The latest big news in the world of debt and credit is the IRS’ attack on the credit counseling industry. The IRS has canceled the tax-exempt (non-profit) status of some of the largest counseling agencies in the industry. A total of 41 organizations have had their non-profit status revoked, and this represents about 40% of the industry’s revenue. There are at least 740 other agencies that have not yet been audited, so obviously the IRS has concentrated first on some of the bigger players.

IRS Commissioner Mark Everson said, “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.”

In addition, the IRS has become very strict on approvals for new applications for non-profit status, with 97 out of 100 such applications rejected.

For more detailed information, here is one version of the basic article that was published online by numerous news sources.

What I find most interesting about all this is the widespread misunderstanding over the concept of non-profit. The tax exempt status associated with non-profit organizations was originally intended to help charitable institutions. So the concept of “non-profit” has been associated in the mind of the average person with “charitable,” i.e., “free.” Yet credit counseling services, even legitimate ones that satisfy the IRS’ criteria for tax-exempt status, are NOT free to consumers. There are always signup fees and monthly fees involved, and these agencies also receive significant compensation directly from the clients’ creditors. Money changes hands. Fees are collected. Sounds like a regular business to me.

But the term “non-profit” makes a powerful impression in the mind of the average consumer. So it’s no surprise that numerous companies have attempted to exploit this association for marketing purposes and monetary gain.

What’s lost in all this though is a deeper question: Why should credit counseling services, or any companies that offer debt management services (including debt settlement), operate under the non-profit model? Last time I checked, this was still America, where it’s ok to MAKE A PROFIT. Whenever any government official discusses this topic, they always refer to “for profit” companies as though they were guilty of some terrible sin. So I ask the obvious question: What’s wrong with (a) helping consumers tackle their debt problems, and (b) making a profit while doing so? Why is this such a bad thing? Consider that companies making a profit can afford better staff, better training, and better equipment. Yes, of course there are bad actors out there that are only in the business to soak the consumer, but just because a company chooses the for-profit model does not automatically place them in that category.

What it really comes down to is this: Most government officials are totally clueless with respect to what it takes to run a successful business in a highly competitive industry. So they automatically assume that anyone who sets up a business to assist consumers while actually managing to make some money in the process must be bad by definition. But there is a major flaw in this logic, in that it completely overlooks the business practices of the credit card industry itself.

Credit card banks operate with impunity and have created a system that preys on the financially disadvantaged. Do we see regulatory scrutiny or enforcement actions against the major players in that industry? No. So I guess the real message is this: It’s ok for the credit card banks to make billions in profit on the misfortune and financial depredation of distressed consumers (think punitive late fees, overlimit fees, 32% interest rates, etc.), but it’s NOT ok for companies to make a profit while trying to help consumers deal with those very same creditors. What’s wrong with this picture?