The Internal Revenue Service has filed a claim for $15 million against credit counseling firm AmeriDebt as part of a recent crackdown on allegedly not-for-profit debt management firms. The claim stems from the IRS's expectation that the firm will lose its tax-exempt status. According to IRS Commissioner Mark Everson, to qualify for tax-exempt status, a credit counseling firm must limit its services to low income customers or, as its primary activity, provide education to the public on how to manage personal finances.
AmeriDebt has also been the subject of a multi-million dollar lawsuit filed by the Federal Trade Commission. The FTC accused AmeriDebt of "engaging in unfair or deceptive acts or practices" specifically by advertising that they offer credit counseling and claim to teach people how to handle credit when actually the company does "not provide advice about consumers' finances or teach them how to handle their debt in the future."
The company is accused of charging customers as much as $499 for the service of paying their bills, with no guarantee that debt will actually be reduced, and in fact many customers end up owing more money because of the unadvertised fee to AmeriDebt. The company settled an $8 million judgment earlier this summer in a class action suit filed in Illinois that alleged deceptive practices and falsely operating as a not-for-profit entity.
AmeriDebt reportedly has nearly 500,000 customers, but instead of servicing the customer accounts, the accounts are turned over to a for-profit organization called DebtWorks Inc., owned and operated by Andris Pukke, husband of AmeriDebt founder, Pamela Pukke. DebtWorks processes customer payments for a fee which is paid by AmeriDebt.
According to a report in the Washington Post, the IRS is investigating 50 credit counseling companies for allegedly taking advantage of people in debt and filling the coffers of affiliated for-profit entities.
The Senate Permanent Subcommittee on Investigations has been looking into the matter as well, and has found that many credit counseling firms are failing to offer the training, counseling, and debt management services they advertise. Earlier this year, IRS Commissioner Everson told the Senate committee the IRS would "utilize all tools available to it, including the pursuit of criminal charges if appropriate, and the revocation of tax-exempt status, in order to quash bad practices in the credit counseling industry."
A report by the Consumer Federation of America analyzes key problems with companies that have recently entered the consumer credit counseling arena, describes abuses of the not-for-profit status of these companies, and offers suggestions for improvement in the industry.