Widespread Abuse Among Credit Counselors
It’s very common for potential bankruptcy clients to ask me why bankruptcy is better than credit counseling. There are a number of reasons and today’s post is not going to explore them all. Today’s post is going to discuss a report from the IRS about credit counseling agencies.
The IRS (go to the IRS’s website at www.irs.gov to view the entire report) announced more steps to insure credit counseling agencies comply with the law. Over the past two years, the IRS has been auditing 63 credit counseling agencies. These agencies represent more than 1/2 of the revenue in the industry. 41 of the audits have been completed representing approximately 40% of the revenue in the industry. All of the audits…all 41 of them…resulted in revocation, proposed revocation or other termination of tax-exempt status!!
To me this isn’t surprising. I’ve often told my clients to be wary of credit counseling agencies who claim to be representing their best interests. IRS Commissioner Mark Everson reported that “over a period of years, tax-exempt credit counseling became a big business dominated by bad actors.” He went on to say that the IRS examinations “substantiated that these organizations have not been operating for the public good and don’t deserve tax-exempt status. They have poisoned an entire sector of the charitable community.”
Credit counseling agencies were found to have failed to provide the level of public benefit required to qualify for tax exemption. They offered “little or no counseling or education” and “appeared to be primarily motivated by profit.” In many instances the IRS found that these agencies “served the private interests of related for-profit businesses, officers or directors.”
The IRS is taking two additional steps in an attempt to stop these abuses. First, the IRS is issuing expanded guidance, including legal standards for exemption and factors considered by the IRS in its reviews of these organizations, and is sending compliance inquiries to each of the remaining 740 known tax-exempt credit counseling agencies not already under audit.
In addition, the IRS has tightened up its review of new applications by credit counseling firms for tax-exempt status. Since 2003, 100 applications have been reviewed, but only three have been approved.
This is important information every consumer should know, especially those of you considering credit counseling as a viable option to help you get out of debt.
