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IRS Plans to Yank Tax-Exempt Status of 20 Credit Counselors

October 13, 2005
Just as the new bankruptcy law is about to require that counsumers sign up for credit counseling before they can file for bankruptcy, the Internal Revenue Service is cracking down on non-profit credit-counseling firms.

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The Washington Post reported that the IRS plans to revoke the tax-exempt status of about 20 large credit-counseling firms that account for about half the industry's revenues. The agency has been auditing 40 counseling firms and expects to audit another 20 when the current round of examinations is finished, the Post said.

The credit-counseling industry has been a sore point with many consumer advocates for years. There are few specific regulations governing credit counselors and many supposedly non-profit firms do little more than act as collection agencies for banks and credit card companies, which traditionally pay all or some of their fees.

The IRS warned credit counselors earlier this year that it was taking a close look at whether non-profit firms were putting their clients' interests first or whether they were acting as businesses intent on making a profit from every transaction.

"It's basic bread-and-butter tax-exempt law ... You help people, you don't hurt people," IRS attorney Debra Kawecki told members of the Association of Independent Consumer Credit Counseling Agencies at its annual meeting in July.

As the IRS crackdown continues, it's likely consumers desperate to file for bankruptcy will have a hard time finding an approved credit counselor to work with them. The Justice Department, which administers the bankruptcy program, is developing a list of approved firms and so far has approved 41 applications out of about 200.

Those that have been approved have been hiring new counselors in hopes of meeting the anticipated demand. Most will be offering counseling via telephone and the Internet as well as in person.

One potential sticking point is that the IRS and the Justice Department are not communicating with each other, since the IRS is not permitted to divulge information about firms it is auditing. That leaves open the possibility that the Justice Department will approve a counseling firm only to have the IRS revoke its tax-exempt status.

Credit-counseling firms are not required to be non-profit but most are.

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