January 23, 2003 | Read Time: 2 minutes
The IRS has published directions it will give auditors in examining nonprofit credit-counseling organizations, a prelude to its focus on such organizations.
The revenue service notes that credit-counseling organizations can provide a valuable service by educating consumers about managing money and reducing debt. However, some organizations prey on the clients they are supposed to be helping, the IRS says, by charging big fees for their services. The IRS announced last year that, beginning this year, it would look into reports that some nonprofit consumer-credit organizations are operated as for-profit businesses or tax shelters.
At issue is the difference between a credit-counseling organization, which mainly educates consumers about how to better manage their debts, and a credit-repair group, which promises to restore a consumer’s credit in a short period of time, often for a hefty fee.
Certain credit-repair practices are illegal, the IRS says, and some groups that have nonprofit status as credit-counseling organizations are actually operating as credit-repair groups. Among illegal practices: encouraging a client to develop a new credit identity or lie to credit bureaus.
The IRS guidelines, which will be published later this year in the agency’s Continuing Professional Education textbook for fiscal 2004, warn auditors that several laws that regulate credit counseling and repair do not apply to groups that have qualified for charity status under Section 501(c)(3) of the Internal Revenue Code.
It explains the laws and regulations that do apply to such groups, and recommends what behavior auditors should pay particular attention to when such groups apply for tax-exempt status.
Because a tax-exempt credit group escapes much federal and state enforcement, the IRS advises examiners that it is very important to examine the groups carefully at the time they apply for exemption.
The auditors’ guidelines are available online at http://www.irs.gov/pub/irs-tege/eotopica04.pdf.
