IRS Says Credit-Counseling Firms May Face Prosecution

IRS Commissioner Mark Everson has threatened criminal prosecution and revocation of tax-exempt status for credit counseling companies that charge high fees and even fail to send money to the creditors of their debt-ridden customers.

Everson told a Senate subcommittee on Wednesday that his agency’s audits "may very well result in the lifting of some tax exemptions and, in fact, criminal referrals to the Department of Justice." Testifying before the Senate Governmental Affairs Committee's investigative panel, Everson said audits on one-third of the $1 billion nonprofit industry should be completed by the end of the year, the Washington Post reported.

An estimated 9 million people a year contact a credit counseling agency. Reputable firms offer programs that allow consumers to consolidate debt, reduce payments and lower interest rates. Banks that issue credit cards have historically financed credit counselors, although those contributions are on the decline.

Everson questioned whether some credit counseling firms are truly nonprofit. Some of the firms being audited "appear to have as their principal activity selling debt-management plans — rather than providing credit counseling." Some, he said, "appear to operate as boiler room call shops instead of charities."

Everson’s contention was backed up by John Paul Allen, a former credit counselor at AmeriDebt Inc. He said the group "was nothing short of a sweatshop — a telemarketing outfit taking advantage of thousands of people in bad financial situations." He said employees were paid commissions for signing up consumers and getting them to pay a "voluntary contribution," usually 3 percent of a consumer's total debt.

AmeriDebt is being sued by the Federal Trade Commission and four state attorneys general, who accuse the company of charging customers exhorbitant fees and falsely operating as a nonprofit. Founder Andris Pukke invoked the Fifth Amendment and would not answer the subcommittee’s questions.

The subcommittee also heard from disgruntled consumers. Retired museum director Raymond Schuck of Lima, Ohio, testified that he called Cambridge Credit Counseling for help with his $90,000 debt. He was asked to make a monthly payment of $1,946 — but the money never made it to his creditors. "My credit rating was completely ruined because of late payments," he said. Schuck later filed for bankruptcy.

Industry executives told the Senate panel that the accusations were overblown and cited some changes in operations that help their customers. For example, Cambridge Credit Counseling said paperwork has been changed to make it more clear that a customer’s first payment does not go to creditors.

Federal Trade Commissioner Thomas B. Leary applauded such changes but said "last-minute conversions do not expunge a violation" of law.

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