The Internal Revenue Service said that it plans to revoke the tax-exempt status of the 41 credit counseling agencies it has audited as part of a crackdown on the industry's practices.

Over the past two years, the IRS has audited 63 credit counseling agencies, representing more than half of the $1 billion industry's revenues. The 41 organizations whose audits have been completed have either already had their exemptions revoked, or the IRS has proposed revocation and the groups are appealing, a process that can take several months.

"Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors," said IRS Commissioner Mark W. Everson, in a statement. "Our examinations substantiated that these organizations have not been operating for the public good and don't deserve tax-exempt status. They have poisoned an entire sector of the charitable community."

The investigation comes on the heels of passage of the Bankruptcy Reform Act of 2005, which requires anyone filing for bankruptcy to first visit one of the agencies. The Justice Department's U.S. Trustee Program, which oversees the nation's bankruptcy courts, decides which credit counseling agencies can give pre-bankruptcy advice. Although tax-exempt status is not required to win approval, nearly all of the 150 credit counseling firms approved have been tax-exempt.

The IRS said that the revocations result from the counseling organizations failing to provide the level of public benefit required to qualify for tax exemption. Many of these agencies were found to offer little or no counseling or education and appeared to be primarily motivated by profit. In many instances, these agencies also served the private interests of related for-profit businesses, officers and directors.

Based on the findings of the examinations, the IRS is taking two additional steps -- issuing expanded guidance for the IRS to consider in its reviews of the organizations, and sending compliance inquiries to each of the remaining 740 known tax-exempt credit counseling agencies not already under audit.

In addition, the IRS has tightened up its review of new applications by credit counseling firms for tax-exempt status. Since 2003, about 100 applications have been reviewed, but only three have been approved.

Previously on WebCPA:

Personal Bankruptcy Filings Drop (April 6, 2006)

IRS Revoking Exemptions of Credit Counselors (Jan 17, 2006)

IRS Considers Credit Counselors' Standing (Oct. 14 , 2005)

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