The Internal Revenue Service has revoked the tax-exempt status of four credit-counseling agencies and is challenging the status of another "two handfuls," an agency official said yesterday.
The revocations are part of a federal and state crackdown on nonprofit credit-counseling agencies after hundreds of consumers complained about deceptive and fraudulent marketing practices, including high fees, high-pressure tactics and inadequate educational services.
The IRS has said it is concerned that many nonprofit entities are misusing their tax-exempt status. Targeting 60 credit-counseling firms for audits, the IRS is looking at whether some have become profit-making entities by pressuring consumers to enroll in debt-management plans with fees that are siphoned off to for-profit companies controlled by the firms' executives.
Revocation is "a painful and drastic remedy," one rarely invoked, Debra J. Kawecki, an IRS senior attorney, told the convention of the Association of Independent Consumer Credit Counseling Agencies in Washington.
Of the four firms whose status has been revoked, one voluntarily gave up its exemption, Kawecki said. She declined to elaborate on the "two handfuls" of firms that have been notified of IRS's revocation plans, other than to say those cases were now in the appeals process.
She also said that the IRS has not granted tax-exempt status to any new credit-counseling agencies since April 2003, when the agency began carefully scrutinizing applications. About 40 applications have been received, but many were withdrawn after the IRS began to scrutinize them, Kawecki said. About half were notified they didn't comply with IRS rules because they weren't providing sufficient charitable and educational programs, she said. However, she added, "a couple of organizations" may receive favorable rulings because they provide a "huge amount of social services" and limited debt-managing planning.
David Borinsky, a Baltimore lawyer who represents credit counselors and companies that provide data processing for them, told Kawecki that the "IRS has hit the industry over the head by a two-by-four," but it was now time for the IRS to issue specific rules for credit counselors. His comment was applauded by attendees at the credit-counseling trade organization's convention.
Kawecki said new rules were unlikely. "I don't think that credit counseling is rocket science," she said. "It's basic bread and butter tax-exempt law. . . . You help people. You don't hurt people. You take care of people" and avoid using the firm for personal benefit, she said.