The Internal Revenue Service has been spending tens of thousands of hours auditing nonprofit credit counseling agencies and ordering changes at the vast majority of them, according to newly released data.

The American Association of Debt Management Organizations, a trade association representing the credit counseling and debt management industry, discovered the statistics after filing a Freedom of Information Act request. The Obama administration has recently ordered federal agencies to sharply curtail the traditional obstacles to fulfilling such requests.

“In response to a Freedom of Information Act request by AADMO, we have learned the number of credit counseling agency audits conducted by the IRS, the infinitesimal number of agencies that received no change recommendations and the massive number of man hours expended in these audits,” said AADMO executive director Mark Guimond. “Given the public attention, the scope of this investigation and the many years that this has been in process, we are astounded at the results.”

The IRS reported that it had conducted 395 audits related to credit counseling, on which auditors spent a whopping total of 38,466.5 hours, according to the IRS’s Audit Management Information Reporting System. Out of the nearly 400 audits, the IRS auditors recommended no change in only 23 audits. IRS auditors spent 6,287 on these no-change examinations.

The statistics date back to tax year 1999.  The IRS began investigating the industry in 2004. “The data suggests that the tax-exempt nonprofit model for credit counseling is not consistent with tax law,” said Guimond. “Consumer groups and others have made bold claims that credit counseling is only legitimate when done through a nonprofit agency. Tax law has rejected their position - nonprofit tax status is not appropriate for the vast, vast, vast majority of credit counseling. The facts prove that, not conjecture.”

His group files numerous FOIA requests on a regular basis, he noted. The reason for filing this request was an IRS announcement at a workshop in September 2008 in which the agency said that it had completed its first round of audits, but the IRS would not disclose the details of its statement. “I thought we'd find out the facts,” he said. He believes that the IRS’s response was unrelated to the Obama administration policy change on FOIA requests.

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