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IRS Crackdown a Reminder to Vet Providers

June 19, 2006
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The decision last month by the Internal Revenue Service to revoke the tax-exempt status of 41 credit counseling organizations was a reminder for employers to check the backgrounds of the financial counselors they hire, even if the organization is registered as a nonprofit.

Consumer credit companies offer financial education and counseling to individuals burdened by credit card debt. Most collect fees by guiding consumers into debt management programs, which attempt to help people pay credit card debt. The IRS determined that the 41 organizations, whose identities have not been revealed, had inadequate counseling. As a result, some are under criminal investigation.

Employers looking to help employees get out from a heavy debt load often look to nonprofit credit counseling and education organizations in good standing with industry associations to teach financial management skills, a benefit that is often bundled as part of an employee assistance program.

Privacy laws, and corporate culture, generally limit companies from becoming directly involved in helping their employees manage their finances beyond providing education and counseling.

"Companies want to be at arm’s length," says Kathy Stoughton, a financial specialist at ComPsych, an EAP provider based in Chicago. "They don’t want to become paternal."

Federal law requires individuals who are preparing to file for personal bankruptcy to meet first with financial counselors. David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, says most people simply need to be educated on how to change their spending habits.

"There are people living paycheck to paycheck who are spending $150 a month on Starbucks," Jones says. "There are just bad spending patterns people need help, education and guidance with, and the great majority of people we speak to fall into that category."

One in four American workers suffers from serious financial worry, according to a report published last year titled "Financial Distress Among Americans." Conducted by E. Thomas Garman, a professor emeritus of personal finance at Virginia Tech University, the report estimates that 30 percent to 80 percent of employees spend time at work worrying about their finances, at a cost in annual productivity of $450 to $2,000 per employee.

Companies looking to hire a credit counselor to educate employees should make sure the company is in good standing with the industry’s two associations, the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies, both of which require their members to be federally tax-exempt organizations.

"The counseling and the education organizations do with consumers is what makes this a nonprofit service," Jones says. Employers can also contact their state’s attorney general’s office or better business bureau to verify a credit counseling organization’s good standing.

Consumer credit organizations say the crackdown by the IRS was long overdue and anticipated. Many of the organizations whose tax-exempt status was revoked can nonetheless operate as non- profit organizations under state charters or as for-profit companies in states that allow them. At for-profit debt settlement companies, consumers stop paying their credit card debt while the company negotiates a reduced principal with the creditor. The companies charge a hefty fee, often as much as 30 percent of the principal owed.

The National Conference of Commissioners on Uniform State Laws recently drafted a law aimed at regulating both nonprofit credit counseling organizations and for-profit debt settlement companies. The group’s legislative director, John McCabe, says the law would rein in for-profit companies currently operating without oversight.

Others worry that the advice of a financial counselor would be tainted by the desire to make a profit. Employers should be aware of such conflicts of interest when hiring a financial counseling service. Organizations that make money through referrals to debt management companies should not be hired.

"Make sure you are clear on how they are compensated," Stoughton says. "If it’s commission-based, there is a conflict of interest."

Jeremy Smerd

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