The Internal Revenue Service has revoked the tax-exempt status of four credit counseling groups, and others are facing the same fate as a result of an agency examination launched two years ago, reports the Baltimore Sun. The IRS began the audits after rising complaints that some nonprofit credit counseling agencies – including Maryland-based AmeriDebt – abused their tax-exempt status by charging high fees, funneling money to for-profit affiliates and not providing the financial education promised to consumers.
Credit counselors are also coming under renewed scrutiny because of the recently passed bankruptcy reform law, which in October will require that consumers undergo credit counseling from a government-approved nonprofit before they can file for bankruptcy. The IRS has not granted tax-exempt status to a credit counseling agency since it stepped up audits. Roughly 40 agencies have applied, and about 20 of those have been notified that they don’t appear to qualify, officials said. Under a debt management plan, consumers make payments to the credit counseling agency, which forwards the money to creditors. In exchange for regular payments, creditors often make concessions on interest rates and penalties.