The Internal Revenue Service has filed a $15 million claim against AmeriDebt Inc. of Germantown in anticipation that the controversial credit-counseling firm's tax-exempt status will be overturned, according to documents filed in U.S. Bankruptcy Court.
The claim is the latest signal of the tax agency's crackdown on credit-counseling businesses. The IRS is auditing 50 companies that together account for about half of the revenue of the $1 billion nonprofit industry. The counseling companies negotiate with credit card companies to lower their customers' interest rates and monthly payments. Many have come under scrutiny for allegedly taking advantage of people in debt and enriching for-profit affiliates.
In a report filed last week, bankruptcy court examiner Raymond J. Peroutka Jr. concludes that nonprofit AmeriDebt's 1999 transfer of its assets to a for-profit company created by AmeriDebt's former chief executive was potentially fraudulent and should be "vigorously pursued." The filing was reported in the Baltimore Sun yesterday.
AmeriDebt was one of the nation's largest debt-management firms, building a customer base of about 500,000 through relentless marketing on cable TV and the Internet. The Federal Trade Commission and four state attorneys general sued the company in recent years, charging that it misled consumers into making "voluntary contributions" that ended up in the pockets of founder Pamela Pukke and her husband, former chief executive Andris Pukke.
AmeriDebt announced last October it would stop accepting new customers. It filed for Chapter 11 bankruptcy protection in June. The company released a statement this week, saying it had made "every effort" to accommodate the court examiner and that "the examiner's report speaks for itself."
John B. Williams, an attorney for Andris Pukke and his for-profit company, DebtWorks Inc., said DebtWorks had paid fair-market value for AmeriDebt's assets in 1999.
The way the deal was structured, DebtWorks didn't pay any money upfront, but deducted $425,000 from the processing payments it received for handling AmeriDebt's customer accounts. Williams said the deal was struck before AmeriDebt's customer base started to boom and the deal became lucrative. Over the years, AmeriDebt paid more than $100 million in processing fees to DebtWorks.
Williams confirmed that DebtWorks is also being audited by the IRS, but asserted that the company had paid its taxes.
A spokesman for Frederick-based Ballenger Group, which has taken over processing AmeriDebt accounts from DebtWorks, said the firm's attorneys are reviewing the report.
Jeffrey Tenenbaum, a D.C. attorney who represents about a half-dozen other credit-counseling firms under audit, said the IRS has given indications that "very few organizations are likely to survive these audits with their tax-exempt status intact."
"In this industry, that's the ultimate death penalty. You can't survive in this industry without the tax-exempt status. It basically puts you out of business," Tenenbaum said. "The IRS is very clearly taking an extremely aggressive posture."
IRS spokesman Bruce Friedland declined to comment, citing laws that protect taxpayer privacy.