IRS targeting nonprofit rank of credit firms

Daily Record, The (Baltimore), May 16, 2006 by Kathleen Johnston Jarboe

Nearly 20,000 Marylanders might be forced to find a new credit counselor as the Internal Revenue Service seeks to pull the nonprofit status of every credit counseling firm it has audited so far.

The IRS yesterday said it was taking the move after finding the largest players in the industry masquerading as charities to make a quick buck.

What we have really substantiated here is that these organizations have not been operating for the public good, said IRS Commissioner Mark W. Everson during a conference call with reporters. They have poisoned an entire sector of the charitable community.

Instead of counseling consumers about their budget problems and advising them on how to best lower debt, most of the largest credit- counseling agencies, if not all, exist solely to push consumers into fee-ridden debt management plans, the IRS said in a report on the issue.

The government agency has audited 41 credit counseling agencies so far. Those firms represented 40 percent of the revenue in the $1 billion industry that purports to help people out of debt. Nine of the firms have since lost their tax-exempt status or withdrawn it voluntarily, an IRS report said. It is moving to revoke the nonprofit status of the remaining 31 firms.

The National Foundation for Credit Counseling welcomed the IRS' actions. The national association serves as a stamp of approval for counseling firms. To gain membership, agencies must pass stringent requirements aimed to ensure true credit advising takes place. A spokesman said none of the group's members was on the list to have its nonprofit status revoked.

It is ultimately a good thing because it weeds out the bad actors and it leaves those organizations, such as NFCC members, that provide the best service for consumers, said spokesman Nick Jacobs.

The move sends ripples perhaps more strongly through Maryland's credit-counseling industry. Only nonprofit agencies can obtain a license to perform the service in the state. This year, more than one-third of those companies told state regulators they had been audited by the IRS. About 41 firms hold licenses.

I am concerned, said Joseph Rooney, deputy commissioner at the Division of Financial Regulation at the Maryland Department of Labor, Licensing and Regulation. About 40 percent [of Marylanders using credit counselors] could lose their debt-management plans due to actions taken by the IRS.

But how the IRS actions will impact the industry in Maryland is still unclear. In February, the federal agency revoked the nonprofit status of Florida-based A Better Way Credit Counseling Inc., which had served Maryland customers. But the Florida counselor has since merged into Consumer Credit Management Services Inc. of Delray, Fla., and obtained a new license to do business in the state.

With many of the firms approved to do business in Maryland at risk of losing their license, some industry experts have said the solution is to allow for-profits to enter the market, especially as new bankruptcy laws add to agencies' workloads. Under the new law, all individuals seeking to extinguish some of their debt through filing for bankruptcy must first receive credit counseling.

State regulators this year pushed unsuccessfully to change state rules to allow for-profit credit counseling companies in the door.

Regulators claim that Maryland's licensure rules are tough enough to curb damage from any bad actors. The state caps setup fees for debt-management programs and limits monthly maintenance charges. Consumer advocates testified against the plan.

Meanwhile, the IRS yesterday said it plans to audit another 22 agencies and could expand the investigation to more of the 740 firms operating in the credit-counseling market nationwide. The IRS has started criminal investigations of some of the firms.