The Effect of Those IRS Credit-Counseling Tax-Exempt Revocations

Here’s the announcement, which is a digest of this Associated Press piece at Business Week’s web site, in my weekly Ohio Society of CPAs e-mail:

IRS revokes tax-exemption status for credit counseling agencies

After a two-year investigation of 41 credit counseling agencies, the IRS has withdrawn the tax-exempt status for several educational credit counseling services after audits revealed scams on debt-ridden customers, said Commissioner Mark Everson said this week.

Everson said that many of those groups, representing more than 40 percent of the revenue in a $1 billion industry, offered little, if any, counseling or education as required of groups with tax-exempt status.

Other such agencies will be required to report on their activities. The IRS is sending compliance inquiries to each of the other 740 known tax-exempt credit counseling agencies not already under audit.

The agency in recent years has tightened up its review of new applications by credit counseling firms for tax-exempt status. Since 2003, the IRS has reviewed 100 such applications and approved only three.

The crack down comes as consumers and the counseling industry are having to learn to live under a new and more restrictive federal bankruptcy law. Congress last year gave the financial counseling sector a new role in the nation’s bankruptcy system by making it harder for people to wipe out debt and requiring consumers to consult with an approved credit counselor before they seek the protection of a bankruptcy court.

Jeff at Credit/Debt Recovery doesn’t this is as big a problem as portrayed:

We’re talking about 41 agencies out of almost 1,000. Sure, those agencies represent almost half the industry’s revenue, but there are still 740 others who haven’t lost their nonprofit status.

Think of it this way; say your local Major League Baseball team has a total team salary of $47,000,000 (yeah, they’re never going to make the playoffs). Suppose they have a superstar who earns $22,000,000. That’s 47% of the team salary right there. Now supose that superstar is caught using steroids. Would it be fair to say “Half the team is on steroids!”?

No, the real statistic here is 5% of credit counseling agencies have lost their non-profit status.

I mostly agree with Jeff, but the replacements aren’t on the same team right now. Clearly, a lot of those who were at the 41 firms that had their tax-exempt status revoked (and I would expect that to be about 40% of the counselors in the business) are either going to have to move and sometimes relocate to those who remain, or will decide to find another line of work. To me this means that there is going to be a big short-term reduction and a small long-term reduction in counseling resources available to clients who need it. I would think that in some areas the admittedly temporary disruption might cause long waits until a counselor can be seen. One thing debtors in trouble usually don’t need is more time to go by while their troubles multiply.