IRS Audits Find Tax-exempt Nonprofit Model for Credit Counseling is Inconsistent with Tax Law

WebCPA reports the IRS has been spending tens of thousands of hours auditing nonprofit credit counseling agencies and ordering changes at the vast majority of them, according to data the American Association of Debt Management Organizations (AADMO), a trade association representing the credit counseling and debt management industry, recently released. The AADMO discovered the statistics after filing a Freedom of Information Act (FOIA) 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 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 hours 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. He pointed out that although consumer groups and others have made bold claims that credit counseling is only legitimate when done through a nonprofit agency, the recently disclosed data on the IRS investigations de-bunks this position. The data suggests that nonprofit tax status is not appropriate for the vast majority of credit counseling agencies.

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