IRS investigates practices of `significant number' of credit-counseling services

Probe could jeopardize agencies' nonprofit status


The Internal Revenue Service is investigating the business practices of nonprofit credit-counseling services, which advise millions of people in debt.

The investigation could jeopardize the agencies' nonprofit status and upend the industry just as a proposed change in federal bankruptcy law stands to steer many thousands more people to debt counseling. As nonprofits, the agencies are now exempt from dozens of state and federal regulations.

The IRS, the Federal Trade Commission and state regulators plan to issue an unusual joint advisory today warning consumers to be wary about the total costs when seeking help from tax-exempt credit-counseling organizations.

"Consumers need to know not to read too much into not-for-profit status - that's no guarantee that someone is legit," said C. Steven Baker, director of the Federal Trade Commission's Midwest operations.

An estimated 9 million people sought the help of credit counseling services last year, according to the National Consumer Law Center and the Consumer Federation of America.

The IRS declined to identify the agencies it is investigating. In a rare disclosure about its enforcement efforts, though, the tax agency said it was auditing "a significant number" of the country's credit counselors and is conducting a more rigorous review of new ones that apply for tax exemption.

The agency is examining the fees charged to consumers, the salaries paid to officers and a host of transactions with for-profit companies.

Illinois and Missouri have sued AmeriDebt, one of the biggest agencies, saying it charges excessive fees and diverts money to affiliated companies.

The industry has changed drastically in the past decade from mostly small local organizations to very visible national operations that advertise aggressively. These big companies have ushered in some welcome improvements, such as 24-hour customer service lines and electronic payments.

But consumer advocates say that some agencies seem more focused on making money by overcharging their customers or by funneling money to related companies than on the best interests of their clients.

"Because of the work that we do, we have to be an arbiter for both sides, and I do think some tension comes from that," said Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta. "But if you're very clearly focused for providing value for consumers, I think that's a tension that can be resolved."

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