The Internal Revenue Service is investigating the business practices of nonprofit credit counseling services, which advise millions of people in debt. The investigation could jeopardize the agencies' nonprofit status and upend the industry just as a proposed change in federal bankruptcy law stands to steer many thousands more people to debt counseling. As nonprofits, the agencies are now exempt from dozens of state and federal regulations.
The
IRS, the Federal Trade Commission and state regulators plan to issue an unusual
joint advisory warning consumers to be wary about the total costs when seeking
help from tax exempt credit counseling organizations. “Consumers need to know not to read too much
into not-for-profit status – that’s no guarantee that someone is legit,” A lot
of these credit counseling companies are using tax-exempt status as a
get-out-of-regulation-free card. That’s
why we’re teaming up with the IRS on this issue.”
Consumer
advocates say that the actions are long overdue, and many credit counseling say
they welcome the scrutiny because they believe some new entrants are giving the
entire industry a bad name.
An
estimated 9 million people sought the help of credit counseling services last
year, according to the National Consumer Law Center and the Consumer Federation
of America. From these and earlier
inquiries, at least 1 million people have consolidated their debts and are now
making a single payment each month to the agencies, which distribute the money
in turn to creditors.
The
IRS declined to identify the agencies it is investigating. In a rare disclosure about its enforcement
efforts, though, the tax agency said it was auditing “a significant number” of
the country’s credit counselors and is conducting a more rigorous review of new
ones that apply for tax exemption.