Caroline E. Mayer
Washington Post
Wednesday, August 4, 2004

Washington -- The Internal Revenue Service's chief counsel has concluded that many credit-counseling agencies do not meet the requirements to be tax-exempt organizations, setting the stage for revocation of their special tax status.

In an internal advice memo issued last week, the chief counsel's office said, "It can and should be argued that the new generation of credit- counseling organizations does not meet the criteria for exemption." Laying out its legal analysis of credit-counseling agencies, the memo said that "they are not providing any meaningful education or relief of the poor," as would be required for the tax exemptions many are receiving.

The memo said that many of the nonprofit organizations may also be violating tax-exemption laws because they are being operated for the private benefit of their executives.

The memo comes as the IRS audits 50 credit-counseling agencies, which account for about half of the revenue of the $1 billion nonprofit industry. The audits were prompted by consumer complaints about deceptive and fraudulent marketing practices.

Congress has also held hearings into allegations that many of the newer credit-counseling firms have turned what was once a social-service-oriented industry into a profit-driven business that charges consumers high fees to the benefit of founders who siphon off the cash through for-profit affiliates.

Travis Plunkett, legislative director for the Consumer Federation of America, said the IRS "is laying the groundwork for (a) large-scale attack on the business practices of many credit-counseling agencies. It isn't going to be tinkering at the margins."

The IRS memo said deceptive business practices, such as contracts that promise free services but then require clients to make a deductible charitable contribution "are incompatible with the purpose" of an organization claiming an educational tax-exempt status.

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