are you using a good crusting icing and are you waiting until it crusts to smooth it with the paper towel? If the icing is still wet, anything that you lay on the icing will stick and pull away.
I use Melvira's method ... the high density paint roller. Once you use this method, you'll never use anything else. Before I discovered Melvira, I used parchment paper on the cake then smooth with my spatula.
I recommend investing in Sugar Shack's buttercream DVD. It will solve all your problems!
http://sugaredproductions.com/buttercreamdvd.html
I've been preaching this for a long time on the Wilton forum. Here is a pic of what I use for smoothing cakes. The red ones came from Lowes or any hardware store would have something similar. I use the large red one all the time and I swear, it makes life so much easier. After applying a thick coat of buttercream, just hold the sharp side of a smoother (not the beveled edge) along side while slowly turning the cake on the turntable. You just keep doing that until you get it just right. Then for the top, bring it in from the edges. I'm telling ya, it works great. If you're working with a crusting buttercream, it needs to be done right after you frost your cake while the frosting is still soft. My buttercream doesn't crust up much so that's not a problem for me. Give it a try. It's an investment of about $2.00 and it works. More questions, email me.
Dana
[email protected]
www.cakekeepsakes.com
I have one just like the big red one that I have been chicken to try 
.. lol
Meganp, like cakemaker61, I also use the "plastic putty knives" from Lowes or Home Depot.
I have found that your frosting's consistancy has a lot to do with how smooth your finished product is. (try not to beat it on too high a speed because you will have a lot of air bubbles, which are impossible to smooth out sometimes) I use the paddle on my KA and never above speed 3 depending on how much I'm making at once, though.
Definitely invest in some of these putty knives, they come in all sizes. Also if you don't have a turntable, try to get one. I didn't buy the Wilton expensive one, I went to IKEA and they had them for $7 (I love that store). That will also help with the smoothing process.
I can't speak of the paper towel method, since I've never used that method, but I worry about fibers from the towels sticking to the frosting if it hasn't crusted enough 
Just keep practicing, I've been baking for 25 yrs., and each time I make a cake I learn something new and it gets easier and better 
Heck, everyday I read the posts on here I learn something new, that's the great thing about speaking to others that bake and go through the same sort of problems that we do 
Good luck
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