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Credit Wise Credit Counseling Crackdown by the IRS
You may have
heard the recent news stories about the IRS revoking the 501c3 tax-exempt status
of 41 credit counseling agencies. If you are a currently a credit counseling
client or considering becoming one, you’re probably wondering what this means
to you. If you have a relationship with a local credit counseling agency, you
may have questions about how this IRS scrutiny will affect the industry. I am
currently on a plane returning from the national conference of the National
Foundation for Credit Counseling (NFCC). We listened to 2 guest speakers
regarding the actions of the IRS so I can answer some of those lingering
questions. More...
First, I’ll start with a little background on the credit counseling industry. About 12 years ago, there were approximately 200 credit counseling agencies. All were members of the NFCC. These NFCC members are held to high member standards and focus on educating consumers to become better money managers. Then, the market was opened up to non-NFCC agencies. While some other non-NFCC agencies may be legitimate, many are not. The Debt Management Plan (DMP) offered by credit counseling agencies was seen as a huge money making opportunity to the “new entrants” into the industry. DMP clients agree to repay their creditors and in return, could receive lower interest rates, waived fees, and lower payments. Since DMP clients are repaying their debts instead of not paying or filing bankruptcy, many creditors pay a contribution to the credit counseling agency based on the amount that clients pay back. These “new entrants” applied for tax-exempt status under the IRS 501(c) 3 code just like the NFCC agencies and applied to become non-profit agencies. The 501(c) 3 designation requires agencies to operate for educational purpose. When the IRS was flooded with applications years ago, they did not closely scrutinize all of the agencies that were applying. They had approximately 1100 agencies apply for the 501 (c) 3 status that would allow them to operate as non-profits and educational entities.
The problem is that many of these “new entrants” did not
have education as their focus. While some may have entered the market to
educate consumers, far too many saw the credit counseling industry as fertile
ground for making money. Cha-ching! Some major players such as the now
bankrupt Ameridebt faced serious Senate scrutiny 2 years ago. The Senate
investigations found that many “new entrants” were more interested in
pushing clients into profitable DMPs instead of spending time educating them.
Instead of counseling consumers on financial issues, they would figure out if
they were DMP candidates in a few minutes on the phone. If not, they did not
receive financial management education. Unscrupulous agencies paid their
management huge salaries (some more than $400,000 per year) and many of these
“non-profits” had business relationships with for profit agencies. Some
would steer DMP clients into a more profitable loan with a for-profit partner,
often owned by a relative of the CEO of the non-profit credit counseling
agency. Others charged high fees to already financially strapped consumers.
The Senate uncovered just how serious these problems were in the credit
counseling industry and the IRS took notice.
The IRS realized that maybe they should have scrutinized those
1100 applications more closely. Since 2003, the IRS has approved only 3
applications to become a 501 © 3 credit counseling agency. They virtually
stopped adding new agencies that did not have consumer education as their
legitimate purpose. What could they do about the ones they had already
approved? Well, that is the reason for the current IRS review.
Earlier this year, the IRS audited 63 credit counseling
agencies. Just last week, they announced that they were revoking the 501 (c) 3
status of 41 of those agencies. The results of the other 22 audits are
pending. It is important to note that none of the revoked agencies are NFCC
members. The IRS revoked their tax-exempt status for numerous reasons ranging
from not enough educational purpose to serving their own self interest.
Most other credit counseling agencies were given “compliance
surveys” to ensure their educational purpose. Based on these surveys, more
audits may follow. After the IRS gives the green light to some agencies based
on the survey results, they plan to launch a website of approved credit
counseling agencies in the coming months.
So, now that I have bored you to sleep with all of this
industry jargon, wake up! Here comes the good part.
What does this mean to you? It means a few important
things. Here they are:
While much of this media attention on credit counseling may
leave you wondering if there are any good agencies left, let me assure you
that there are a lot of good ones out there. A good one will educate you and
will not pressure you into a repayment plan. A good one will teach you
something. A true educational agency operates with a mission and purpose to
help people. You can usually tell this in the way the counselors talk to you
with kindness and compassion. Most true non-profit agencies do not pay their
employees extremely high salaries. Those employees are working for that agency
not because they are motivated by money but because they wake up every day
with a desire to make a positive difference in someone’s life. Many of the
legitimate counseling agencies have been around since the 1960’s. They were
here before the “new entrants” came in and I believe they will be here
long after they are gone.
* * *
Copyright © 2006 by Jennifer Delcamp. All rights reserved. Want more money-saving tips? Get a FREE Subscription to our monthly newsletter!
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