IRS Announces Audits of Credit Counseling Companies, FTC Files Suit

The Internal Revenue Service (IRS) is auditing more than 30 nonprofit credit counseling companies as part of a wide-ranging investigation into business practices in the $1 billion industry.

"This is an unprecedented effort by the IRS and one that is fully justified," said IRS Commissioner Mark Everson. "If warranted, we will revoke the tax-exempt status of these organizations." Forty percent of the industry is under audit, he said.

The IRS is joined by the Federal Trade Commission (FTC) and a number of state attorneys general in cracking down on nonprofit credit counseling companies that direct business to for-profit affiliates, the Wall Street Journal reported. Executives are suspected of enriching themselves while failing to provide the financial management counseling they promise their debt-ridden customers.

As part of that effort, the FTC filed suit against industry giant AmeriDebt for using deceptive marketing to attract customers who, in turn, never received debt counseling services. The FTC, which filed the suit Wednesday in U.S. District Court in Greenbelt, Maryland, also alleges the company hid fees and falsely described itself as nonprofit when it actually works to make money for affiliated for-profit companies.

The suit contends that AmeriDebt led customers to believe that an initial fee would go to their creditors, but it went to AmeriDebt instead. The company’s advertisements say AmeriDebt helps customers learn better financial management skills, but the company simply enrolls all of its customers in so-called debt management plans, which include hundreds of dollars of hidden up-front costs, the suit claims.

To qualify for tax-exempt status, these organizations must either serve low-income clients or offer services to help people manage their money, the IRS says.

AmeriDebt attorney Zynda Sellers said the company does provide educational services to customers and that the payments cited by the FTC are "voluntary contributions."
FTC is asking the court to order AmeriDebt to stop deceiving consumers, and to reimburse anyone who has been fooled by the company's practices.

The credit counseling business is growing quickly, and so are the complaints. According to Edward Johnson, president and chief executive of the Better Business Bureau-Washington D.C., 237 complaints were filed nationwide in 1998. Last year, complaints grew to 1,480, with the largest percentage naming AmeriDebt.

Travis Plunkett, legislative director at the Consumer Federation of America, applauded the action. "AmeriDebt has become the symbol of bad credit counseling in this country, but they are by no means the only shady operators," he said.

Minnesota's attorney general also filed sued against AmeriDebt on Wednesday, accusing the company of defrauding customers. Texas was expected to follow suit. Illinois and Missouri filed separate lawsuits against the company earlier this year.

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