The Internal Revenue Service could revoke the tax-exempt status of about 20 credit-counseling firms, just as the country's new bankruptcy laws are set to go into effect on Oct. 17.
The bankruptcy changes will require consumers to go through credit counseling before being eligible to file for bankruptcy. The firms whose exempt status is being examined account for about half of the counseling industry's revenues and raise questions of whether any court-approved counseling firms will be available to debtors. The Justice Department's U.S. Trustee Program, which oversees the nation's bankruptcy courts, is developing a list of firms that it has approved to provide the education and counseling required by the new law.
The IRS commissioner of the Tax-Exempt and Government Entities Division, Steven T. Miller, said this week that his division is already auditing 40 credit-counseling firms and plans to audit an additional 20 nonprofit agencies after the current audits are completed. The IRS began its audits two years ago after consumers complained about deceptive business practices -- such as high fees, pressure tactics and inadequate educational services.
The last point is the IRS's main concern about the organizations under scrutiny. The IRS also has been concerned that many of the nonprofit counselors have been misusing their tax-exempt status, by pressuring consumers to enroll in debt-management plans with fees that are siphoned off to for-profit companies controlled by the firms' executives.Bankruptcy filings have reached record highs in the past month as consumers rushed to file before the new law, requiring some levels of repayment in most cases, takes effect. According to Lundquist Consulting Inc., last week, bankruptcy filings averaged 20,000 a day, more than triple the average last year.
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