The IRS has canceled the tax-exempt status of some of the nation's largest educational credit counseling services after determining that they prey on debt-ridden customers.

"These organizations have not been operating for the public good and don't deserve tax-exempt status," IRS Commissioner Mark Everson explained on Monday. "They have poisoned an entire sector of the charitable community."

A two-year investigation has resulted in the revocation, possible revocation or other termination of the tax-exempt status of 41 credit counseling agencies, said Everson.

According to Everson, many of the services offered little in the way of counseling or education. Counseling agencies must provide education and counseling to have tax-exempt status.

The 41 counseling organizations represent over 40% of the revenue in the $1 billion industry.

The remaining tax-exempt credit couseling services will be required to report on their activities. The other 740 known tax-exempt services will receive compliance inquiries.

"Depending on the responses received, additional audits may be undertaken," said the agency.

Everson explained that groups secure tax-exempt status and make cold phone calls to people in desperate financial situations. They use scare tactics to sell debt management plans that are not really geared towards reducing consumer debt. These plans are often very costly, charging consumers all types of administrative fees.

Everson recommends the 150 consumer credit counseling organizations that are approved by the Better Business Bureau. He warns that you could still find predatory agencies, no matter the endorsement.

Since 2003, the IRS has processed 100 applications by credit counseling firms for tax-exempt status. It has only approved three.

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