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The Internal Revenue Service is cracking down on credit-counseling agencies that appear to be more interested in profits than counseling consumers. Today the IRS it has cancelled or intends to cancel the tax-exempt status of 41 credit agencies. These include some major players and together they account for more than 40% of the industry's billion dollars in revenue.

NPR's Wendy Kaufman reports.

WENDY KAUFMAN reporting:

Prodded in part by a Congressional oversight committee and consumer advocates, the IRS began investigating dozens of credit-counseling agencies two years ago. What the agency found was extremely troubling. IRS commissioner Mark Everson.

Mr. MARK EVERSON (IRS Commissioner): Some of these organizations, most of these large organizations have not been operating for the public good and they don't deserve tax-exempt status. They have actually poisoned an entire sector of a charitable community. I don't say this lightly, but the organizations have been offering little or no counseling or education to individuals and they appear to be primarily motivated by profit.

KAUFMAN: Everson says in many instances, the companies were organized just to funnel business to related for-profit companies. Many of these firms spend millions of dollars on commercials urging anyone with debt to call them to solve their financial woes. What's more, says IRS commissioner Everson, because tax-exempt organizations are not bound by the Do Not Call list, the firms were able to telephone consumers and pitch their services under the guise of a non-profit counseling service.

Mr. EVERSON: The insidious thing here was that individuals were sucking people in and then basically channeling them to profit-making businesses to pedal debt management plans.

KAUFMAN: Which often came with high fees and costs. Legitimate counseling agencies, which are often funded at least in part by creditors, operate differently. Trained counselors provide education and evaluate a debtors entire financial picture and then work out a total program. They don't nearly push debtors into high fee debt management plans.

Ms. SUSAN C. KEATING (National Foundation for Credit Counseling): Consumer debt has become a market in this country.

KAUFMAN: Susan C. Keating is president and CEO of the National Foundation for Credit Counseling, an industry umbrella group that's been in existence for more than half a century. She says her organization welcomes the scrutiny, noting that none of its members has appeared on the IRS target list.

Ms. KEATING: We think it's important that the steps that are being taken differentiate qualified organizations that operate against standards from those that are really geared to making profits and capitalizing on the extreme consumer debt.

KAUFMAN: Another group heartened by the IRS action is the National Consumer Law Center. But Center attorney Deanne Loonin says she hopes the IRS moves quickly to complete its investigations so consumers can more easily find legitimate counseling agencies. Loonin also worries that revoking the tax-exempt status of some of these firms won't necessarily put them out of business.

Ms. DEANNE LOONIN: (National Consumer Law Center): These companies, the bad ones, are very creative and they already knew this was going to happen. They knew this was coming down the pipelines. So they've been thinking of ways that they can continue to operate, potentially still as non-profits, but perhaps a different category of non-profit. Or potentially just taking their business into the for-profit sector.

So it's very encouraging, but we're not out of the woods yet.

KAUFMAN: In addition to the actions announced today, the IRS is sending more than 700 compliance letters to the rest of the credit counseling industry. The IRS investigations will affect consumers under the federal bankruptcy law. Consumers considering bankruptcy must now get credit counseling before they're allowed to file. The IRS wants to ensure that only legitimate non-profit agencies are doing that counseling.

Wendy Kaufman, NPR News.

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