IRS Revokes Exempt Status for Credit Counseling Agencies

On May 15, 2005, the IRS announced the revocation of tax-exempt status from numerous credit counseling agencies. In all, 63 cases have been examined, representing 56% of credit counseling industry revenues. While some audits have not been completed, all 41 audits that have been completed have resulted in final or proposed revocations. These revocations account for 41% of total industry revenue from debt management plans. Chief Counsel Mark Everson released the figures as a part of the ongoing credit counseling compliance project.

In all, 9 final revocations or terminations have been issued, and another 32 proposed revocations have been announced. No credit counseling organization that has been audited has succeeded in preserving their exempt status. This is not a surprise since the IRS intentionally targeted those companies which appeared to be relying on revenue from debt management plans (DMPs) the most. Some organizations that are under audit are expected to maintain their tax-exempt status, although none have so far.

The IRS is also in the process of collecting surveys from 743 nonprofit credit counseling agencies as a part of their compliance checks. The intent is to determine if any additional agencies should be audited as well.

New applications are undergoing increased scrutiny. 110 new applications have been filed in the three years since 2003 by organizations seeking tax-exempt status under ยง 501(c)(3). Of these, 37 applications were denied and 58 were abandoned by the applicant. Only 3 applications were approved. Since this report, we are happy to announce that the IRS approved the tax-exempt application for Vision Credit Education.

Approximately 8 states require that an agency maintain tax-exempt status to operate within their state. As a result, many companies are operating as for-profit entities within the remaining states. It is up to consumers to find a reputable credit counseling agency that will provide thorough counseling, objective advice and substantial opportunities for financial education. Sometimes the best option is to search for a local agency through the Better Business Bureau. There is no guarantee that these agencies are free from problems, but you should ensure that the agency you contact has a satisfactory rating. If you are uncomfortable with their fees or their approach, seek help with a different agency.