You can’t turn on the TV lately without seeing those ads from so-called "debt counseling" services which offer to reduce or eliminate your credit card debt by consolidating your debt, among other plans. Often, those services included significant fees for "helping you" with your debt. Income to the companies that run those gigs? Of course not. You may not realize it, but many of these services are registered tax-exempt organizations – yeah, you read that right, they’re calling themselves charities.
The IRS is concerned about this trend of charitable credit counseling agencies and has been auditing a number of those agencies over the past few years. According to the Service, 41 such audits have been completed, representing 40% of the revenue in the industry. All of those audits have resulted in revocation, proposed revocation or termination of tax-exempt status.
Ouch. Perhaps they’re not so charitable after all?
According to IRS Commissioner Mark W. Everson: “Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors. Our examinations substantiated that these organizations have not been operating for the public good and don’t deserve tax-exempt status. They have poisoned an entire sector of the charitable community.”
And if you’re one of those credit-counseling companies seeking new tax-exempt status? Don’t print up your stationery just yet. Out of 100 new applications since 2003, only three received tax-exempt status. Easy math there… A 3% approval rate.
What does this mean for the future of the industry? I’m not sure. With bankruptcies on the rise despite creditor-favorable laws passed by Congress, more and more people will likely find themselves in the position of needing a quality, honest credit counseling service. Apparently, however, there aren’t many of those around…
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An interesting angle I had not considered, though in retrospect I knew there were unsavory counseling services. I was searching around regarding structured settlements and found a small host of considerations (headaches) to be considered in an already stressful situation.