For decades, many organizations have provided valuable credit counseling
and education that assist consumers in putting their personal finances in
order. The Internal Revenue Service continues to view organizations that
counsel and educate consumers as qualifying for tax exemption under
Section 501(c)(3) of the Internal Revenue Code.
However, federal and state officials have become increasingly aware that
as the market for consumer credit has undergone changes in the past 30
years, so have some of the entities that offer services to debtors. Many
of these services do not provide meaningful education or counseling.
For example, some organizations put their clients on fixed payment plans
to pay down their debt. But an organization that offers only this service,
without significant education and counseling, would not qualify for
IRS officials are concerned that some credit counseling organizations that
might have qualified for tax-exempt status in the past may no longer
qualify due to changes in the services they provide. This problem is
magnified because the organizations, by reason of their tax exemption, are
exempted from many state and federal consumer protections.
For example, the Credit Repair Organization Act of 1997 sought to further
regulate the practice of for-profit organizations involved in ?credit
repair,? a series of activities aimed at improving a customer?s credit
history. But the Act exempted Section 501(c)(3) organizations from the
provisions of this law. A similar pattern of exceptions for tax-exempt
organizations is replicated in many state consumer laws.
The IRS is concerned that the combination of tax-exempt status and
exemption from consumer protections may leave certain taxpayers
vulnerable. To address this concern, the Exempt Organizations (EO) office
of the IRS has taken the following steps:
Credit counseling organizations submitting applications for exemption will
only receive that status after a full review, which includes answering
additional questions and a close analysis of the marketing materials the
organizations distribute. The aim is to ensure that the organizations?
activities qualify for tax exemption.
In January 2003, EO published a 50-page Continuing Professional Education
article that reviewed the law in this area and provided tools for
reviewing applications by new organizations.
EO officials held sessions to train both those reviewing new applications
for exempt organization status and those examining existing qualified
organizations. Developed in conjunction with state charity officials and
the Federal Trade Commission, these training sessions focused on changes
in the credit counseling industry and their implications for the EO
EO has initiated a project to address concerns in this area and to
recommend strategies. A number of examinations of consumer credit services
organizations have commenced. The results of these examinations will be
monitored to assess the extent to which tax-exempt credit counseling
organizations are operating in a manner that conforms with the laws and
regulations governing Section 501(c)(3) status.
EO officials are conducting outreach with the consumer credit industry and
attorneys practicing in this area and speaking to them on the tax rules
relating to non-profit consumer credit organizations.