Credit Counseling Organizations – Questions and Answers: Exemption Criteria for 501(c)(3) Organizations
How does the IRS decide whether a credit counseling organization qualifies for tax-exempt status under section 501(c)(3)?
When examining a credit counseling organization or reviewing a credit counseling organization’s application for tax exemption, the IRS looks at the facts and circumstances to see if the organization has a substantial purpose to help clients gain a better understanding of their financial problems and develop the necessary skills to address those problems. We look at whether the organization provides each debtor with options tailored to fit his or her specific needs and circumstances, for example, if an organization is simply enrolling individuals in debt management plans without considering the individual’s specific needs and circumstances, it is not meeting the requirements for exemption. In evaluating the organization’s purpose, we consider factors such as how the organization markets its services, interviews clients, develops recommendations, and trains its counselors. In addition, founders, officers, directors, or for-profit companies cannot personally benefit from the credit counseling organization's operations.
Internal Revenue Code section 501(q) imposes additional requirements for exemption under section 501(c)(3) or 501(c)(4).