IRS Probes Credit Counselors' Fees .. abuse of tax-exempt status !!

[MORTARDUDE]

IRS Probes Credit Counselors' Fees

THE WALL STREET JOURNAL

October 15, 2003

-By RYAN J. FOLEY



WASHINGTON -- Federal regulators are warning that some credit-counseling organizations may be taking advantage of consumers through high fees while abusing their tax-exempt status.

A number of the companies, which are supposed to function as nonprofits, are now the focus of an investigation by the Internal Revenue Service into deceptive business practices that may throw the growing industry into turmoil, investigators said. Consumers looking for a "quick fix" to pay medical bills, get out of credit-card debt, or recover from unemployment or divorce are the most vulnerable to the tactic, regulators said.

The IRS investigation, reported Tuesday by the New York Times, is looking at whether companies are really offering the educational or counseling services that are required for tax-exempt status. Investigators suspect some credit-counseling companies might instead be offering only standardized commercial-type payment plans. In return, they believe, the companies might be charging high fees masked as charitable contributions.

The inquiry comes as demand for credit counseling and the number of firms providing it hit record highs. A record nine million people turned to credit-counseling services last year. Many firms are heavy promoters through e-mail "spam" and other forms of advertising promoting advice to get out of debt.

"With these new entrants into the industry, what we're seeing is exorbitant fees passed on to consumers," said Lydia Sermon-Ward, senior vice president of marketing and communications of the National Foundation for Credit Counseling, which represents 140 credit-counseling companies. She said some of the bad actors won't take customers with less than $10,000 debt.

Investigators also are looking at whether companies are paying excessive compensation to officers or funneling business to for-profit affiliates.

The IRS wouldn't identify companies it is examining. But a lawsuit filed last month by Missouri Attorney General Jay Nixon against AmeriDebt, a credit-counseling service based in Germantown, Md., that has 100,000 clients, appears to offer a glimpse into type of business practices under investigation.

The suit accuses the company of charging excessive, hidden fees that amount to $327 for the first monthly payment, or 3% of the consumer's total debt. Fees averaging about $70 per month for the payment plans, which typically last three to five years, are "secretly transferred" to for-profit companies closely tied to the organization, the suit alleges.

"To suggest that AmeriDebt is not a nonprofit organization is 100% dead wrong," the company's general counsel, Rob Herrell, said in a statement, noting that all fees are considered voluntary contributions. He added that AmeriDebt "has an exemplary record of helping needy debtors negotiate lower interest rates and payments."