IRS will start charging tax on crooked credit counselors

WASHINGTON — The Internal Revenue Service has canceled the tax-exempt status of some of the nation’s largest credit counseling services after audits showed they exist mainly to prey on debt-ridden customers, IRS Commissioner Mark Everson said.

“These organizations have not been operating for the public good and don’t deserve tax-exempt status,” Everson said. “They have poisoned an entire sector of the charitable community.”

A two-year investigation of 41 credit counseling agencies resulted in the revocation, proposed revocation or other termination of their tax-exempt status, he said.

The IRS did not identify the organizations. But its website listed several consumer counseling services whose tax-exempt status has been revoked.

The most recent additions to the list were Ameratrust Inc. of Delray Beach, Fla., added to the list May 1, and Consumer Guidance Corp. of Sun Valley, Calif., added to the list April 17.

The IRS would not comment on whether those were two of the 41. Representatives of those companies could not be reached for comment.

Everson said the 41 agencies reaped 40 percent of the revenue in a $1 billion industry. Many offered little, if any, counseling or education as required of groups with tax-exempt status, he said, adding that the IRS is following up the revocations with some criminal investigations.

The IRS also is sending compliance inquiries to each of the other 740 known tax-exempt credit counseling agencies not already under audit, requiring them to report on their activities.

“Depending on the responses received, additional audits may be undertaken,” the agency said.

In addition, the IRS is issuing new guidance on how to comply with federal law to legitimate organizations that educate people on how to maintain good credit.

According to Everson, groups looking to make a profit would secure tax-exempt status and make cold phone calls to people in desperate financial straights. They would use scare tactics to sell the people “cookie-cutter” debt management plans often not geared toward reducing the consumers’ debt and often too costly for them. Administrative fees, he said, were sometimes collected by third parties handling the paperwork for a profit.

The IRS crackdown is occurring at a time when consumers and the counseling services are having to live under a new, more restrictive federal bankruptcy law.

Congress last year gave the financial counseling sector a new role in bankruptcies by requiring consumers to consult with an approved credit counselor before they seek the protection of a bankruptcy court.

Everson recommended that consumers pick one of the 150 consumer counseling organizations approved by groups like the Better Business Bureau. But bad actors may exist among them, too, he cautioned.

The Consumer Federation of America said consumers looking for credit counseling should look for several red flags, including if the setup fee for a debt management plan is more than $50 and monthly fees are more than $25.

Consumers also should beware of people on the other end of the phone reading from a script and those who offer a debt management plan in fewer than 20 minutes — not enough time to look at a person’s finances and recommend a suitable plan, the consumer group said.

The IRS in recent years has tightened its review of new applications by credit counseling firms for tax-exempt status. Since 2003, the IRS has reviewed 100 such applications and approved only three.