Former Minnestota governor Tim Pawlenty, a leading VP contender, was forced to correct his campaign disclosure forms after questionable telecom payments were revealed

The touting of Tim Pawlenty as potential running-mate for Mitt Romney has reignited questions over his refusal as governor of Minnesota to release tax returns during a scandal over payments from a company owned by a close political ally.

Democrats have been digging into a web of allegations from nine years ago which involved Pawlenty's use of a shell corporation to shield $60,000 in payments from a telecommunications group during his election campaign that were not declared to the state's campaign finance board. The money came from a firm run by a prominent Republican strategist. Pawlenty had until recently been a board member.

Opponents accused Pawlenty of accepting an unethical and possibly illegal salary to campaign. The scandal widened because the telecommunications group making the payments was exposed for scamming customers, many of them elderly.

Pawlenty is touted as a leading candidate to be Mitt Romney's running-mate in part because his background is seen as a political antidote to Romney's life of privilege. He is the working class son of a truck driver, who knows adversity after his mother died while he was a boy and his father lost his job.

But if he is on the Republican ticket, a fresh airing of the allegations from 2003 is not only likely to undermine Pawlenty's attempts to portray himself as the voice of the working man but threatens to draw unwelcome attention to difficult issues for Romney – the pressure to release his own tax returns, the morality of his business practices and the parking of millions of dollars in shell companies.

The accusations against Pawlenty centered on payments made to him for more than a year, from August 2001 until just before the election, while he was campaigning to become governor of Minnesota.

During that time, Pawlenty:

• accepted $4,500 a month from a company headed by a business partner, campaign adviser and Republican strategist, Elam Baer, but failed to declare the income to the state's Campaign Finance and Public Disclosure Board;

• set up a shell company to receive the money, with only one employee – himself;

• was formerly a director of, and remained an investor in, NewTel, the parent company of the firm making the payments to him. New Tel headed a telecommunications group heavily penalised for scamming customers in 10 states;

• subsequently refused to make public his tax returns on the grounds they were private.

At the heart of the allegations was a claim by Pawlenty's political opponents that the payments from a New Tel subsidiary, Access Anywhere, amounted to a salary for him to campaign as a gubernatorial candidate arranged by Baer.

Jack Uldrich, then chair of the Minnesota Independence Party – the party of Pawlenty's predecessor as governor, Jesse Ventura – was among those pressing the claims.

He told the Guardian: "Tim Pawlenty had a job with a company from which he was receiving a lot of money – $60,000 – and he wasn't doing any work for it. It was a buddy of his who was essentially paying him to run for governor. From my perspective it was certainly unethical and I thought it was illegal. We tried to get him to explain what he did for that money and he never did."

A former Republican governor of Minnesota, Arne Carlson, also remains critical of Pawlenty, saying that he was "engaged in several questionable things".

"The whole business was very bothersome," he said. "I regarded Pawlenty as a man who used public office for his own personal ambitions and he didn't care how he got there. He regarded politics as a chess game in which you do what necessary to win and hope not to get caught."

Months after he was elected governor, when the payments were exposed, Pawlenty "corrected" his disclosure report to acknowledge that during the campaign he received the payments from Access Anywhere. At the time, he described his failure to declare the $60,000 payment as the result of "oversights" and "confusion" over what was legally required.

Under pressure, he also released a five-page contract that said he was hired to "assist the company with regulatory compliance issues". But he declined to say whether he actually did any work for Access Anywhere.

Pawlenty continued to refuse to release his tax returns by saying that to do so would be to "reward reckless behaviour" by his opponents in levelling allegations against him.

Asked by the Guardian if he would make the relevant tax returns public if Romney selects him as the Republicans' vice-presidential candidate, Pawlenty said he would not because they had already been reviewed by the Minnesota legal authorities.

"I did present them to the authorities at the time and they reviewed them and issued a public report certifying that all income was reported and all taxes were paid and the claims were without merit," he said.

But if Pawlenty makes it onto the GOP ticket, Democrats intend to exploit the issue, which they believe would underline Romney's vulnerability on key character questions.

"This year's it's made doubly relevant by the fact that Romney's refusing to disclose and Pawlenty's refusing to disclose," said John Lesch, a Minnesota state prosecutor and Democratic member of the state legislature then and now, who was among those leading the push for Pawlenty to make public his tax returns in 2003.

"This calls up a lot of issues the Republicans will have to face. Why they pay a lower percentage of tax. How they make their money. And who they owe when they take money while they campaign. The public needs to know: who do you owe?"