IRS targets nonprofit counselors of credit

The Internal Revenue Service is warning nonprofit credit-counseling agencies to stop trying to make money off their clients or face being shut down by the government.

“If you’re not upfront with us, we’re going to find out,” Steve Grodnitzky, an IRS exempt-organization manager, said during a meeting of the National Foundation for Credit Counseling at a downtown hotel this week.

Credit-counseling agencies operate as nonprofit organizations to help consumers overcome debt by managing their money better.

Last week, the IRS said it revoked or proposed revoking the tax-exempt status of 41 of the nation’s largest credit-counseling agencies. Another 22 are being investigated.

Together, they earn more than 41 percent of the credit-counseling industry’s $1 billion a year in revenue.

Further investigations of credit-counseling agencies soon will follow, Mr. Grodnitzky said.

“We have seen a lot of abusive organizations,” he told about 100 credit-counseling industry representatives.

The IRS says the groups are claiming to be nonprofit organizations, but are selling clients debt-management programs that they must pay for on a monthly basis, usually at the rate of $15 to $25 a month.

In exchange, the agencies agree to negotiate with the clients’ creditors for lower interest rates and no late fees on their debt.

In many cases, the debt-management programs merely add to the clients’ debt, according to the IRS.

Instead, credit-counseling agencies should focus on educating clients about money management, Mr. Grodnitzky said.

The IRS crackdown coincides with a rise in consumer debt from easy access to credit and a new federal bankruptcy law that took effect in the fall requiring debtors to seek credit counseling before declaring bankruptcy.

Last year, U.S. mortgage foreclosures jumped 25 percent to 846,982, according to the trade group for credit counselors. Consumers owe $9 trillion in mortgage debt and $800 billion in credit card debt.

In the last decade, the number of credit-counseling agencies has risen from about 200 to more than 700, the group says.

Some credit-counseling agencies say the IRS crackdown is hurting credit-counseling organizations, but giving them little direction on how to correct the problems.

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