Non-profit status revocations

Monday the IRS announced that they canceled the tax-exempt status 41 credit credit counseling agencies. (link to BusinessWeek article)

First of all, this is old news: the IRS may have just made the announcement, but we've known about this for some time. It's been in the Wikipedia entry on credit counseling almost from the beginning.

But there's a misconception here that persists everywhere from AADMO's press release (which I linked to yesterday) to Wikipedia (since I lost the edit war when trying to keep the article useful and non-biased). The AP article says the agencies in question represent "more than 40 percent of the revenue in a $1 billion industry." That's not the same thing as saying they represent half of the industry.

We're talking about 41 agencies out of almost 1,000. Sure, those agencies represent almost half the industry's revenue, but there are still 740 others who haven't lost their nonprofit status.

Think of it this way; say your local Major League Baseball team has a total team salary of $47,000,000 (yeah, they're never going to make the playoffs). Suppose they have a superstar who earns $22,000,000. That's 47% of the team salary right there. Now supose that superstar is caught using steroids. Would it be fair to say "Half the team is on steroids!"?

No, the real statistic here is 5% of credit counseling agencies have lost their non-profit status. Not 50%. Not 40%. 5%.

The IRS commissioner suggested that consumers looking for credit counseling call "one of the 150 consumer counseling organizations approved by groups like the Better Business Bureau." Good advice.

I'm not saying to avoid for-profits; just do your research and choose carefully. I have acquaintances in the for-profit counseling sector who think the non-profit credit counselors have an unfair competitive advantage. I don't see it that way. If the non-profit is on the level, then they're committing a lot of resources to education and community service, not to mention responding to IRS audits and EOUST scrutiny. (And lawsuits from bankruptcy lawyers, etc. etc. etc.) The only way a non-profit gets an unfair competitive advantage is if they don't really do all of the non-profit community education work that goes into being a 501(c)3; hence the IRS revocations. Meanwhile the for-profit agency doesn't have the same community or education obligations (and there's nothing wrong with that; a lot of clients don't want education, they just want a DMP), so those resources are freed up to pay taxes. That's utterly simplistic and leaves out a lot of important issues (like accreditation, federal & state laws, etc.), but it's my position.

Comments

[Tom at BizzyBlog]

Jeff, I mostly agree that the write-ups are overreacting, but there will be a workout period as counselors move around to new agencies.

I have a post going up tomorrow morning on this at about 10:30 ET.

[Jeff Michael]

Thom's post is up, so interested readers should head over to Bizzyblog and check it out.

And all those displaced credit counselors might want to read this:
http://www.bizzyblog.com/?p=2103

[Tom Blumer]

Thanks, Jeff. I don't understand why the trackback didn't work. :--<