reduce taxes, eliminate penalties and get representation before the IRS.  We help our clients understand how they developed their tax problems they have and help them fix the entire problem that caused their tax debt.  We can often reduce the tax our clients owe even before attempting to develop a tax strategies with the IRS.





Through our tax professionals, we offer the following services:





·
Get our clients into compliance with their obligation to file income tax returns and pay back taxes due;·
Reduce taxes by reducing penalties and interest on tax debts;·
Settle our client’s tax debt for the lowest amount possible under the law;·
Stop IRS wage garnishments;·
Stop IRS property seizure;·
Defend our client in an IRS audit or IRS criminal investigation;·
Recover seized funds; and·
Remove an IRS levy or lien.





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Description of Revenues





We offer our clients a no-charge initial consultation regarding their tax problems.  The free initial consultation enables our tax consultants to get information from the potential client about his or her tax problem and understand the nature of the problem.  From the initial consultation, we can determine what services and forms the client will need and we can present a cost estimate for the client.





We charge our clients a fee based on the type of tax problem we are addressing and the service we are providing:  (i) an IRS collection matter, (ii) preparing or amending tax returns (including schedules), (iii) negotiated settlements and/or (iv) audits.  In addition, some of our rates will vary depending on whether our client is an individual or a business.  Built into all of our fees are the initial consultation we have with the IRS to determine all of the client’s problems and the preparation by us of a findings letter outlining the tax problems.  In addition to the fee, certain services will require our tax consultants to interact with the IRS, such as a settlement negotiation or an audit, for which we charge our clients additional consulting fees.  We may provide our services on a “pay-as-you-go” basis and an installment plan.





The Company’s revenue is generated from the sale of our proprietary tax resolution products and services.  These services are Consultations, Tax Returns, Automated Collection Service (ACS), Revenue Officer Case (ROC), Collection Due Process (CDP), and Settlement Analysis.  These products and services may be sold individually or in combination with any of the products and services.  The Company had been recording revenue based on the proportionate completion method for revenue recognition. Effective January 1, 2010, the Company recognizes revenue under ASC 605-25, Revenue Arrangements with Multiple Deliverablesand retroactively adoptedASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU 2009-13”).Retroactive application is permitted, and was done so for our fiscal year 2009, no material changes to our revenue numbers were required to be recognized.




ASC 605-25, as amended by ASU 2009-13, provides guidance on accounting for arrangements that involve the performance of multiple products, services and/or right to use assets.  In accordance with the guidance, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting base on its relative fair value and recognized revenue for each unit of accounting when revenue recognition criteria have been met.  The price charged when the element is sold separately generally determines the fair value.





The Company may receive advance payments that are refundable or nonrefundable depending on the individual contract.   These advance payments are recorded as deferred revenue on the balance sheet and are reclassified as revenue on the statement of operations only after services have been provided and such revenue has been earned.





Refund Policy for Client’s Early Termination of Agreement





The Company’s client may terminate his or her agreements with the Company at any time, and in the client’s sole discretion, by providing notice in writing to the Company.  If a client terminates his or her agreement with the Company within three business days from the date of the agreement is signed (by providing written notice to the Company) the Company will refund all fees paid by such client except for fee for services performed by the Company prior to termination plus a $350 administrative fee.





If the client elects to terminate his or her agreement with the Company after three business days but within 18 months from the date the agreement is signed, the Company will refund the lesser of (1) all fees paid by the client except for fees for services performed by the Company prior to termination plus a $350 administrative fee or (2) all fees paid by Client less a cancellation fee in the amount of twenty five percent (25%) of the total of fees due under the contract.





Processing of refunds takes approximately 60 days from the later of date of notice of termination or the date of payment by the client.  The client must execute a full release of all claims before receipt of any refund.




Description of Expenses





Our expenses include the following: (i) Costs of services, which consists primarily of salaries and benefits to our tax consultants, customer service consultants, outside services and professional fees used to provide our tax services, including associated marketing expenses; (ii) Marketing costs (a significant portion of which consists of our advertising expense); and (iii) General administrative costs, which consists of overhead expenses, such as rent, utilities and telecommunications.





We currently have no material research and development expenses.


-18-


Results of Operations





Results for the year ended December 31, 2010 versus the year ended December 31, 2009.





The following table sets forth selected statement of operations data as a percentage of total revenues for the periods indicated





For years ended December 31,Statement of Operations Data:

2010


2009Total    Revenue

$
43,940,000



100.0
%

$
37,916,000



100.0
%Operating Costs and Expenses:Selling, general and Administrative


25,557,000



58.2
%


18,892,000



49.8
%Compensation


19,548,000



44.5
%


18,082,000



47.7
%Depreciation


768,000



1.7
%


241,000



0.6
%Total Operating expenses


45,873,000



104.4
%


37,215,000



98.1
%Total Other Income / (expenses)


(247,000
)


-0.6
%


(123,000
)


-0.3
%Net (Loss)  before taxes

$
(2,180,000
)


-5.0
%

$
578,000



-1.5
%




Revenues.  Revenues increased by approximately $6.0 million, or 15.9%, to approximately $43.9 million in 2010 as compared to approximately $37.9 million in 2009.  This increase in sales was due to increased sales volume attributable to an increase in our advertising expense.





Compensation expense.  Compensation expense, which is comprised of salaries and payroll taxes, health insurance and fees, contract labor and charges taken for equity-based compensation, for the year ended December 31, 2010 was approximately $19.5 million, which was an increase of approximately $1.4 million, or 7.7%, from the compensation expense of approximately $18.1 million for year ended December 31, 2009.  The increase in compensation expense was mainly due to (i) an increase in the number of tax consultant personnel hired to support our increase in the number of clients (and, therefore, sales volume).  As a result of a significant increase in full time employees general salaries increased approximately $2.9 million to approximately $17.5 million for the year ended December 31, 2010.  Payroll taxes and fees also increased approximately $0.2 million in fiscal year 2010.  There were no officers bonuses expense and employee stock compensation expense in fiscal year 2010 as compared to bonus granted in fiscal year 2009 of approximately $1.2 million and stock compensation expense of approximately $0.5 million.





Selling, general and administrative costs (“SG&A”).  Selling, general and administrative costs increased by approximately $6.7 million or 35.3%, from approximately $18.9 million for the year ended December 31, 2009 to approximately $25.6 million for the same period in 2010.  Selling expenses, which consists mainly of advertising expenses and bank fees associated with process payments increased to approximately $16.8 million or 20.9% from approximately $13.8 million in 2009.  Advertising expense for the 2010 was approximately $16.0 million, an increase of approximately $2.2 million or 15.9%.  Professional fees, which include outside services, accounting and legal fees for fiscal year 2010 was approximately $2.7 million, an increase of approximately $1.6 million or 92.5%. from the 2009 costs.  The increase in professional fees are due to services to keep abreast of the latest tax law development and certain legal issues of a public company.  General offices expenses, such as, supplies, repair and maintenance, postage and equipment rentals increased approximately $1.1 million to approximately $1.2 million in 2010 as compared to same period in 2009.   Rent increased approximately $0.9 million to approximately $1.4 million, or 155.6%, from approximately $0.6 million for the same period in 2009. Cost associated with community relations and investor relations associated with being a public company increased approximately $0.9 million in fiscal year 2010.  Increases in the various expenses discuss above were partially offset by an approximately $1.1 decrease in expenses associated with Travel, lodging, meal and entertainment (“T&E”) for the fiscal year 2010, as the Company plan to reduce T&E expenditures in 2010. The Company incurred an settlement fee costs of approximately $0.5 million in 2010.  The remaining expenses in general and administrative costs consisted of overhead expenses, such as utilities, customer telecommunication expenses, insurance costs which increased approximately $0.2 million in 2010 versus 2009.





Total Operating Expenses.  Total operating expenses for the year ended December 31, 2010 were approximately $45.9 million, an increase of approximately $8.7 million, or 23.3%, from total operating expenses of $37.2 million for the same period in 2009.  Total operating expenses for 2010 increased due to increases in compensation costs of approximately $1.4 million, advertising expenses increased approximately $2.2 million,  other SG&A expenses $4.6 million as described above and depreciation expense increased approximately $0.5 million.





-19-


Total Other Income and  Expenses.  Total other income and other expenses consist of interest income, interest expense and other non operating related adjustments.  Interest expense for, 2010 was approximately $280,000, an increase of approximately $118,000 or 72.8% increase from the same period in 2009, this increase is mainly due to the interest expense from the note payable to related party and the use of capital leases to purchase equipment.  Interest income for the 2010 was approximately $33,000, a decrease of approximately $6,000, a15.4% decrease.





Income taxes benefit.   Total income taxes  benefit was approximately $0.3 million for the year ended December 31, 2010, a decrease of approximately $2.7 million or 90%.  This decrease was primarily due to change in tax status.  Prior to the reverse merger of August 4, 2009, the Company’s operating subsidiary, TaxMasters, was taxed as a limited partnership, then changed to Subchapter S corporation and was not subject to corporate taxes which has created a deferred tax asset.





Net (Loss) Income.  The net loss for the year ended December 31, 2010 was approximately $1.9 million as compared to net income of approximately $3.6 million for the same period in 2009, a decrease of approximately $1.7 million.  Operating net loss for the year ended December 31, 2010 was approximately $2.2 million as compared to operating net income of approximately $0.6 million for 2009, an decrease of approximately $2.7 million in loss.  This reduction in operating income is mainly due the increases in operating expenses as discussed above.  The change in net income (loss) can also mainly be attributed to the increases in operating expenses.




Liquidity and Capital Resources





For the year ended December 31, 2010, the Company had total current assets of approximately $2.7 million and total current liabilities of approximately $19.6 million, resulting in negative working capital of approximately $16.9 million.  At December 31, 2010, the Company's current assets consisted of approximately $0.9 million in cash, $0.3 million in short-term investments and approximately $0.7 million in deferred tax asset









During the year ending December 31, 2011, the Company expects to generate positive cash flow from its operations.  We believe that our existing cash and expected cash flow from operations will be sufficient to meet our projected operating expenses at least through December 31, 2011.   The Company will also seek to raise additional funding through the sales of equity instruments.   These funding efforts will proceed unabated but the Company can provide no guarantee that the funding will be realized





Operating Activities





Net cash used in operating activities was approximately $0.2 million for the year ended December 31, 2010, as compared to cash provided by operating activities of approximately $3.5 million for the year ended December 31, 2009, a decrease of approximately $3.6 million or 104%.  This decrease in cash provided by operating activities can be attributable to a  reduction in cash generated by operations of approximately $2.3 million, increase in cash used to pay our accounts payable and prepaid items in the amount of approximately $0..7 million and a reduction in cash received for deferred revenue of approximately $0.6 million .





Investing Activities





Net cash used in investing activities was approximately $1.0 million for the year ended December 31, 2010 compared to net cash used in investing activities of approximately $953,000 for the year ended December 31, 2009, an increase in cash used of approximately $47,000, or 8.5%.   The primary reason for the change in investing activities was an increase in the purchase of property and equipment in the amount of approximately $0.7 million in fiscal year 2010 versus 2009.  This increase in purchase of property and equipment in 2010 was mainly offset by not issuing any notes receivable in 2010, we did issue $650,000 of notes receivable in the fiscal year 2009.





Financing Activities





Net cash used in financing activities was approximately $0.8 million for year ended December 31, 2010 compared to approximately $3.3 million for the year ended December 31, 2009, a decrease in cash used in financing activities of approximately $2.5 million or 76.3%.  This decrease can be primarily attributable to the distribution of $2.3 million to the shareholder in 2009.   The repayment of  a note payable from a related party within the Company were also approximately $0.5 million lower in fiscal year 2010 versus fiscal year 2009.  The Chief Executive Officer of the Company loaned the Company $5.3 million at an interest rate of prime plus 1% (the “CEO Note”).  The CEO Note is unsecured and is due on demand, with covenants that limit demand rights.  The covenants in the CEO Note limit demand rights to $1 million annually so long as the Company is achieving certain financial targets and has the cash for repayment. The declines in cash used in financing activity in 2010 were slight offset by an increase in our capital lease payment in 2010 of approximately $0.3 million.




-20-


Commitments and Contingencies





We currently have two separate lease agreements for our office space under an operating lease through December 2015.  Our monthly lease payment under these agreements amounts to approximately $25,162 and 74,804. Total obligation through 2015 under these agreements is approximately $5,817,000.








We also lease certain computer equipment under capital leases.  Our obligation under these leases continues until July 2015. Our total obligation under these leases is approximately $1,828,000.





We currently plan to utilize both lease office spaces through 2010 and will evaluate office space needs in 2011 to determine if a sublet option or termination of a lease is appropriate.





On July 31, 2009, we entered into a lease agreement for approximately 107,890 square feet of office space, which we expect to occupy in late first quarter or early second quarter of 2010.  This lease has a term of 66 months and expires in late first quarter or early second quarter of 2015, depending on the date we occupy the space.  Under this lease, upon the commencement date we will not pay any rent until for the first six months, we will pay a monthly rent of $74,804 for months 7 to 26, which after 20 months will increase to $83,795 for the following 20 months.  During the last 20 months of the lease our monthly rent will be $92,785.  The Company has the right to extend the term of the lease for one additional term of five years.





These obligations are summarized in the table below:





Contractual Obligations





The following table presents future contractual obligations due by fiscal period as of December 31, 2010:





2011



2012-2013



2014-2015


Thereafter


TotalOperating lease commitments

$
1,206,000


$
2,601,000


$
2,010,000


$
0


$
5,817,000Capital & Equipment leases


593,000



931,000



406,000



0



1,930,000Total

$
1,799,000


$
3,532,000


$
2,416,000


$
0


$
7,747,000





Off-Balance Sheet Arrangements





We currently have no off-balance sheet arrangements.





Critical Accounting Policies





The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances.  Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:





Revenue Recognition





The Company’s revenue is generated from the sale of our proprietary tax resolution products and services.  These services are Consultations, Tax Returns, Automated Collection Service (ACS), Revenue Officer Case (ROC), Collection Due Process (CDP), and Settlement Analysis.  These products and services may be sold individually or in combination with any of the products and services.  The Company had been recording revenue based on the proportionate completion method for revenue recognition. Effective January 1, 2010, the Company recognizes revenue under ASC 605-25, Revenue Arrangements with Multiple Deliverablesand retroactively adoptedASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU 2009-13”).Retroactive application is permitted, and was done so for our fiscal year 2009, no material changes to our revenue numbers were required to be recognized.





-21-


ASC 605-25, as amended by ASU 2009-13, provides guidance on accounting for arrangements that involve the performance of multiple products, services and/or right to use assets.  In accordance with the guidance, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting base on its relative fair value and recognized revenue for each unit of accounting when revenue recognition criteria have been met.  The price charged when the element is sold separately generally determines the fair value.




The Company may receive advance payments that are refundable or nonrefundable depending on the individual contract.   These advance payments are recorded as deferred revenue on the balance sheet and are reclassified as revenue on the statement of operations only after services have been provided and such revenue has been earned.




Refund Policy for Client’s Early Termination of Agreement





The Company’s client may terminate his or her agreements with the Company at any time, and in the client’s sole discretion, by providing notice in writing to the Company.  If a client terminates his or her agreement with the Company within three business days from the date of the agreement is signed (by providing written notice to the Company) the Company will refund all fees paid by such client except for fee for services performed by the Company prior to termination plus a $350 administrative fee.





If the client elects to terminate his or her agreement with the Company after three business days but within 18 months from the date the agreement is signed, the Company will refund the lesser of (1) all fees paid by the client except for fees for services performed by the Company prior to termination plus a $350 administrative fee or (2) all fees paid by Client less a cancellation fee in the amount of twenty five percent (25%) of the total of fees due under the contract.





Processing of refunds takes approximately 60 days from the later of date of notice of termination or the date of payment by the client.  The client must execute a full release of all claims before receipt of any refund.





Income Taxes


The Company provides for income taxes using an asset and liability based approach for reporting for income taxes.  Deferred income tax assets and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.


The Company also complies with the provisions accounting for uncertainty in income taxes. The accounting regulations prescribes a recognition threshold and measurements process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return.





Recently Adopted Accounting Pronouncements





In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted.  Effective January 1, 2010, the Company adopted ASU 2009-13.  The adoption did not result to a material impact to the Company’s results of operations or financial condition.




January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820 to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirements for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2009.  The adoption of ASU 2010-06 did not impact the Company’s operating results, financial position or cash flows, but did impact the Company’s disclosures on fair value measurements.  See note 4 “Fair Value Measurement of Financial Instruments”.





In February 2010, FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). This update amends Subtopic 855-10 and gives a definition to SEC filer, and requires SEC filers to assess for subsequent events through the issuance date of the financial statements. This amendment states that an SEC filer is not required to disclose the date through which subsequent events have been evaluated for a reporting period. ASU 2010-09 becomes effective upon issuance of the final update. The Company adopted the provisions of ASU 2010-09 on January 1, 2010.




In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29, “Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” The amendments in this ASU affect any public entity as defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect adoption of ASU 2010-29 to have a material impact on the Company’s results of operations or financial condition.




Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.





ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.





-22-


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





TAXMASTERS, INC.





FINANCIAL STATEMENTS




Contents





PageReport of Independent Registered Public Accounting Firm
F-2Balance Sheets as of December 31, 2010 and 2009
F-3Statements of Operations for the Years Ended December 31, 2010 and 2009
F-4Statements of Stockholders’ Deficit for the Years Ended December 31, 2010, and 2009
F-5Statements of Cash Flows for the Years Ended December 31, 2010, and 2009
F-6Notes to Financial Statements for the Years Ended December 31, 2010 and 2009
F-7












































F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the Board of Directors
 TaxMaster, Inc.
 Houston, Texas
 
 We have audited the accompanying balance sheets of TaxMaster, Inc. formerly known as Crown Partner, Inc, (the “Company”) as of December 31, 2010 and 2009 and the related statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’ s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
 As disclosed in Note 12 to the financial statements, the Company restated its previously financial statements as of December 31, 2009 and for the year then ended.
 
 
 /s/ MALONEBAILEY, LLP
 MALONEBAILEY, LLP
 www.malone-bailey.com
 Houston, Texas
 April 15, 2011


F-2


TaxMasters, Inc.BALANCE SHEETSAs of December 31,As Restated2010


2009ASSETSCURRENT ASSETSCash and cash equivalents

$
945,505


$
2,892,895Short-term investments


317,204



313,663Deferred tax asset


699,607



405,565Prepaid expenses


34,250



125,000Other current assets


708,713



394,259Total current assets


2,705,279



4,131,382Property and equipment, net


2,883,722



2,533,387Note receivable


-



250,000Investments


429,779



423,968Deferred tax asset, net of current


2,835,411



2,607,567Other assets


17,000



17,000TOTAL ASSETS

$
8,871,191


$
9,963,304LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable

$
4,359,766


$
3,099,427Accounts payable related parties


145,440



117,673Accrued liabilities


4,103,719



2,448,783Deferred revenue


6,113,438



8,307,667Current portion of capital lease obligation


543,800



568,562Note payable to related party


4,360,912



4,582,718Total current liabilities


19,627,075



19,124,830LONG TERM DEBTCapital lease obligations, net of current portion


1,284,048



1,708,588Total liabilities


20,911,123



20,833,418COMMITMENTS AND CONTIGENCIESSTOCKHOLDERS' DEFICITPreferred stock, $0.001 par value,500,000,000 shares authorized, 1,000 shares issued and outstanding


1



1Common stock, $0.001 par value, 1,000,000,000authorized, 340,699,899 shares (2009 - 339,675,899) issued and140,699,899 shares (2009 - 339,675,899) outstanding


340,700



339,676Additional paid-in capital


930,744



199,768Accumulated deficit


(13,311,377
)


(11,409,559
)Total stockholders' deficit


(12,039,932
)


(10,870,114
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
8,871,191


$
9,963,304See accompanying notes to financial statements.
 F-3
 TaxMasters, Inc.STATEMENTS OF OPERATIONSFor the years ended December 31,As Restated2010


2009REVENUES, net

$
43,940,477


$
37,915,929OPERATING COSTS AND EXPENSES:Selling, general and administrative expenses


25,556,959



18,891,317Compensation


19,548,121



18,082,066Depreciation


768,241



241,348Total operating costs and expenses


45,873,321



37,214,731NET INCOME (LOSS) FROM OPERATIONS


(1,932,844
)


701,198OTHER  INCOME (EXPENSE):Interest income


33,291



39,030Interest expense


(280,228
)


(161,927
)Total other income (expense)


(246,937
)


(122,897
)NET  INCOME (LOSS) BEFORE INCOME TAXES


(2,179,781
)


578,301INCOME TAX BENEFIT, NET


(277,963
)


(3,013,132
)NET INCOME (LOSS)

$
(1,901,818
)

$
3,591,433EARNINGS (LOSS) PER COMMON SHAREBasic and diluted

$
(0.01
)

$
0.01WEIGHTED AVERAGE NUMBER OF COMMON SHARESBasic and diluted


239,482,102



316,712,298See accompanying notes to financial statements.
 F-4


TaxMasters, Inc.STATEMENTS OF CASH FLOWSFor the years ended December 31,As Restated2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
(1,901,818
)

$
3,591,433Adjustments to reconcile net income (loss) to net cash provided byoperating activities:Change in deferred tax asset


(521,886
)


(3,013,132
)Depreciation


768,241



241,348Deferred rent


563,025



464,231Common stock issued to employees for service


-



534,495Common stock issued to non-employees for service


732,000



4,950Write off of note receivable


266,202



400,000Changes in operating assets and liabilities:Prepaid expenses


90,750



(125,000
)Other current assets


(330,657
)


(394,259
)Accounts payable and accrued liabilities


2,352,250



3,439,098Accounts payable to related parties


27,767



(122,327
)Deferred revenue


(2,194,229
)


(1,568,723
)Net cash provided by operating activities


(148,355
)


3,452,114CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investments, net


(9,352
)


(18,049
)Issuance of note receivable


-



(650,000
)Purchase of fixed assets


(1,014,515
)


(284,969
)Net cash used in investing activities


(1,023,867
)


(953,018
)CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of capital lease obligations


(553,362
)


(231,444
)Repayment, net of accrued interest, of note payable to related party


(221,806
)


(732,130
)Distributions to shareholders prior to conversion to C corp


-



(2,326,094
)Net cash used in financing activities


(775,168
)


(3,289,668
)NET CHANGE IN CASH AND CASH  EQUIVALENTS


(1,947,390
)


(790,572
)CASH AND CASH EQUIVALENTS—Beginning of year


2,892,895



3,683,467CASH AND CASH EQUIVALENTS—End of year

$
945,505


$
2,892,895Supplemental schedule for cash flow informationCash paid for interest

$
281,913


$
117,906Cash paid for taxes


-



-NON CASH INVESTING AND FINANCING ACTIVITIESPurchase of property and equipment by seller financing

$
104,061


$
2,297,594Issuance of note payable to related party due to conversion from S to C corp


-



5,314,848See accompanying notes to financial statements.





F-5





TaxMasters, Inc.Statements of Stockholders' DeficitFor the years ended December 31, 2010 and 2009Preferred Stock


Common Stock


AdditionalPreferred


Par Value $.001

Common


Par Value $.001


Paid-In


AccumulatedShares


$ Amount


Shares


$ Amount


Capital


Deficit


TotalBalance at December 31, 2008


1,000


$
1



301,000,000


$
301,000


$
(301,001
)

$
(7,360,050
)

$
(7,360,050
)Distribution to stockholder of undistributed tax retained earnings prior to conversion from S to C Corp


-



-



-



-



-



(7,640,942
)


(7,640,942
)Effect of recapitalization for reverse merger transaction on August 4, 2009


-



-



2,712,899



2,713



(2,713
)


-



-Stock issued to employees for services


-



-



35,633,000



35,633



498,862



-



534,495Stock issued to non-employee for services


-



-



330,000



330



4,620



-



4,950Net income


-



-



-



-



-



3,591,433



3,591,433Balance at December 31, 2009, as restated


1,000



1



339,675,899



339,676



199,768



(11,409,559
)


(10,870,114
)Stock issued to non-employees for services


-



-



1,024,000



1,024



730,976



-



732,000Net loss


-



-



-



-



-



(1,901,818
)


(1,901,818
)Balance at December 31, 2010


1,000


$
1



340,699,899


$
340,700


$
930,744


$
(13,311,377
)

$
(12,039,932
)





See accompanying notes to financial statements.


F-6


TaxMasters, Inc.
 Notes to Financial Statements
 December 31, 2010 and 2009
 
 Note 1 - Basis of Presentation
  The accompanying financial statements information reflects financial information of TaxMasters, Inc. (“Company”) and (“TaxMasters”).  On August 4, 2009 the Company (formerly known as Crown Partners, Inc.), a Nevada corporation, closed a share exchange agreement with TaxMasters, Inc. under which all of the following occurred: (i) the Company amended its Articles of Incorporation changing its name to “TaxMasters, Inc”, increased authorized shares of common stock to 1,000,000,000, par value $0.001 and increased authorized shares of undesignated preferred stock to 500,000,000, par value $0.001, (ii) the Company issued 301,000,000 shares of its common stock to the sole stockholder of TaxMasters, Inc. (the “TaxMasters Stockholder”) in exchange for all of the issued and outstanding shares of common stock of TaxMasters, Inc. as a result of which TaxMasters became a wholly-owned subsidiary of the Company; (iii) the Company issued 1,000 shares of its Control Series of Preferred Stock to the TaxMasters Stockholder which give the TaxMasters Stockholder the authority to designate a majority of the Company's board of directors for a five year period; (iv)  the TaxMasters Stockholder has the right to earn up to an additional 299,000,000 shares of the Company's common stock during the next  five years based on a formula calculated on the net profits of the Company;  (v)  the Company's then-current board of directors and officers resigned effective with the closing and concurrently appointed the TaxMasters Stockholder as a director; and (vi) the Company sold all of the shares of Crown Equity Holdings, Inc. (“Crown Equity”), which prior to the closing was a majority-owned operating subsidiary of the Company.  The accompanying financial statements included herein reflect the above transaction which has been accounted for as a reverse merger whereby Tax Masters, Inc. is considered the accounting acquirer and the historical and future financial statements will be those of Tax Masters, Inc. since the Company discontinued its primary business activity conduct through Crown Equity, which was to develop, sell, and produce computer systems which are capable of running multiple monitors from one computer.
  The Company primarily engages in resolution of complicated Internal Revenue Service tax problems for customers located in the USA and other parts of the world with USA operations.  The Company also assists customers with state and local tax problem resolution.  The Company headquarters is located in Houston, Texas.
  The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP") and the rules of the Securities and Exchange Commission.
  Note 2 – Summary of Significant Accounting Policies
 
 Revenue Recognition
  The Company’s revenue is generated from the sale of our proprietary tax resolution products and services.  These services are Consultations, Tax Returns, Automated Collection Service (ACS), Revenue Officer Case (ROC), Collection Due Process (CDP), and Settlement Analysis.  These products and services may be sold individually or in combination with any of the products and services.  The Company had been recording revenue based on the proportionate completion method for revenue recognition. Effective January 1, 2010, the Company recognizes revenue under Accounting Standards Codification (ASC) 605-25, Revenue Arrangements with Multiple Deliverablesand retroactively adoptedAccounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to Financial Accounting Standards Board (FASB) ASC Topic 605, Revenue Recognition) (“ASU 2009-13”). Retroactive application is permitted, and was done so for our fiscal year 2009. No material changes to our revenue numbers were required to be recognized.
  F-7
 ASC 605-25, as amended by ASU 2009-13, provides guidance on accounting for arrangements that involve the performance of multiple products, services and/or right to use assets.  In accordance with the guidance, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting base on its relative fair value and recognized revenue for each unit of accounting when revenue recognition criteria have been met.  The price charged when the element is sold separately generally determines the fair value.
  The Company may receive advance payments that are refundable or nonrefundable depending on the individual contract.   These advance payments are recorded as deferred revenue on the balance sheet and are reclassified as revenue on the statement of operations only after services have been provided and such revenue has been earned.
  Earnings Per Share
  Basic earnings per share are computed using the weighted-average number of common shares outstanding. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.  There were no common stock equivalents outstanding as of December 31, 2010 and 2009.
  Use of Estimates
  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Actual results may differ from those estimates.
  Financial Instruments
 
 The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair values due to their short term maturities.  The carrying values of the Company’s long-term debt approximate their fair values based upon a comparison of the interest rate and terms of such debt to the rates and terms of debt currently available to the Company.
 
 Fair Value Measurements
  The Company adopted Statement of ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”).  ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date).  Under ASC 820, fair value measurements are not adjusted for transaction cost.  ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
 
 Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities
 
 Level 2: Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available.  Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
 
 F-8
 Level 3:  Unobservable inputs.  Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
  An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Availability of observable inputs can vary and is affected by a variety of factors.
 
 The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.  See Note 4, “Fair value of Financial Instruments”, for additional information regarding the Company’s financial assets and liabilities measured at fair value on a recurring basis.
 
 Cash and Cash Equivalents
  The Company considers all bank deposits and highly liquid investments with original maturities of three months or less to be cash and cash equivalents.  Cash in financial institutions exceeded the Federal Deposit Insurance Corporation (FDIC) coverage.  Management does not consider such deposits over the FDIC insured limits to be a significant risk.  We use quoted market prices where available and industry standard valuation models using market-based inputs when quoted prices are unavailable.
  Short-Term Investments
  Short-term investments consist of investments with original maturities greater than three months and less than one year.  The Company invests excess funds in Certificates of Deposits (“CDs”) issued by domestic banks and, at times, may exceed federally insured limits The Company had Bank CD’s valued at approximately $317,204 and 313,663 as of December 31, 2010 and 2009, respectively.  These CDs matured on January 09, 2011 and were rolled over into new 6 month CDs maturing on July 09, 2011.  The interest rates were approximately 1.15% and 1.00% for the 2010 and 2009 CDs, respectively (see Note 4 below for level hierarchy presentation). We use quoted market prices where available and industry standard valuation models using market-based inputs when quoted prices are unavailable.
  Long-Term Investments
  Long-term investments consist of investments with original maturities greater then one year.  The Company invests excess funds in Certificates of Deposits (“CDs”) issued by domestic banks and, at times, may exceed federally insured limits The Company had Bank CD’s valued at approximately $429,779 and $423,968 as of December 31, 2010 and 2009, respectively.  These CDs matured on January 09, 2011 and were rolled over into new 12 month CDs maturing on January 9, 2012.  The interest rates were approximately 0.6 % and 1.15% for the 2010 and 2009 CDs, respectively (see Note 4 below for level hierarchy presentation).  We use quoted market prices where available and industry standard valuation models using market-based inputs when quoted prices are unavailable
  Trade Accounts Receivables
  As of December 31, 2010, and 2009, the Company does not have any trade accounts receivable. The Company’s policy is to recognize only if (and when) the Company completes the services due under the contract without receiving the payment of the balance due.  The Company, typically, does not complete any work unless payment has been received.
  F-9
 Property and Equipment
  Property and equipment are stated at cost, less accumulated depreciation.  Major renewals and improvements that extend the useful lives of property and equipment are capitalized.  Expenditures for maintenance and repairs are charged to expense as incurred.  Upon sale or retirement, the cost of the property and equipment and the related accumulated depreciation are removed, and any resulting gains or losses are credited or charged to operations.
  Depreciation is computed using straight-line methods with various estimated useful lives: computer equipment at 3 years, office furniture and fixtures and office equipment at 5 years.  Leasehold improvements are depreciated over the shorter of the term of the lease or their estimated useful lives, which is 5 years.
  Long-Lived Assets
  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable and at a minimum on an annual basis.  The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators.  Conditions that would necessitate impairment include a significant decline in the observable market value of an asset, a significant change in the extent of manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.  For long-lived assets to be held and used, the Company recognizes an impairment loss only if an impairment is indicated by its carrying value not being recoverable through undiscounted cash flows.  The impairment loss is the difference between the carrying amount and the fair value of the asset estimated using discounted cash flows.  Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.
  Income Taxes
  The Company provides for income taxes using an asset and liability based approachfor reporting for income taxes.  Deferred income tax assets and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized (see Note 9 below for details).
  The Company also complies with the provisions accounting for uncertainty in income taxes. The accounting regulations prescribes a recognition threshold and measurements process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Pursuant to this guidance, we can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied, the benefit associated with a tax position is measured as the target amount that is greater than 50% likely of being realized upon settlement. No liability for unrecognized tax benefits was recorded as of December 31, 2010 and 2009.
  Advertising Expenses
  The Company expenses the costs of advertising as incurred.  Advertising expenses totaled $15,995,244 and $13,837,752 for 2010 and 2009, respectively.
  F-10
 Recently Adopted Accounting Pronouncements
 
 In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted.  Effective January 1, 2010, the Company adopted ASU 2009-13.  The adoption did not result to a material impact to the Company’s results of operations or financial condition.
 
 January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820 to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirements for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2009.  The adoption of ASU 2010-06 did not impact the Company’s operating results, financial position or cash flows, but did impact the Company’s disclosures on fair value measurements.  See Note 4 “Fair Value Measurement of Financial Instruments”.
 
 In February 2010, FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). This update amends Subtopic 855-10 and gives a definition to SEC filer, and requires SEC filers to assess for subsequent events through the issuance date of the financial statements. This amendment states that an SEC filer is not required to disclose the date through which subsequent events have been evaluated for a reporting period. ASU 2010-09 becomes effective upon issuance of the final update. The Company adopted the provisions of ASU 2010-09 on January 1, 2010.
  In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29, “Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” The amendments in this ASU affect any public entity as defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect adoption of ASU 2010-29 to have a material impact on the Company’s results of operations or financial condition.
  Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
 
 F-11
 Note 3 – Notes Receivable
 
 On December 11, 2009, the Company loaned $250,000 to Americlean Dry Cleaning Centers, Inc. (“Americlean”).  The note bears a 6% interest rate, which shall be accrued and paid at maturity.   With this note the Company had the right to purchase up to 65% of the total shares of common stock of Americlean at an option price of approximately $0.05 per share  and both the principle and the accrued interest thereon shall be converted in payment of the exercise price.  On June 30, 2010 TaxMasters elected not to exercise its option to acquire 65% of Americlean, thus the principal and interest converted into a new promissory note which will be due on or before December 31, 2010, with interest at 12%.  The new note and old note is collateralized by (a) a pledge of 146,000 shares of Americlean owned by the president of Americlean, together with a security interest in and to certain assets (contracts, receivables, etc.) of the borrower,  subordinate only to the security interest of TJV Management, Inc.   It was determined on December 31, 2010, that this note was not collectible and was written off.  The loss on the write off of $266,202 is included in selling, general and administrative expenses in the statements of operations.
 
 Note 4 - Fair Value
 
 ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.
 
 The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2010 and 2009. As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for the twelve months ended December 31, 2010.
  Balance at December 31, 2010

Level 1


Level 2


Level 3


TotalAssetsInvestments- short-term

$
317,204



-



-


$
317,204Investments- long-term


429,779











429,779Total Assets

$
746,983



-



-


$
746,983Liabilities – N/A


-



-



-



-
 
 Balance at December 31, 2009

Level 1


Level 2


Level 3


TotalAssetsInvestments- short-term

$
313,663



-



-


$
313,663Investments- long-term


423,968











423,968Total Assets

$
737,631



-



-


$
737,631Liabilities – N/A


-



-



-



-
 
 F-12
 All short-term investments were in bank CD’s at December 31, 2010 and 2009, and have a maturity range from six to twelve months (see Note 2 above).
 
 Some of the Company's financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.
 
 NOTE 5-
PROPERTY AND EQUIPMENT
  Property and equipment consist of the following as of December 31, 2010 and 2009:
  2010


2009Furniture & Fixtures

$
132,502


$
132,502Leasehold improvements


620,412



-Computer equipment


1,389,489



882,900Phone equipment – Capital lease


1,914,471



1,914,4714,056,874



2,929,873Less - accumulated depreciation


(1,173,152
)


(396,486
)$
2,883,722


$
2,533,387
 
 Depreciation expense charged to operations for the years ended December 31, 2010 and 2009, was $768,241 and $241,348, respectively.
 
 Note 6 – Capital Lease Obligations
  The Company acquired equipment under long-term leases with two to five year terms, generally bearing interest rates from 2% to 26%.  For financial reporting purposes, the present value of the minimum lease payments has been capitalized.
 
 December 31


December 31Year


2010


20092006
The Company entered into various capital leases for computer equipment.  The terms range from 36 to 48 months and the monthly lease payments are approximately $2,427 including interest, with maturity dates ranging from January 2009 to January 2010.

$
-


$
6512007
The Company entered into various capital leases for computer equipment and office equipment.  The terms are for 36 months and the monthly lease payments are approximately $4,560 including interest, with maturity dates ranging from January 2010 to August 2010.


-



20,9672008
The Company entered into various capital leases for computer equipment and office equipment.  The terms range from 24 to 48 months and the monthly lease payments are approximately $10,159 including interest, with maturity dates ranging from January 2011 to March 2012.


45,872



138,1122009
The Company entered into various capital leases for computer equipment, office equipment and phone system equipment.  The terms range from 24 to 60 months and the monthly lease payments are approximately $41,702, with maturity dates ranging from February 2011 to December 2014


1,692,730



2,117,4202010
The Company entered into various capital leases for computer equipment, office equipment and phone system equipment.  The terms of 36 months and the monthly lease payments are approximately $3,757, with a maturity date of September 2013.


89,246



-Total  lease obligation


1,827,848



2,277,150Less:  current portion


543,800



568,562Capital lease obligation, net of current portion

$
1,284,048


$
1,708,588
 
 F-13
 Future payments under these capital lease arrangements are as follows:
 
 2011

$
593,1732012


510,7422013


420,6042014


405,840Total future payments

$
1,930,359Less: amount representing interest


102,511Present value of net minimum lease payments

$
1,827,848
 
 Note 7 – Stockholders’ Deficit
  Common Stock
  During the year ended December 31, 2010, the Company issued a total of 1,024,000 fully vested, non-forfeitable common shares to non-employees for services rendered. The Company recorded an expense of $732,000 to Selling, general and administrative expenses.  The value of the related services was determined to be the price of the stock on the performance commitment date.
 
 During 2009, the Company issued 35,963,000 common shares to employees and non-employee for services rendered for estimated value of $539,445 and expensed as compensation in the statements of operations.  The shares were issued as follows:
 
 ·
On August 4, 2009, 32,704,000 common shares were issued to six executives under their employment agreements.  These were "signing bonus" shares.
 ·
On August 4, 2009, 500,000 common shares were issued evenly to 5 directors for services.
 ·
On August 4, 2009, 1,870,000 common shares were issued to various rank and file employees in recognition to services to the company.
 ·
On December 7, 2009, 559,000 common shares were issued to all employees who were with the Company on August 4, 2009, the date of the Company became a public entity.
 ·
On November 11, 2009, the Company issued 330,000 common shares to a non-employee for services valued at $4,950.
 
 Contingently Issuable Shares
 
 On July 1, 2010, the Company entered into a voluntary Financial Reorganization Agreement with Patrick R. Cox, the Company’s Chief Executive Officer and majority and controlling shareholder, and Olde Monmouth Stock Transfer Co., Inc., the Registrant’s transfer agent (“Olde Monmouth”).
 
 Pursuant to the Financial Reorganization Agreement, Mr. Cox transferred 200 million common shares owned by him to Olde Monmouth, which shall hold such shares in escrow until June 30, 2015.  Such escrowed shares were originally issued to Mr. Cox in a “B” reorganization under the Internal Revenue Code of 1986.  While the escrowed shares are held by Olde Monmouth in escrow, Mr. Cox shall not have the right to vote such escrowed shares nor receive any dividend or other distributions in respect of such escrowed shares.  After each of the Company’s fiscal years, completed prior to June 30, 2015, Mr. Cox shall be entitled to claw back the number of such escrowed shares based upon a formula tied to the financial performance of the Company for such fiscal year.  If the formula calculation is negative, no shares shall be released and under no circumstances shall Mr. Cox be required to turn back any of the 101 million shares which he is retaining.  If the calculation would require the release of more shares than those that remain in escrow, only the remaining shares shall be released, the Company is not required to issue any additional shares to Mr. Cox.  At June 30, 2015, any escrowed shares not released to Mr. Cox pursuant to the Financial Reorganization Agreement shall be cancelled.
 
 The 200,000,000 shares are considered contingently issuable shares since they have been placed in escrow to be issued only when certain performance conditions have been met and as such, are reported as issued but not outstanding in the Balance Sheets at December 31, 2010 and were not included in the computation of earnings (loss) per share for the year ended December 31, 2010.
 
 Stock Options
  On August 4, 2009, the Company authorized and approved (i) the 2009 TaxMasters Stock Option Plan of the Company (“Non-Qualified Plan”), (ii) the 2009 TaxMasters Incentive Stock Option Plan (‘ISO Plan”) and (iii) TaxMasters 2009 Stock Bonus Plan (“Bonus Plan”).  The authorized shares and prices are still to be determined for each plan and as of December 31, 2010 and 2009, no options or stock grants have been authorized or granted under any of the three plans.
 
 F-14
 Preferred Stock
  On August 4, 2009, the Company issued 1,000 shares of “Control Series of Preferred Stock” to Mr. Patrick Cox.  The preferred stock gives Mr. Cox the right to elect a majority of TaxMaster’s Board for a period of five (5) years and each share of Control Series Preferred Stock will also have one (1) vote per share, voting as a single class with TaxMasters' common stock.  The shares of the Control Series Preferred Stock will not be convertible into TaxMasters' common stock and at the end of five years the Control Series Preferred Stock will terminate.  The shares of Control Series Preferred Stock will receive such dividends as TaxMasters' Board may declare from time to time.
 
 Distributions
  For the year ended December 31, 2009, the Company or its wholly-owned subsidiary, TaxMasters, made distributions to the TaxMasters Stockholder of $2,326,094, before the reverse merger transaction.  In addition to the 2009 distributions, the Company distributed the 2008 undistributed previously taxed earnings in amount of $5,314,848. This amount was then loaned back to the Company.  (see Note 8 below for details).
  Note 8 - Note Payable - Related Party
  In August 2009, the Chief Executive Officer, loaned the Company $5,314,848, at an interest rate of prime plus 1%.  The note is unsecured and is due on demand, with covenants that limit demand rights. The covenants limited demand rights to $1 million annually as long as the company is achieving certain financial targets and the Company has the cash for repayment.  Total repayments to the note, net of accrued interest, amounted to $221,806 and $732,130 for 2010 and 2009, respectively.
 
 Note 9 – Income Taxes
  As part of the process of preparing the financial statements, the Company is required to estimate its income taxes. The process incorporates an assessment of the current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. Such differences may result in deferred tax assets and/or liabilities, which are included within the balance sheet. Prior to the reverse merger of August 4, 2009, the Company was taxed as a Sub-S corporation and was not subject to corporate taxes which created a deferred tax asset when the Sub-S corporation was converted to a C corporation and converted from cash basis to accrual basis for tax purposes.
  Our provision (benefit) for income taxes at December 31, 2010 and 2009 consisted of the following:
  2010


2009Current:Federal

$
-


$
-State


243,923



-Deferred:Federal


(521,886
)


(3,013,132
)State


-



-$
(277,963
)

$
(3,013,132
)
 
 F-15
 The U.S. federal statutory income tax rate is reconciled to the effective rate at December 31, 2010 and 2009 as follows:
 
 2010

2009Income tax expenses at U.S. federal statutory rate


34.0%


34.0%Permanent differences


(11.9%)


25.6%Other


(9.3%)


-Income taxed as S-Corp.


-


(580.6%)Effective tax rate


12.8%


(521.0%)
 
 The components of the net deferred tax assets (liability) at December 31, 2010 and 2009 are as follows:
 
 2010


2009Deferred tax assetsNet operating loss carryover

$
3,179,790


$
2,913,121Deferred rent


349,267



117,077Accrued expenses


518,576



365,736Customer refund


83,632



38,297Other


97,399



1,5304,228,664



3,435,761Deferred tax liabilityProperty and equipment


693,646



422,629$
3,535,018


$
3,013,132
 
 The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets and determines if a valuation allowance is necessary. As a result of this analysis the Company concluded that it is more likely than not that its deferred tax assets will ultimately be recovered and, accordingly, no valuation allowance was recorded as of December 31, 2010 and 2009.
 
 Note 10 – Related Party Transactions
  The Company incurs certain business development and entertainment expenses related to brand image development, employee retention, necessary entertainment, and certain expenses related to its community relations activities that are paid to companies owned by one or more of the corporate executives.  It is believed that these costs are reasonable and approximate the costs of similar activities with unrelated parties.
  The Company is affiliated, through common ownership, with another company that provides the Company with advertising.  The affiliated company charged $968,064 and $881,358 for the years ended December 31, 2010 and 2009, respectively, for advertising costs incurred.  In addition, the outstanding balance due to the affiliated company as of December 31, 2010 and 2009 was $112,138 and  $109,939, respectively.
  In addition, the Company has marketing services provided by a related entity that is owned by the Company’s management.  Marketing expenses were $142,000 and $564,677 for the years ended December 31, 2010 and 2009, respectively.  There were no outstanding balances due to this related entity as of December 31, 2010 and 2009.
  F-16
 Note 11 – Commitments and Contingencies
  Leases
  The Company has two separate lease agreements.  The Company leased its main office space in Houston, Texas under a lease agreement that commenced in December 2006 and expires February 2014.  In addition, there were two expansion leases entered into for this property in January and March 2008 which both expire in May 2014.  The aggregate monthly lease payments are $25,162.  In July 2009, The Company entered into an additional lease agreement for additional office space in Houston, Texas through December 31, 2015.  Monthly lease payment under this agreement are $0 for the first six months, $74,804 for the months seven through twenty–six,   $83,795 for months twenty-seven through forty-six, and $92,785 thereafter.
  The future minimum lease payments are as follows:
  Year Ended:2011

$
1,206,4652012


1,277,2392013


1,323,3982014


1,176,838Thereafter


833,450Total

$
5,817,390
 
 Total rent expense for 2010 and 2009 was $1,424,952 and $529,463 , respectively.
  Deferred Rent
  The Company recognizes rent, including rent holidays, and escalating rent provisions, on a straight-line basis over the terms of the lease.  The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. The current portion of deferred rent is included in accrued expenses.  Cash reimbursements received from landlords for leasehold improvements and other incentives are also recorded as deferred rent and amortized on a straight-line basis over the lease term as an offset to rent expense.  The amounts at December 31, 2010 and 2009 are $1,027,256 and $464,231, respectively, and are included in accrued liabilities.
  Legal Proceedings
  On May 13, 2010, the Texas Attorney General’s (AG) office filed a suit against the Company and its Chief Executive Officer in state district court for Travis County, Texas.  In the suit, styled as The State of Texas v. TaxMasters, Inc., TMIRS Enterprises, Ltd., GP Services, LLC, d/b/a TaxMasters, and Patrick R. Cox, the AG  alleges, the Company violated certain provisions of the Texas Deceptive Trade Practices Act (“DTPA”) and the Texas Debt Collection Act and is seeking (i) injunctions against the Company from further violations of the applicable Texas statutes, (ii) restitution, and (iii) civil penalties of up to $20,000 per violation for each violation of the DTPA. The Company denies the allegations and is vigorously defending the AG’s claims.
 
 F-17
 On May 25, 2010, as part of the same proceeding, the court granted and agreed temporary injunction which requires the Company to more clearly and conspicuously disclose to potential customers prior to their purchase of tax resolution services from the Company that (i) the Company’s contract provides that the Company is entitled to its full fee regardless of the Company’s success or failure in resolving the customer’s tax issues, (ii) the Company’s contract provides that the Company is not obligated to perform services for the customer until the Company’s fee has been paid in full, (iii) if the customer is paying in installments, the Company may not be working on the customer’s tax issues until the Company has received its entire fee and (iv) the Company’s contract provides that any and all fees paid to the Company for its services are non-refundable.
 
 Management believes that the Company has complied with all the requests from the Texas Attorney General’s office and has made appropriate changes to its current business model.  The Company is vigorously defending itself against these allegations but the Company also recognizes that it is probable it will incur some civil penalties and have to make restitution.  Company’s management has determined that the amount of penalties and restitution cannot be reasonably estimated and any estimate would be so uncertain as to impair the integrity of these financial statements.  Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if the event is (1) probable and (2) the amount of the loss can be reasonably estimated. Since the amount cannot be reasonably estimated, no accrual for this contingent loss has been made to these financial statements.
 
 On December 16, 2010, the Minnesota Attorney General’s (AG) office filed a suit against the Company in state district court for the Fourth Judicial District of Hennepin County, Texas.  In the suit, styled as State of Minnesota by its Attorney General, Lori Swanson vs. TaxMasters, Inc. a Nevada corporation, d/b/a TaxMasters, the AG alleges, the Company violated certain provisions of the Minnesota Consumer Fraud Act and the Uniform Deceptive Trade Practices Act.  The AG further alleges that the Company was unjustly enriched.  The AG is seeking to have the court (i) enjoin the Company from engaging in deceptive practices or making false or misleading statements, (ii) award civil penalties, (iii) award restitution for all persons injured by Company’s acts; and (iv) award costs, including costs of investigation and attorneys’ fees.  The Company denies the allegations and is vigorously defending the AG’s claims. Company’s management has determined that the amount of penalties and restitution cannot be reasonably estimated and any estimate would be so uncertain as to impair the integrity of these financial statements.  Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if the event is (1) probable and (2) the amount of the loss can be reasonably estimated. Since the amount cannot be reasonably estimated, no accrual for this contingent loss has been made to these financial statements.
 
 Also from time to time, the Company is involved in other various legal proceedings in the ordinary course of business. The Company has recorded an accrual of $4,890 for the year ended December 31, 2010 and $67,363, for the year ended December 31, 2009 for the potential losses resulting from legal proceedings. Management believes that no other pending legal proceedings will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
  Assessment from U.S. Department of Labor
 
 On December 14, 2010, the Company, without admitting it violated any Fair Labor Standards Act (FLSA) provision, entered into a settlement agreement with the U.S. Department of Labor (DOL) concerning the DOL’s allegation that the Company incorrectly determined overtime wage payments for some employees from July 2007 to June 2010. On December 23, 2010, a consent judgment was filed bring this matter to a close.  In connection with the settlement, the Company has accrued an expense of $512,000 as of December 31, 2010.
 
 F-18
 Deferred Bonus
  On December 31, 2009, the Chief Executive Officer of the Company earned a bonus of $1,008,333 per the terms of his employee contract. This bonus is payable within the next twelve months provided the Company meets certain covenants per the agreement.
  Note 12 – Restatement of Previously Issued Financial Statements
 
 On January 3, 2011, the Company reported that previously issued financial statements for the fiscal year ended December 31, 2009 should no longer be relied upon. Previously, the Company accounted for the unpaid and incomplete portion of its customer contracts as accounts receivable and deferred revenue. The Company has determined that the balance of the amount due under the contract should have been accounted for as an account receivable only if (and when) the Company completes the services due under the contract without receiving the payment of the balance due.
 
 As a result of the above error, the Company has determined that accounts receivable and deferred revenue as of December 31, 2009 were overstated by $11,031,778.  The Company concluded that accounts receivable should be zero since, as a matter of policy, the Company does not complete any work unless payment has been received.
 
 The Company also identified an overstatement in deferred revenue as of December 31, 2009 and an understatement in revenues for the year then ended of $1,138,905 for contracts already completed which were not previously accounted for.
 
 The above errors resulted to a corresponding overstatement in income tax benefit of $2,350,428 and an overstatement in current and non-current deferred tax assets of $1,248,565 and $1,101,863, respectively.
 
 The Company identified a non-trade receivable in the amount of $394,259 needed to bereclassified from trade receivables to other assets-other receivable.
  The following tables show the impact of the errors to the Balance Sheet and Statement of Operations as of and for the year ended December 31, 2009:
  BALANCE SHEET

December 31, 2009As previously reported


Adjustments


As restatedCURRENT ASSETSCash and cash equivalents

$
2,892,895





$
2,892,895Short-term investments


313,663






313,663Accounts receivable trade, net


11,426,037



(11,426,037
)


-Deferred tax asset


1,654,130



(1,248,565
)


405,565Prepaid expenses


125,000







125,000Other current assets


-



394,259



394,259Total current assets


16,411,725



(12,280,343
)


4,131,382Property and equipment, net


2,533,387







2,533,387Note receivable


250,000







250,000Investments


423,968







423,968Deferred tax asset, net of current


3,709,430



(1,101,863
)


2,607,567Other assets


17,000







17,000$
23,345,510


$
(13,382,206
)

$
9,963,304LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable

$
3,099,427






$
3,099,427Accounts payable related parties


117,673







117,673Accrued liabilities


2,448,783







2,448,783Deferred revenue


20,478,350



(12,170,683
)


8,307,667Current porion of capital lease obligation


568,562







568,562Note payable to related party


4,582,718







4,582,718Total current liabilities


31,295,513



(12,170,683
)


19,124,830LONG TERM DEBTCapital lease obligations, net of current portion


1,708,588







1,708,588Total liabilities


33,004,101



(12,170,683
)


20,833,418STOCKHOLDERS' DEFICITPreferred stock


1







1Common stock


339,676







339,676Additional paid-in capital


199,768







199,768Accumulated deficit


(10,198,036
)


(1,211,523
)


(11,409,559
)Total stockholders' deficit


(9,658,591
)


(1,211,523
)


(10,870,114
)$
23,345,510


$
(13,382,206
)

$
9,963,304
  F-19
 STATEMENT OF OPERATIONS

For the year ended December 31, 2009As previously reported


Adjustments


As restatedREVENUES, net

$
36,777,024



1,138,905


$
37,915,929OPERATING COSTS AND EXPENSES:Selling, general and administrative expenses


18,891,317



-



18,891,317Compensation


18,082,066



-



18,082,066Depreciation


241,348



-



241,348Total operating costs and expenses


37,214,731



-



37,214,731NET INCOME (LOSS) FROM OPERATIONS


(437,707
)


1,138,905



701,198OTHER  INCOME (EXPENSE):Interest income


39,030



-



39,030Interest expense


(161,927
)


-



(161,927
)Total other income (expense)


(122,897
)


-



(122,897
)NET  INCOME (LOSS) BEFORE INCOME TAXES


(560,604
)


1,138,905



578,301INCOME TAX BENEFIT, NET


(5,363,560
)


2,350,428



(3,013,132
)NET INCOME (LOSS)

$
4,802,956


$
(1,211,523
)

$
3,591,433EARNINGS (LOSS) PER COMMON SHAREBasic and diluted

$
0.02


$
(0.01
)

$
0.01WEIGHTED AVERAGE NUMBER OF COMMON SHARESBasic and diluted


316,712,298







316,712,298
 
  The adjustments to the Statement of Cash Flows for the year ended December 31, 2009 did not result in any changes to the amounts previously reported for net cash from operating activities, investing activities or financing activities.
  F-20
 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





None.





ITEM 9A.  CONTROLS AND PROCEDURES





(a)  Disclosure Controls and Procedures.    Our management, with the participation of our principal executive officer (chief executive officer) and principal financial officer (chief financial officer), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2010 (the “Evaluation Date”).  Based on this evaluation, and due to the material weaknesses in our internal control over financial reporting (as described below in the“Report of Management on TaxMasters, Inc.’s Internal Control Over Financial Reporting” , our chief executive officer and chief financial officer concluded that as of December 31, 2010, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.





The material weakness relates to the lack of segregation of duties in financial reporting, as our financial reporting and all accounting functions are performed by external consultants with no oversight by a professional with accounting expertise.  Our CFO does not possess accounting expertise and our company does not have an accounting staff with public company audit experience.  This weakness is due to the fact that TaxMasters, Inc., which we acquired on August 4, 2009, was a privately held company and its staff, overall, had minimal experience in public company matters, including public company accounting.  To remedy this material weakness, we intend to engage accountant personnel to assist with financial reporting as promptly as possible.





(b)  Internal Controls Over Financial Reporting.    There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal year to which this report relates that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Set forth below is the“Report of Management on TaxMasters, Inc.’s Internal Control over Financial Reporting”





Report of Management on TaxMasters, Inc.’s Internal Control Over Financial Reporting





Our principal executive officer (chief executive officer) and principal financial officer (chief financial officer), as members of management of TaxMasters, Inc., are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f).  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.





Because of its inherent limitations, our internal controls and procedures may not prevent or detect misstatements.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.





A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that we have the following material weakness in our internal control over financial reporting as of December 31, 2010, which has been disclosed to, and reviewed with, our independent auditor.


-23-


●
We have a lack of documentation regarding internal controls over financial reporting. Although the Company maintains numerous internal controls over financial reporting, the level of documentation for such controls is inadequate. This heightens the possibility that existing controls may not be applied consistently and properly. As a result such controls could malfunction, and a material misstatement in the annual or interim consolidated financial statements may not be prevented or detected. Accordingly, management has determined this control deficiency constitutes a material weakness.●
The Company was unable to ensure that all information required to be disclosed in our filings was accumulated and communicated to management to allow timely decisions regarding required disclosure.●
The Company is lacking qualified resources to perform the internal audit functions properly; and the scope and effectiveness of the Company’s internal audit function are yet to be developed.





Remediation Initiative:





●
Externally, we will continue the process of improving the Company’s internal control system based on COSO Framework under a consulting firm’s assistance.





●
Continue using consultants experienced in accounting principles generally accepted in the United States, including internal controls over financial reporting and SEC reporting.





●
Internally we established a central management center to recruit more senior qualified people in order to improve our internal control procedures.





As of December 31, 2010 our management, with the participation of our chief executive officer and chief financial officer, documented our control environment, however, management did not assess our internal control over financial reporting based on criteria for effective internal control over financial reporting as described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.  As a result of the material weaknesses described above, management has concluded that our internal controls over financial reporting were not effective as of December 31, 2010.





This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this annual report.




ITEM 9B.  OTHER INFORMATION





None.





PART III





ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The name, age and business experience of each of our directors and executive officers as of March __, 2010 are shown below.  Biographical information for each is set forth following the table.  Each such person became an officer and/or director of the Company at the closing of our acquisition of TaxMasters, Inc. on August 4, 2009 upon the resignation of our officers and directors on such date  (biographical descriptions below which reference dates (i) from April 6, 2009 to July 10, 2009 relate to such officer’s role at TaxMasters, Inc., our wholly-owned subsidiary, and (ii) prior to April 6, 2009 relate to such officer’s role at TMIRS Enterprises, Ltd., the predecessor to TaxMasters, Inc.):





Name

Age

PositionPatrick R. Cox (3), (4)

47

Chairman of the Board, Chief Executive Officer, President and DirectorChristopher J. Koscinski

41

Chief Financial Officer and TreasurerFrederick V. Hackett

43

General Counsel and SecretaryGlenn A. Clamon

38

Vice President – SalesPaulette M. Kitson

52

Vice President – Human ResourcesKevin L. Schmidt

41

Chief Information OfficerReneé L. Anderson-Miller

47

Vice President – OperationsMichael E. Holdgrafer (1), (4)

52

DirectorDavid M. Hyink (2), (3)

63

DirectorJames S. Milholland (1), (3)

48

DirectorGreg Ralph (1), (2)

41

DirectorRichard A. Wright Jr. (2), (4)

44

Director





(1)
Member of the Audit Committee(2)
Member of the Compensation Committee(3)
Member of Nominating Committee(4)
Member of Governance Committee





-24-


Patrick R. Cox is the founder of TMIRS Enterprises, Ltd., the predecessor to TaxMasters, Inc.  Mr. Cox has been a director and TaxMasters’ President and Chief Executive Officer since January 2004 and our Chairman of the Board of Directors since September 17, 2009.  Mr. Cox is the Chairman of our Nominating Committee.  Mr. Cox is a Certified Public Accountant licensed in the state of Texas.  Mr. Cox also founded and operated various businesses, including (i) Patrick R. Cox & Associates, Inc., an accounting firm, from January 2001 to August 2007; (ii) Pawn Tax Enterprises, Ltd., which was formed in 2006 and provides technical and marketing support to third parties that prepare small tax returns; (iii) Gurdon Properties, LLC, which was formed in 2006 and operates a rental property business; and (iv) Team Advertising, Inc., which was formed in 2008 and runs a race car team.





Christopher J. Koscinski has served as the Chief Financial Officer and Treasurer of TaxMasters since September 2007,   From October 2006 to September 2007, Mr. Koscinski was a Relationship Manager and Assistant Vice President at the Global Trust Department of the Bank of New York, where he handled compliance matters and assisted in the management of collateral in multi-million dollar secured debt financings.  From July 1997 to October 2006, Mr. Koscinski worked in various capacities at AIM Investments, including as a supervisor in the retirement services group from January 2002 to October 2006.





Frederick V. Hackett has served as outside legal counsel to TaxMasters from 2004 to June of 2007 when he became the General Counsel of TaxMasters.  He departed TaxMasters for active duty in support of Operation Iraqi Freedom with the U.S. Army as a Judge Advocate ("JAG") in July of 2009 and he returned from active duty and has served as our General Counsel and Secretary since August 20, 2010.  From August 2005 to December 2006, Mr. Hackett served as a Judge Advocate in support of Operation Enduring Freedom.  He worked at Wauson & Probus, P.C. from February 2007 to May 2007 (as Of Counsel) and October 2003 to March 2004 (as an associate).  Mr. Hackett was a police officer in the Rosenberg Police Department, Rosenberg, Texas, March 1993 to October 2003.  Mr. Hackett is currently a reserve Deputy Constable and is licensed to practice law in Texas.








Glenn A. Clamon has served as the Vice President – Sales of TaxMasters since January 2004.  Mr. Clamon is also a co-owner with his wife of Pelagic Marketing, Inc., which is a sales and marketing consulting firm that he and his wife formed in 2005.





Paulette M. Kitson has served as the Vice President – Human Resources of TaxMasters since December 2006.  From June 2003 to October 2006, Ms. Kitson worked at Comerica Incorporated, a publicly traded financial services company, where she was a Banking Center Manger (2005 – 2006) and an Assistant Manager (2003 – 2004). Ms. Kitson has over 20 years experience in retail banking, including seven years of managerial experience in that industry.










-25-


Kevin L. Schmidt has served as the Chief Information Officer of TaxMasters since May 2008.  From 2007 to May 2008, Mr. Schmidt was the Director of IT for the Houston Texas Fire Fighters Credit Union, a credit union that provides a range of financial services to its members.  From 2003 to 2007, he was the Director of IT at American Intercontinental University, a private, multi-campus university that offers associates, bachelors and master degree programs as well as an online university.





Renee L. Anderson-Miller has served as the Vice President – Operations of TaxMasters since April 2008.  From 2005 to April 2008, Ms. Anderson-Miller was an Operations Manager in accounting at Encompass Holdings, Inc., a privately held real estate investment firm.  From 2002 to 2005, she was a Senior Tax Analyst and Audit Coordinator at El Paso Oil & Gas division of El Paso Corporation, a public traded energy company.  From 1999 to 2002, Ms. Anderson-Miller was a Senior Tax Associate at Arthur Anderson LLP in its Houston Texas office.  From 1994 – 1999, she was a Tax Assistant at The Coastal Corporation, a publicly traded energy company that was acquired by El Paso Corporation in 2001.





Michael E. Holdgrafer became one of our directors on August 4, 2009 and he served on the Advisory Board of TaxMasters since September 2007.  He has been a corporate attorney for Dollar Thrifty Automotive Group, Inc., a publicly traded auto rental company, since March 1996 where he has handled acquisitions and employment matters (March 1996 to October 2008) and managed Dollar Thrifty’s properties and concessions group (since October 2008).  Mr. Holdgrafer is licensed to practice law in Oklahoma





David M. Hyink became one of our directors on August 4, 2009 and he served on the Advisory Board of TaxMasters since September 2007.  Dr. Hyink is the Chairman of our Compensation Committee.  Dr. Hyink has been retired since April 2007.  From June 1980 to March 2007, he worked as Senior Scientific Advisor and Chief Forestry Scientist at Weyerhaeuser Company, a publicly traded forestry products company, focusing on topics and issues related to forestry and forest growth and development.  Dr. Hyink received his Ph.D. in Forest Biometrics, Statistics and Operations Research from Purdue University in May 1979 and he received a Masters degree in Forest Biometrics from Stephen F. Austin State University in December 1972.





James S. Milholland became one of our directors on August 4, 2009 and he served on the Advisory Board of TaxMasters since September 2007.  Mr. is a Region Vice President at Kemper, a Unitrin Business, where he manages Kemper’s casualty and property insurance business in a seven state region.  Mr. Milholland has worked at Kemper since 1990.





Greg Ralph became one of our directors and our Vice Chairman of the Board on September 17, 2009.  Mr. Ralph is the Chairman of our Audit Committee.  Since 1985, Mr. Ralph has worked as an accountant at Ralph & Ralph, PC, an accounting firm based in Houston, Texas.  He has been a Managing Director at Ralph & Ralph since 1993.  Mr. Ralph has extensive experience in business audits, financial planning, business tax planning and compliance, litigation support in accounting matters and accounting issues in mergers and acquisitions and buy-sell agreements.





Richard A. Wright Jr. became one of our directors on August 4, 2009 and he served on the Advisory Board of TaxMasters since September 2007.  Mr. Wright is the Chairman of our Governance Committee.  Mr. Wright has served as the President of Wright’s Reprints, a reseller of content and intellectual property from national publications, since 2000. He has also served as the President of Wright’s Printing, a commercial sheet-fed printing company since 2002.





Section 16(a) beneficial reporting compliance





No person who, during the fiscal year ended December 31, 2009, was a director or officer of the Company, or beneficial owner of more than ten percent of the Company’s Common Stock (which is the only class of securities of the Company registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”)), failed to file on a timely basis reports required by Section 16 of the Act during such fiscal year except that Fred Hackett filed an untimely Form 3 on March 25, 2011 (for a transaction occurring on August 20, 2010).  The foregoing is based solely upon a review by the Company of Forms 3 and 4 relating the most recent fiscal year as furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year.





Audit Committee; Audit Committee Financial Expert





The three members of the Audit Committee of our Board of Directors (the “Audit Committee”) are Greg Ralph (Chairman), Michael Holdgrafer and Scott Milholland.  The Board of Directors has determined that each member of the Audit Committee meets the independence criteria prescribed by applicable law and the rules of the SEC for audit committee membership and meets the criteria for audit committee membership required by NASDAQ.  Further, each Audit Committee member meets NASDAQ’s financial knowledge requirements.  Also, our Board has determined that Greg Ralph qualifies as an “audit committee financial expert,” as defined in the rules and regulations of the SEC.





-26-


Code of Ethics





Effective August 4, 2009, we adopted a code of ethics that applies to all of our directors, officers (including our chief executive officer (our principal executive officer) and chief financial officer (our principal financial and accounting officer), and any person performing similar functions) and employees.  We have made our Code of Ethics available by filing it as Exhibit 14.1 with our Current Report on Form 8-K filed on August 10, 2009.




ITEM 11.
EXECUTIVE COMPENSATION





Compensation of Executive Management





The following table sets forth the cash and non-cash compensation for each of our last two fiscal years awarded to, earned by or paid to (i) our chief executive officer during the fiscal years ended December 31, 2008 and 2009 and (ii) the most highly compensated individuals (up to two) other than the chief executive officer that served as an executive officer at the conclusion of the fiscal years ended December 31, 2008 and 2009 and who received total compensation in excess of $100,000 during such fiscal years (collectively, the “named executive officers”):





SUMMARY COMPENSATION TABLE





Name and

Principal Position
Year

Salary


Bonus


Stock

Awards


Option

Awards


All Other

Compensation


TotalPatrick R. Cox

Chief Executive Officer (1)
2010

$
950,000


$
--


$
--


$
--


$
--


$
702,0542009

$
419.480


$
61,885


$
--


$
--


$
--


$
481,365Glenn A. Clamon

Vice President – Sales (2)
2010

$
229,788


$
--


$
--


$
--


$
--


$
229,7882009

$
85,337


$
--


$
540,036


$
--


$
4,798


$
630,171Reneé L. Anderson-Miller

Vice President Operations  (3)
2010

$
151,332


$
--


$
--


$
--


$
--


$
151,3322009

$
159,365


$
18,141


$
5,454


$
--


$
792


$
183,752







(1)
During 2008, Mr. Cox was eligible for a bonus of up to 400% of his annual base salary as determined in the discretion of the TaxMasters Board of Directors.  In September 2009, we entered into an employment agreement with Mr. Cox.  The minimum annual base salary under Mr. Cox’s employment agreement is $950,000.  Mr. Cox also received under his employment agreement reimbursement of (i) $60 per month for cell phone expenses and (ii) any deductible, co-pay and/or co-insurance payments made by Mr. Cox under any medical, dental and/or vision insurance provided by us.  On September 17, 2009, we granted Mr. Cox 100,000 shares of restricted common stock as compensation for Mr. Cox’s service on our board of directors for the twelve month period ending July 31, 2010.





-27-





(2)
During 2008, Mr. Clamon was eligible for a bonus equal 400% of his annual base salary based on profit performance and sales leads.  Mr. Clamon’s bonus was paid quarterly and was determined in the discretion of the Board based on the parameters described above.  In September 2009, we entered into an employment agreement with Mr. Clamon.  The minimum annual base salary under Mr. Clamon’s employment agreement is $225,000.  Mr. Clamon’s employment agreement also provided for a bonus equal to up to 400% of his annual base salary.  Upon signing of his employment agreement, Mr. Clamon received, as a one-time "signing bonus", Thirty Million (30,000,000) unregistered shares of our Common Stock, which shares vested immediately.  Mr. Clamon also received under his employment agreement reimbursement of (i) $60 per month for cell phone expenses and (ii) any deductible, co-pay and/or co-insurance payments made by Mr. Cox under any medical, dental and/or vision insurance provided by us.





(3)
During 2008, Ms. Anderson-Miller was eligible for a bonus equal 40% of her annual base salary.  Ms. Anderson-Miller’s bonus was paid quarterly and was determined in the discretion of the Board based on the parameters described above.  In September 2009, we entered into an employment agreement with Ms. Anderson-Miller.  The minimum annual base salary under Ms. Anderson-Miller’s employment agreement is $150,000.  Ms. Anderson-Miller’s employment agreement also provided for a bonus equal to up to 40% of her annual base salary.  Upon signing of his employment agreement, Ms. Anderson-Miller received, as a one-time "signing bonus", Three Hundred and One Thousand (301,000) unregistered shares of our Common Stock, which shares vested immediately.  Ms. Anderson-Miller also received under her employment agreement reimbursement of (i) $60 per month for cell phone expenses and (ii) any deductible, co-pay and/or co-insurance payments made by Mr. Cox under any medical, dental and/or vision insurance provided by us.





OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END - DECEMBER 31, 2010





Option Awards
Stock AwardsName
Number of Securities Underlying Unexercised Options (#) Exercisable

(1)
Number of Securities Underlying Unexercised Options (#) Unexercisable (1)
Equity Incentive Plan Awards:  Number of Securities Underlying Unexercised Unearned Options (#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested (#)
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards:  Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards:  Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)Patrick R. Cox
--
--
--
$      --

--
$         --
-
$      --Glenn A. Clamon (2)
--
--
--
$      --

--
$         --
-
$      --Reneé L. Anderson-Miller (2)
--
--
--
$      --

--
$         --
-
$      --





(1) During the year ended December 31, 2010, we did not grant any options to our executive officers.





(2) Pursuant to his employment agreement, Mr. Clamon is entitled to a grant of 5,000,000 stock options under our 2009 stock option plan at the end of fiscal 2010 (December 31, 2010).  Such options have not yet been granted.  Such option grant, if and when made, will be subject to an adjustment in the event we issue any earn out shares to Patrick R. Cox pursuant to Section 5.1 of the Share Exchange Agreement (under which we acquired of all of the outstanding shares of TaxMasters, Inc.).  Pursuant to Section 5.1 of the Share Exchange Agreement, Mr. Cox may receive up to 299,000,000 additional shares of common stock as an earn out based on our net income for the year ended December 31, 2009 and for the years ending December 31, 2010, 2011, 2012 and 2013 and for the quarters ending March 31, 2014 and June 30, 2014 (collectively, the “earn out shares’).





(2) Pursuant to her employment agreement, Ms. Anderson-Miller is entitled to a stock option grants under our 2009 stock option plan at the end of fiscal 2009, 2010 and 2011.  We have not yet granted to Ms. Miller her options with respect to the fiscal year ended December 31, 2010.  All such option grants, if and when made, will be subject to an adjustment for the issuance of any earn out shares.





-28-


Employment agreement





Patrick R. Cox





Patrick R. Cox, our Chairman of the Board, Chief Executive Officer and President, is employed pursuant to an agreement through December 31, 2012.  We have the option to renew his employment agreement for successive one year terms.  Under the terms of his employment agreement, Patrick R. Cox receives a minimum base salary of $950,000 per year.  In addition, under his employment agreement, Mr. Cox will receive reimbursement of (i) $60 per month for cell phone expenses and (ii) any deductible, co-pay and/or co-insurance payments made by Mr. Cox under any medical, dental and/or vision insurance provided by us.   If Mr. Cox’s employment is terminated by the Company without cause (including upon or in connection with a change of control of the Company), then he is entitled to receive (i) his annual salary earned but not yet paid through the date that notice of such termination was given and (ii) reimbursement for any expenses (subject to his compliance with the documentation requirement for such reimbursement).  Under his employment agreement, Mr. Cox is subject to a non-disclosure, non-compete and non-solicitation provisions.  The non-compete provision covers the period of Mr. Cox’s employment and 12 months after his employment is terminated, and the non-solicitation covers the period of Mr. Cox’s employment and 36 months after his employment is terminated.  Mr. Cox receives no additional payments with respect to any of these restrictive covenants.





Glenn A. Clamon





Glenn A. Clamon, our Vice President – Sales, is employed pursuant to an agreement through December 31, 2012.  We have the option to renew his employment agreement for successive one year terms.  Under the terms of his employment agreement, Mr. Clamon receives a minimum base salary of $225,000 per year.  During each fiscal year during the term of his employment agreement, Mr. Clamon is entitled an annual cash bonus equal to a maximum of Four Hundred Percent (400%) of his base annual salary.  Such bonus will be paid quarterly within sixty (60) days after the end of each fiscal quarter.  The amount of each quarterly cash bonus payment will be determined by our Board of Directors, but such amount cannot be greater than Mr. Clamon’s base annual salary in effect for such fiscal year.  At the end of each fiscal year during the term of his employment agreement, Mr. Clamon will be eligible for a bonus consisting of restricted shares of our common stock as determined by our Board of Directors.   Additionally, Mr. Clamon’s employment agreement provides that he will receive a grant of stock options under our 2009 Stock Option Plan in the amount of Five Million (5,000,000) options at the end of fiscal 2009, which options have not yet been granted to Mr. Clamon.  In the event that we issue earn out shares with respect to 2009 to our Chief Executive Officer, Patrick R. Cox, then the options we grant to Mr. Clamon for 2009 will be increased in the same proportion as the number of earn out shares issued to Mr. Cox bears to the 299,000,000 earn out shares that are issuable under Section 5.1 of the Share Exchange Agreement.  All options granted to Mr. Clamon pursuant to his employment agreement will have a three (3) year term and shall vest immediately upon grant.  Under his employment agreement, Mr. Clamon will receive reimbursement of (i) $60 per month for cell phone expenses and (ii) any deductible, co-pay and/or co-insurance payments made by Mr. Clamon under any medical, dental and/or vision insurance provided by us.  If Mr. Clamon’s employment is terminated by the Company without cause (including upon or in connection with a change of control of the Company), then he is entitled to receive (i) his annual salary earned but not yet paid through the date that notice of such termination was given, (ii) any annual stock bonus earned under his employment agreement but not yet paid and (iii) reimbursement for any expenses (subject to his compliance with the documentation requirement for such reimbursement).  Under his employment agreement, Mr. Clamon is subject to a non-disclosure, non-compete and non-solicitation provisions.  The non-compete provision covers the period of Mr. Clamon’s employment and 12 months after his employment is terminated, and the non-solicitation covers the period of Mr. Clamon’s employment and 36 months after his employment is terminated.  Mr. Clamon receives no additional payments with respect to any of these restrictive covenants.





Reneé L. Anderson-Miller





Reneé L. Anderson-Miller, our Vice President – Operations, is employed pursuant to an agreement through December 31, 2012.  We have the option to renew her employment agreement for successive one year terms.  Under the terms of her employment agreement, Ms. Anderson-Miller receives a minimum base salary of $150,000 per year.  During each fiscal year during the term of her employment agreement, Ms. Anderson-Miller is entitled an annual cash bonus equal to a maximum of Forty Percent (40%) of her base annual salary.  Such bonus will be paid quarterly within sixty (60) days after the end of each fiscal quarter.  The amount of each quarterly cash bonus payment will be determined by our Board of Directors, but such amount cannot be greater than ten percent (10%) of Ms. Anderson-Miller’s base annual salary in effect for such fiscal year.  At the end of each fiscal year during the term of her employment agreement, Ms. Anderson-Miller will be eligible for a bonus consisting of restricted shares of our common stock as determined by our Board of Directors.   Additionally, Ms. Anderson-Miller’s employment agreement provides that she will receive a grant of stock options under our 2009 Stock Option Plan in the amount of Five Million (5,000,000) options at the end of fiscal 2009, which options have not yet been granted to Ms. Anderson-Miller, One Million (1,000,000) options at the end of fiscal 2010 and One Million (1,000,000) options at the end of fiscal 2011.  In the event that we issue earn out shares with respect to 2009, 2010 and/or 2011 to our Chief Executive Officer, Patrick R. Cox, then the options we grant to Ms. Anderson-Miller for 2009, 2010 and/or 2011 will be increased in the same proportion as the number of earn out shares issued to Mr. Cox for each such fiscal year bears to the 299,000,000 earn out shares that are issuable under Section 5.1 of the Share Exchange Agreement.  All options granted to Ms. Anderson-Miller pursuant to her employment agreement will have a three (3) year term and shall vest immediately upon grant.  Under her employment agreement, Ms. Anderson-Miller will receive reimbursement of (i) $60 per month for cell phone expenses and (ii) any deductible, co-pay and/or co-insurance payments made by Ms. Anderson-Miller under any medical, dental and/or vision insurance provided by us.  If Ms. Anderson-Miller’s employment is terminated by the Company without cause (including upon or in connection with a change of control of the Company), then she is entitled to receive (i) her annual salary earned but not yet paid through the date that notice of such termination was given, (ii) any annual stock bonus earned under her employment agreement but not yet paid and (iii) reimbursement for any expenses (subject to her compliance with the documentation requirement for such reimbursement).  Under her employment agreement, Ms. Anderson-Miller is subject to a non-disclosure, non-compete and non-solicitation provisions.  The non-compete provision covers the period of Ms. Anderson-Miller’s employment and 12 months after her employment is terminated, and the non-solicitation covers the period of Ms. Anderson-Miller’s employment and 36 months after her employment is terminated.  Ms. Anderson-Miller receives no additional payments with respect to any of these restrictive covenants.





-29-


Compensation of directors





Prior to August 4, 2009, we did not provide any compensation for our directors.  In September 2009, our board of directors adopted a compensation arrangement for our directors for their service as member of our board of directors.  Under this compensation arrangement, each director receives a grant of 100,000 unregistered shares of our common stock for their service on the board for the 12 month period ending July 31.  The Company did not make any stock grants made to our directors in 2010.   Directors are reimbursed for reasonable out-of-pocket expenses incurred in the performance of their duties and the attendance of board meetings and any meeting of stockholders.  Any new independent Director will receive a pro-rata annual cash retainer and stock option grant.








DIRECTOR COMPENSATION - 2010


Name

Fees

Earned or

Paid in

Cash ($)


Stock

Awards

($)


Option

Awards

($)

Non-Equity

Incentive Plan

Compensation

($)

Change in Pension

Value and Non-

Qualified Deferred

Compensation

Earnings

All Other

Compensation

($)

Total ($)Patrick R. Cox

$
--


$
--


$
--

$
--

$
--

$
--

$
--Michael E. Holdgrafer

$
--


$
--


$
--

$
--

$
--

$
--

$
--David M. Hyink

$
--


$
--


$
--

$
--

$
--

$
--

$
--James S. Milholland

$
--


$
--


$
--

$
--

$
--

$
--

$
--Greg Ralph

$
--


$
--


$
--

$
--

$
--

$
--

$
--Richard A. Wright Jr.

$
--


$
--


$
--

$
--

$
--

$
--

$
--





.








-30-


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The following table sets forth the beneficial ownership of our securities as of April 11, 2011, by (a) each person known by the Company to be the beneficial owner of more than 5% of any class of the Company’s securities, (b) the Company’s directors, (c) the Company’s executive officers, and (d) all directors and executive officers as a group.  The address of all owners listed is c/o TaxMasters, Inc., 900 Town & Country Lane, Houston, Texas 77024.  As of April 11, 2011, we had a total of 140,060,649 shares of the Company’s common stock were outstanding.





Name of

Beneficial

Owner

Number of Shares

and Nature

of Beneficial

Ownership(1)

Percent of Common

Stock

Outstanding(2)Patrick R. Cox (3) (4) (5)

98,100,000

70.0%Christopher J. Koscinski (3)

500,000

--Fred Hackett (3)

500,000

--Glenn A. Clamon (3)

30,000,000

21.4%Paulette M. Kitson (3)

301,000

*Kevin Schmidt (3)

301,000

*Renee L. Anderson-Miller (3)

301,000

*David M. Hyink (4)

100,000

*Michael E. Holdgrafer (4)

100,000

*James S. Milholland (4)

100,000

*Greg Ralph (4)

100,000

*Richard A. Wright Jr. (4)

100,000

*All Officers and Directors (12 persons)

130,003,000

92.8%





*  Indicates ownership of less than 1.0%










-31-


(1)
A person is considered to beneficially own any shares: (i) over which the person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which the person has the right to acquire beneficial ownership at any time within 60 days (such as through exercise of stock options). Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.(2)
Based on [140,060,649] shares of common stock outstanding as of April 11, 2011, plus each person’s warrants or options that are currently exercisable or that will become exercisable within 60 days of April 11, 2011.  Shares of our common stock underlying warrants and stock options that are exercisable as of April 11, 2011 or within 60 days of April 11, 2011 are considered outstanding for purposes of computing the percentage shown but are not considered outstanding for any other purpose.  Does not include performance based options to the extent they have not yet vested.(3)
Officer.(4)
Director.(5)
Does not include 1,000 shares of Control Series Preferred Stock held by Mr. Cox.  Also does not include (i) up to 299,000,000 additional shares of Common Stock that may be issued to Mr. Cox based on an earn-out formula in regard to our net income for the years ending December 31, 2009, 2010, 2011, 2012 and 2013 and for the quarters ending March 31, 2014 and June 30, 2004 and (ii) shares that may be clawed back by Mr. Cox under the Financial Reorganization Agreement entered into by Mr. Cox and the Company.





Securities authorized for issuance under equity compensation plans





In 2006, we adopted the Crown Partners, Inc. 2006 Stock Option Plan (“2006 Plan”), which Plan provides for the granting of stock options and other stock grants to certain directors, key employees and certain independent contractors of Crown.  At the closing of the Share Exchange, all options previously granted under the 2006 Plan were cancelled.  We currently have 500,000 shares of common stock for issuance under the 2006 Plan (after giving effect to the 1-for-20 reverse stock split that took place on July 27, 2009).





On August 4, 2009, our board of directors adopted three equity compensation plans:  (i) the 2009 TaxMasters Stock Option Plan, (ii) the 2009 TaxMasters Incentive Stock Option Plan and (iii) the 2009 Stock Bonus Plan.  Our Board has reserved 400,000 shares of our common stock for issuance under the 2009 Stock Bonus Plan.  As of December 31, 2009, we have not reserved any shares for issuance under the 2009 TaxMasters Stock Option Plan nor the 2009 TaxMasters Incentive Stock Option Plan.   Consequently, we have not issued any options under these equity compensation plans.





In September 2009, we issued 35,074,206 common shares to employees for services rendered for estimated value of $631,336  and expensed as compensation in the statements of operations.   These issuances to employees included (i) an aggregate of 32,403,000 shares of common stock to seven of our executives in varying amounts as signing bonuses to such executives under their respective employment agreements, (ii) 2,171,000 shares of common stock to various non-executive employees of the Company to reward them for their service to the Company and (iii) 100,000 shares of our common stock issued to each of our five directors for their service on our board of directors (for an aggregate of 500,000).





In 2010, we have not issued any shares or options under any of our equity compensation plans.





-32-


The following table summarizes outstanding options under our Stock Option Plan as of December 31, 2009.  Options granted in the future under our stock option plans are within the discretion of our Compensation Committee and therefore cannot be ascertained at this time.





Plan Category
(a)





Number of Securities to

be Issued Upon Exercise

of Outstanding Options
(b)





Weighted-Average

Exercise Price of

Outstanding Options
(c)

Number of Securities

Remaining Available for

Future Issuance Under

Equity Compensation

Plans (excluding securities

Reflected in column (a))Equity compensation plans

Approved by security holders
--
--
--Equity compensation plans not approved by

security holders
-- (1)
--
-Total
--
--
-





(1) On August 4, 2009, our board of directors adopted (i) the 2009 TaxMasters Stock Option Plan and (ii) the 2009 TaxMasters Incentive Stock Option Plan.  As of December 31, 2009 and April 15, 2010, we have not reserved any shares for issuance under the 2009 TaxMasters Stock Option Plan nor the 2009 TaxMasters Incentive Stock Option Plan and we have not granted any options under either of these plans.





ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





In August 2009, our Chief Executive Officer, loaned the Company $5,314,468, at an interest rate of prime plus 1%.  The note is unsecured and is due on demand, with covenants that limit demand rights. The covenants limited demand rights to $1 million annually as long as the company is achieving certain financial targets and the Company has the cash for repayment.  For the twelve months ended December 31, 2010, repayments to the note, net of accrued interest amounted to $221,806. The balance of this note payable at December 31, 2010 is $4,360,912.





We pay advertising fees to Team Advertising, Inc., which is wholly-owned by Patrick Cox.  We paid Team Advertising approximately$867,000 in 2010, $881,358 in 2009 and $332,825 in 2008 as the primary sponsor of the racing team and for appearance on the race team trailer and all 6 team cars.





Since 2007, we have used the sales and marketing consulting firm Pelagic Marketing, Inc. which is owned by our Vice President – Sales, Mr. Glenn Clamon, and his wife.  During the years ended December 31, 2008, 2009 and 2010 we paid Pelagic Marketing consulting fees of $264,309, $564,677 and $142,000, respectively.





ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES





The following is a summary of the fees billed to us by MaloneBailey LLP for professional services rendered for the fiscal years ended December 31, 2010 and 2009:





Fee Category

Fiscal 2010

Fees


Fiscal 2009

FeesAudit Fees

$
189,703


$
130,000Audit Related Fees


-



-Tax Fees


-



-All Other Fees


-



-Total Fees

$
189,703


$
130,000





Audit Fees.  Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by MaloneBailey LLP in connection with statutory and regulatory filings or engagements.





Audit Related Fees.  Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.





Tax Fees.  Consists of fees billed for professional services for tax compliance, tax advice and tax planning.





All Other Fees.  Consists of fees for product and services other than the services reported above.





Policy on audit committee pre-approval of audit and permissible non-audit services of independent auditors





The Audit Committee has adopted a policy that requires advance approval of all audits, audit-related, tax, and other services performed by our independent registered public accounting firm.  The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services.  Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it.  The Audit Committee has delegated to the Chair of the Audit Committee authority to approve permitted service, provided that the Chair reports any decisions to the Audit Committee at its next scheduled meeting.  All of the services performed by our independent registered public accounting firm during 2010 and 2009 were pre-approved by the Audit Committee.





-33-


PART IV




ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a) Documents filed as a part of this report.





1.
List of Financial Statements.





The following financial statements of TaxMasters, Inc. and Report of MaloneBailey, LLP, Independent Registered Public Accounting Firm, are included in this report:


·
Report of MaloneBailey, LLP, Independent Registered Public Accounting Firm.




·
Balance Sheets at December 31, 2010 and 2009




·
Statements of Operations for the years ended December 31, 2010 and 2009




·
Statements of Stockholders’ Deficit for the years ended December 31, 2010 and 2009




·
Statements of Cash Flows for the years ended December 31, 2010 and 2009




·
Notes to Financial Statements for the years ended December 31, 2010 and 2009




2.
List of all Financial Statement Schedules.





All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.





Exhibits required by Item 601 of Regulation S-K. The following exhibits are filed as a part of, or incorporated by reference into, this Report:





3.1
Amended and Restated Articles of Incorporation filed on July 16, 2009 with the Nevada Secretary of State (filed as Exhibit 3.1 to the Form 8-K, dated August 4, 2009, filed on August 10, 2009 (“August 2009 Form 8-K”) and incorporated herein by reference).3.2
Certificate of Designation filed on July 16, 2009 (filed as Exhibit 3.2 to the August 2009 Form 8-K and incorporated herein by reference).3.3
By-laws of the Registrant (filed as Exhibit 3.3 to the Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”) and incorporated herein by reference).10.1
Share Exchange Agreement, dated as of August 4, 2009, by and among the Registrant, TaxMasters, Inc., Patrick Cox and, as to Article VI only, Zaman Family Trust, Tisa Capital Corp. and Phoenix Consulting Services Inc. (filed as Exhibit 10.1 to the August 2009 Form 8-K and incorporated herein by reference).10.2
Lease, dated as of December 21, 2006, by and between Jim R. Smith Interest (“Landlord”) and TMIRS Enterprises, Ltd. d/b/a TaxMasters (“TMIRS”) (filed as Exhibit 10.2 to the August 2009 Form 8-K and incorporated herein by reference).10.3
First Amendment to Office Lease, dated January 22, 2008, by and between Landlord and TMIRS (included in Exhibit 10.2) (filed as Exhibit 10.3 to the August 2009 Form 8-K and incorporated herein by reference).10.4
Second Amendment to Lease Agreement, dated March 31, 2008, by and between Landlord and TMIRS (included in Exhibit 10.2) (filed as Exhibit 10.4 to the August 2009 Form 8-K and incorporated herein by reference).10.5
Lease Agreement, dated as of July 31, 20009, by and between DAP Plaza and TaxMasters, Inc.  (filed as Exhibit 10.5 to the August 2009 Form 8-K and incorporated herein by reference).





-34-


10.6
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Patrick R. Cox (filed as Exhibit 10.1 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.7
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Glenn A. Clamon (filed as Exhibit 10.2 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.8
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Renee L. Anderson-Miller (filed as Exhibit 10.3 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.9
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Christopher J. Koscinski (filed as Exhibit 10.4 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.10
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Michael L. Wallace (filed as Exhibit 10.5 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.11
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Paulette M. Kitson (filed as Exhibit 10.6 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.12
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Kevin L. Schmidt (filed as Exhibit 10.7 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.13
Employment Agreement, dated as of August 4, 2009, by and between the registrant and Frederick V. Hackett (filed as Exhibit 10.8 to the Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).#10.14
Financial Reorganization Agreement, dated as of June 30, 2010, by and among the Registrant, Patrick R. Cox and Olde Monmouth Stock Transfer Co., Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K, dated July 1, 2010, filed on July 7, 2010 and incorporated herein by reference).14.1
Code of Ethics (filed as Exhibit 14.1 to the August 2009 Form 8-K and incorporated herein by reference).21.1
Subsidiaries of the Registrant (filed as Exhibit 21.1 to the 2009 Form 10-K and incorporated herein by reference).31.1*
Section 302 Certification of Principal Executive Officer.31.2*
Section 302 Certification of Principal Financial Officer.32.1*
Section 906 Certification of Principal Executive Officer - Certification of Compliance to Sarbanes-Oxley.32.2*
Section 906 Certification of Principal Financial Officer - Certification of Compliance to Sarbanes-Oxley.





* Exhibit filed herewith.





# Management contract or compensatory plan or arrangement.








-35-


SIGNATURES





In accordance with the requirements of Section 13 on 15(k) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf on April 15, 2011 by the undersigned thereto.




TAXMASTERS, INC./s/ Patrick R. CoxPatrick R. Cox, Chief Executive Officer and Chairman of the Board





In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 15, 2011.





Signature

Title

Date/s/ Patrick R. Cox

Chief Executive Officer

April 15, 2011Patrick R. Cox

Chairman of the Board and Director

(Principal Executive Officer)/s/ Christopher J. Koscinski

Chief Financial Officer

April 15, 2011Christopher J. Koscinski

and Treasurer

(Principal Financial and

Accounting Officer)/s/ Michael E. Holdgrafer

Director

April 15, 2011Michael E. Holdgrafer/s/ David M. Hyink

Director

April 15, 2011David M. Hyink/s/ James S. Milholland

Director

April 15, 2011James S. Milholland/s/ Greg Ralph

Director

April 15, 2011Greg Ralph/s/ Richard A. Wright Jr.

Director

April 15, 2011Richard A. Wright Jr.








-36-