Credit firms' status revoked

IRS says 41 debt counselors will lose tax-exempt standing

May 16, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN REPORTER

The Internal Revenue Service said yesterday that it has revoked or plans to repeal the tax-exempt status of every one of the 41 credit counselors it has audited, saying the nonprofits were largely motivated by profit and failed to provide adequate counseling to debt-laden consumers.

Additionally, IRS Commissioner Mark W. Everson said his agency has "criminal investigations under way" of credit counselors, but he would not comment further on the probes.

The 41 credit counselors earned more than 40 percent of the industry's $1 billion in annual revenues, Everson said in a telephone conference yesterday. The names of agencies whose tax-exempt status has been revoked will be posted on the IRS Web site once the groups exhaust their appeals or challenges in tax court, Everson said. So far, about a half-dozen names have been posted.

The IRS began auditing credit counselors more than two years ago after an outcry by consumers, their advocates and Congress about abuses in the industry that often left debtors in worse financial shape.

Some credit counselors - including Maryland-based AmeriDebt Inc. - were accused of pushing consumers into debt repayment plans that charged high, often poorly disclosed fees. Critics complained that the IRS liberally granted tax-exempt status, which lulled consumers into believing the groups were government-approved.

The need to clean up the industry became even more critical with the passage of the new law last year that requires debtors to undergo credit counseling from a nonprofit before they can file for bankruptcy. Officials said there is an adequate supply of pre-bankruptcy counselors. The U.S. Trustee Program has approved about 150 nonprofits nationwide for pre-bankruptcy counseling.

Credit counselors that have indicated they were subject to an audit have waived privacy rights allowing the IRS to share their tax information with the trustee program, said spokeswoman Jane Limprecht.

The IRS continues to audit 22 other credit counselors, Everson said. It also is sending compliance inquiries to the 740 remaining tax-exempt counseling agencies that might result in more audits, he said.

The IRS has tightened its application review: Three out of about 100 credit counseling applicants have received tax-exempt status since 2003.

Everson and others say there are good credit counseling agencies.

"Does the scrutiny overall improve the industry? Absolutely," said Nick Jacobs, a spokesman for the National Foundation for Credit Counseling, a trade association in Silver Spring. The downside is that all the good work that legitimate agencies perform has been ignored while the bad players have gotten all the publicity, he said.

Credit counselors that lose tax-exempt status can reorganize as a for-profit, Everson said. Some states, including Maryland, require credit counseling to be performed by tax-exempt nonprofits. Maryland's General Assembly this year considered lifting the ban on for-profit counseling.

Joseph E. Rooney, deputy commissioner of financial regulation, expressed frustration yesterday that the IRS has not released the names of the counselors involved in the revocations.

Rooney is concerned that after the IRS finishes its work, there will be a shortage of counseling agencies for Marylanders.

AmeriDebt, once one of the largest credit counselors in the nation, has been told by the IRS that its tax-exempt status will be revoked.

The Maryland nonprofit was sued by the Federal Trade Commission in 2003 for deceptive practices, filed for bankruptcy and shut its doors last year.

eileen.ambrose@baltsun.com

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