CREDIT COUNSELING IRS probes companies claiming tax-exempt status

Investigators say some credit counselors prey on those in financial distress.
WASHINGTON (AP) -- The Internal Revenue Service is investigating more than 30 credit counseling companies to see if they are falsely claiming tax-exempt status.
The disclosure by IRS Commissioner Mark Everson came last week, a day after the Federal Trade Commission filed a lawsuit against industry giant AmeriDebt. It was the first such government action against a credit counselor.
Everson said the companies under investigation account for 40 percent of the revenue generated by the $1 billion industry. They also include nine of the 15 largest companies, but he declined to name them.
Credit counseling companies offer financial education services and debt-management programs, in which counselors work with consumers and their creditors to come up with a repayment plan for the amounts they owe.
Hundreds of the companies are nonprofits.
Qualifying as tax-exempt
Everson said such companies can qualify for tax-exempt status if they limit services to low-income customers or provide educational services, such as teaching better money management skills to debt-ridden people.
The commissioner said that although many credit counseling groups provide valuable services, an increasing number "prey on those in financial distress."
Lawmakers questioned the generous salaries of top officials with credit counseling corporations. In some cases, they were reported at more than $600,000. Everson said hefty salaries like those would be a red flag for the IRS.
Howard Beales, director of the FTC's Bureau of Consumer Protection, also testified, saying the case against AmeriDebt illustrates some of the troubling practices in the industry.
The FTC accused the Germantown, Md.-based company in a lawsuit of hiding fees from customers, providing no educational programs to help consumers get out of debt and abusing its nonprofit status.
Credit counseling companies that appeared at the hearing praised the government actions and attributed misbehavior in the industry to a few bad companies that do not reflect the majority of the industry.