For decades, many organizations have provided valuable credit counseling and education that assist consumers in putting their personal finances in order. The Internal Revenue Service continues to view organizations that counsel and educate consumers as qualifying for tax exemption under Section 501(c)(3) of the Internal Revenue Code.
However, federal and state officials have become increasingly aware that as the market for consumer credit has undergone changes in the past 30 years, so have some of the entities that offer services to debtors. Many of these services do not provide meaningful education or counseling.
For example, some organizations put their clients on fixed payment plans to pay down their debt. But an organization that offers only this service, without significant education and counseling, would not qualify for tax-exempt status.
IRS officials are concerned that some credit counseling organizations that might have qualified for tax-exempt status in the past may no longer qualify due to changes in the services they provide. This problem is magnified because the organizations, by reason of their tax exemption, are exempted from many state and federal consumer protections.
For example, the Credit Repair Organization Act of 1997 sought to further regulate the practice of for-profit organizations involved in “credit repair,” a series of activities aimed at improving a customer’s credit history. But the Act exempted Section 501(c)(3) organizations from the provisions of this law. A similar pattern of exceptions for tax-exempt organizations is replicated in many state consumer laws.
The IRS is concerned that the combination of tax-exempt status and exemption from consumer protections may leave certain taxpayers vulnerable. To address this concern, the Exempt Organizations (EO) office of the IRS has taken the following steps:
Credit counseling organizations submitting applications for exemption will only receive that status after a full review, which includes answering additional questions and a close analysis of the marketing materials the organizations distribute. The aim is to ensure that the organizations’ activities qualify for tax exemption.
In January 2003, EO published a 50-page Continuing Professional Education article that reviewed the law in this area and provided tools for reviewing applications by new organizations.
EO officials held sessions to train both those reviewing new applications for exempt organization status and those examining existing qualified organizations. Developed in conjunction with state charity officials and the Federal Trade Commission, these training sessions focused on changes in the credit counseling industry and their implications for the EO office.
EO has initiated a project to address concerns in this area and to recommend strategies. A number of examinations of consumer credit services organizations have commenced. The results of these examinations will be monitored to assess the extent to which tax-exempt credit counseling organizations are operating in a manner that conforms with the laws and regulations governing Section 501(c)(3) status.
EO officials are conducting outreach with the consumer credit industry and attorneys practicing in this area and speaking to them on the tax rules relating to non-profit consumer credit organizations.
Internal Revenue Code section 501(q)
Statute providing additional criteria for exemption of credit counseling organizations
Technical explanation of credit counseling provisions in Pension Protection Act of 2006
Prepared by the staff of the Joint Committee on Taxation
IRS Reports on Credit Counseling Initiative
An article discussing an Internal Revenue Service report on tax-exempt credit counseling agencies and steps being taken to ensure these organizations comply with the law.
Frequently Asked Questions
FAQs about the IRS Credit Counseling Compliance Project
Written Testimony of Mark Everson, Commissioner of Internal Revenue
Before the Permanent Subcommittee on Investigations, Committee on Governmental Affairs, United States Senate, Hearing on the Role and Tax-Exempt Status of Certain Not-For-Profit Credit Counseling Agencies, March 24, 2004
Credit Counseling Organizations
An Exempt Organizations Continuing Professional Education article
IR-2003-120 — IRS, FTC and State Regulators Urge Care When Seeking Help from Credit Counseling Organizations
Credit Counseling Organizations continuing professional education text — ( PDF 731K)
Commissioner Mark W. Everson’s congressional testimony on credit counseling organizations, Nov. 20, 2003 ( PDF 142K)
Federal Trade Commission — Become familiar with the latest scam alerts; file complaints.
Tax Information for Charities & Other Non-Profits — Determine whether the organization is tax-exempt and what an organization must do to maintain that status.
National Association of State Charity Officials — Obtain a list of state charity official offices.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.