Widespread tax-exempt fraud uncovered by IRS

Filed under: Banking & Finance |

An ongoing Internal Revenue Service investigation has uncovered that a large number of tax-exempt credit counseling agencies are not complying with tax-exempt operating laws.

During the last two years, the IRS has been auditing 63 credit counseling agencies that generate more than half the industry’s revenue.

To date, the audits of 41 organizations, which generate more than 40 percent of the industry’s revenue, have been completed.

All the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status.

“Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors,” said IRS Commissioner Mark Everson in a prepared statement. “Our examinations substantiated that these organizations have not been operating for the public good and don’t deserve tax-exempt status. They have poisoned an entire sector of the charitable community.”

Officials said the news is particularly concerning because of mandates under the Bankruptcy Reform Act of 2005.

The act requires that anyone who files for bankruptcy must first visit a tax-exempt credit counseling agency to enroll in financial education and personal budgeting courses.

Most of the noncompliant agencies were cited for failing to provide the level of public benefit required to qualify for tax exemption. Many of the agencies offered little or no counseling or education and appeared to be primarily motivated by profit, according to the IRS.

In many instances, the agencies also served the private interests of related for-profit businesses, officers and directors, IRS officials said.

Based on the findings of the examinations, the IRS has begun issuing expanded guidance, including legal standards for exemption and factors considered by the IRS in its reviews of these organizations; and sending compliance inquiries to each of the remaining 740 known tax-exempt credit counseling agencies not already under audit.

Depending on the responses received, additional audits could be undertaken.

IRS officials also say the agency is tightening up its review of new credit counseling firm applications for tax-exempt status, even though only three firms that applied for the status since 2003 have been approved.

Wachovia stock dips

Wachovia Corp.’s stock took a dip last week after the bank announced its planned $25.5 billion acquisition of California-based Golden West Financial Corp.

According to Wachovia, shares fell at least 6 percent, down $3.43 to $55.96. The announcement, however, boosted Golden West’s stock more than 7 percent, up $5.11 to $75.62.

Wachovia Chief Financial Officer Tom Wurtz said the sizable decline was not expected.

Analysts said they anticipated the drop because investors would fret about the sheer size of the deal as well as Golden West’s “mortgage-heavy business model.”

The deal is expected to bolster Wachovia’s consumer banking footprint and open access to fast-growing markets in western states.

Wachovia representatives said the financial institution will add 285 consumer banking offices with $62 billion in retail deposits in 10 states.

The bank plans to enter new markets in Arizona, California, Colorado, Illinois, Kansas and Nevada.

The combined company, with assets of $669 billion, will serve banking customers in 21 states and Washington, D.C.

Wachovia will gain mortgage lending operations under the World Savings Bank name in 39 states. The deal would eliminate 1,100 jobs and close 55 branches.

The new institution will number some 107,500 employees, according to Wachovia.

ACH transactions hit $14B

The number of automated clearing house transactions grew by more than 16 percent in 2005 to reach a total of 14 billion payments.

The statistics come from the Electronic Payments Association, which also said annual ACH payment volume has doubled during the last five years.

The ACH is a nationwide electronic funds transfer system for inter-bank clearing of electronic payments for participating depository financial institutions.

An ACH transaction is an electronic fund transfer through the Federal Reserve Bank from a checking or savings account

Last year’s ACH transaction increase is likely the result of growing popularity and access to consumer electronic bill payment methods.

U.S. financial institutions were part of 12.98 billion ACH transactions in 2005 and 976 million ACH payments. The total is an increase of more than 1.9 billion compared to 2004.

The EPA is also reporting that Internet-initiated ACH payments grew by 38.9 percent to 1.34 billion. Officials estimate that 80 percent of the Internet transactions were to pay bills via company or billing service Web sites, and the rest were fund transfers.

Direct deposit transactions remain the most popular. Transactions for the ACH increased 5.1 percent in 2005 to 4.4 billion payments, with an average deposit of $1,290.

NACHA estimates that more than 71 percent of the private-sector work force in the United States. uses direct deposit, and as many as 145 million Americans use direct deposit for their payroll or government benefits.

The total number of business-to-business ACH payments also saw considerable growth, reaching 2 billion in 2005, an 11.3 percent compared to 2004.

Rob Larimer covers banking and finance for the Colorado Springs Business Journal.