Credit counselors got hit with another blow in July, this one from the Internal Revenue Service. But warring factions in the business appeared to be taking a wait-and-see attitude about possible changes in their tax status.
The IRS released an internal memo in July presenting its overview of credit counseling. It concludes that many agencies should not receive tax-exempt, or not-for-profit, status.
Many agencies, especially the "new generation of ... organizations" do not provide "any meaningful education or relief of the poor" and operate for private benefit, the IRS reports. That violates two standards for tax-exempt status, according to the IRS.
The agency also notes that some counseling agencies may lose their not-for-profit status because net earnings of the organization benefit private shareholders or individuals.
The IRS memo is shaking up the entire business, says Travis B. Plunkett, legislative director of the Consumer Federation of America. "This is not just a look at peripheral issues. This gets to the heart of business practices and abuses in the industry."
Plunkett notes that the memo comes as the IRS continues its audits of about 50 counseling agencies ("The Heat Is on Credit Counselors," June). The agency declined further comment on the report and by policy doesn't discuss individual audits.
Susan C. Keating, president and chief executive of the National Foundation for Credit Counseling, praised the IRS for publicly making clear its approach to the industry.
She also acknowledged that some of the NFCC's 127 members might be among those being audited. "We are a major force in the industry. Some could be part of the review," she says.
The Silver Spring, Md.-based NFCC is a 53-year-old trade group.
The Coalition for Responsible Credit Practices, a trade group at odds with the NFCC, gave the IRS memo a cautious thumbs-up. "It seems to say we should treat this as a for-profit industry. That supports what we'd like to see," says Darrell McKigney, director of the Coalition and its sister group, Consumers for Responsible Credit Solutions (CRCS).
The CRCS in July released a study claiming that the NFCC and its agencies are controlled by card issuers and other credit grantors and can't independently represent consumers.
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