IRS SAYS CREDIT COUNSELORS ARE REALLY “DEBT COLLECTORS”

December 13, 2004

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This past year, the IRS began tightening its scrutiny of the nonprofit tax status of credit counseling agencies. In some recently made public letters rejecting the nonprofit tax status of particular agencies the IRS makes it clear that it doesn’t buy the argument that using credit counseling to collect debts for creditors is a legitimate “nonprofit” activity, and could wipe out the “nonprofit” tax-exempt status of virtually the entire industry.

In the letters, the IRS essentially makes the case that the creditor funding and the creditor benefits of debt management plans (DMPs) effectively make credit counseling agencies debt collectors, not charities. The members of the largest credit counseling association, the National Foundation for Credit Counseling (NFCC), for example, collectively receive two-thirds of their funding from creditors. That funding, as determined by the IRS in these letters, is essentially payment for debt collection services, which it does not consider to be a tax-exempt activity.

If the principles spelled out in the IRS letter were applied industry- wide, it could have the effect of wiping out virtually the entire credit counseling industry. That’s because virtually the entire industry is composed of nonprofit, tax-exempt CCAs which rely heavily on creditor “fair share” funding provided in exchange for servicing DMPs.

Source: The Coalition for Responsible Credit Practices