The Internal Revenue Service has revoked the tax-exempt status of four credit counseling groups, and others are facing the same fate as a result of an agency examination launched two years ago, an IRS attorney told an industry association yesterday.
The IRS began the audits after rising complaints that some nonprofit credit counseling agencies - including Maryland-based AmeriDebt - abused their tax-exempt status by charging high fees, funneling money to for-profit affiliates and not providing the financial education promised to consumers.
Credit counselors are also coming under renewed scrutiny because of the recently passed bankruptcy reform law, which in October will require that consumers undergo credit counseling from a government-approved nonprofit before they can file for bankruptcy. The IRS has not granted tax-exempt status to a credit counseling agency since it stepped up audits. Roughly 40 agencies have applied, and about 20 of those have been notified that they don't appear to qualify, IRS senior attorney Debra Kawecki told members of the Association of Independent Consumer Credit Counseling Agencies. The group concluded its annual conference in Washington yesterday.
Some of those facing rejection are closely tied to for-profit service providers and focus on enrolling consumers in fee-generating debt management plans without providing appropriate financial education to consumers, Kawecki said.
"We don't see charity at all happening," she said.
The IRS, however, may approve the applications of two organizations that emphasize consumer education and offer a small number of debt management plans, Kawecki said.
Under a debt management plan, consumers make payments to the credit counseling agency, which forwards the money to creditors. In exchange for regular payments, creditors often make concessions on interest rates and penalties.
Of the four revocations, one was voluntary, Kawecki said. She didn't give many more details.
But according to the IRS Web site, A Better Way Credit Counseling of Greenacres, Fla., and the National Center for Debt Elimination of North Huntingdon, Pa., no longer qualify to receive tax-deductible contributions. Neither group could be reached for comment yesterday. A Better Way's Web site says Maryland consumers with questions and complaints about it can contact the state's commissioner of financial regulation at 888-784-0136.
AmeriDebt, once one of the nation's largest credit counseling agencies, is being liquidated in bankruptcy court. It was notified last year that the IRS intended to revoke its tax-exempt status. The Federal Trade Commission is suing AmeriDebt founder Andris Pukke, seeking to recoup $172 million for consumers.
Kawecki said that "two handfuls" of organizations are now appealing IRS proposals to revoke their tax-exempt status.
In the past, the IRS has been criticized by consumer advocates for liberally handing out tax-exempt status to credit counseling agencies that didn't deserve it. Kawecki said credit counseling is a top priority for the IRS commissioner.
In April, Commissioner Mark W. Everson told a Senate committee that the IRS identified 60 credit counselors for examination. He added that the IRS revoked or proposes to revoke the tax-exempt status of counselors representing more than 20 percent of the industry's gross receipts.