But consumers still don't have a way to find out who the problem agencies are

11:22 PM CDT on Sunday, May 21, 2006

At a time when credit-counseling firms are taking on more importance in consumers' lives, it's good to know that the Tax Man is cracking down on the industry.

The Internal Revenue Service has yanked the tax-exempt status of some of the nation's largest credit-counseling firms after audits showed they exist mainly to prey on debt-ridden customers, IRS Commissioner Mark W. Everson said.

Many of the organizations "have not been operating for the public good and don't deserve tax-exempt status," he said. "They have poisoned an entire sector of the charitable community."

The trouble is there's no way to find out who the problem counseling agencies are. IRS officials say the law prohibits them from identifying the firms they're auditing.

The IRS does have a list of organizations that no longer have tax-exempt status at www.irs.gov/charities.

Click on "Search for Charities" and then "Recent Deletions From Cumulative List."

The list isn't terribly helpful. For one thing, other organizations besides credit counselors are on the list.

Second, you can't infer that the organizations listed lost their tax-exempt status because they did something wrong.

They could have become a for-profit organization or gone out of business, IRS spokesman David Stell said.

Good for the IRS in weeding out the bad apples. But the agency needs to give consumers information they can truly use.

Travis Plunkett is legislative director of the Consumer Federation of America, which co-wrote a report in 2003 with the National Consumer Law Center on how a new generation of credit counseling agencies are engaging in deceptive practices, improper advice and excessive fees.

He wishes the IRS would give more information, too.

"The hard part is, consumers don't know who are the good agencies and who are the bad agencies," Mr. Plunkett said. "If the agencies that are about to have their tax-exempt status revoked are those that have been approved for bankruptcy counseling, there could be a significant problem."

The IRS says it's working with the Federal Trade Commission and other federal agencies on a Web site with links and other information for consumers on credit-counseling organizations.

For two years, the IRS has been auditing 63 credit-counseling agencies, representing more than half of the industry's revenue.

The audits of 41 organizations, representing more than 40 percent of industry revenue, have been completed.

All of the audits have resulted in revocation, proposed revocation or other termination of the organizations' tax-exempt status.

The IRS' action comes as a new bankruptcy law requires debtors to undergo a two-part credit-counseling and financial-education program before filing for bankruptcy.

"There may be fewer agencies to choose from, but that doesn't necessarily mean consumers will have fewer choices," Mr. Plunkett said. "If what's left are the agencies that truly want to provide low-cost, high-quality credit counseling, this isn't necessarily a bad thing."

The IRS probe was sparked by reports that some credit-counseling firms had abused their tax-exempt status to squeeze profits from indebted consumers.

"In recent years, the IRS has seen an increase in abuses in the credit counseling industry," the agency said in a fact sheet.

"Many organizations have moved away from their approved tax-exempt purpose of offering counseling and education to help individuals understand and address their financial problems.

"Instead, their focus is on debt management services, including promises to restore favorable credit ratings or to provide commercial debt consolidation services."

It's seen more credit-counseling organizations become "mere sellers of debt management plans," the IRS said.

"They appear motivated primarily by profit and offer little or no counseling or education," the agency said. "In many cases, the credit-counseling organizations also appear to serve the private interests of related for-profit businesses, officers and directors."

Debt management programs aren't bad in and of themselves, but they must be appropriate for a debtor.

Many credit counselors told me the people they've seen in the pre-bankruptcy counseling sessions were too far gone financially to be saved through a payment program with their creditors.

The credit-counseling industry supports the IRS' effort.

"We think their scrutiny is important," said Susan C. Keating, chief executive of the National Foundation for Credit Counseling, the umbrella organization for Consumer Credit Counseling Service agencies.

She said the IRS has audited some of her member agencies.

"We believe that has been a necessary part of the whole process because we represent a significant part of this sector and believe our members will establish the baseline for quality," Ms. Keating said.

E-mail pyip@dallasnews.com