Credit counseling organization loses exemption over commercial operations and private benefits

Plain-English summary

The IRS examined a nonprofit credit counseling organization whose main operation was a call center that enrolled and serviced consumers in debt management plans. The agency concluded that the organization did not primarily provide charitable education or financial counseling, and instead operated a commercial debt management business. The report also found substantial benefits for a major referring creditor, the founder's family, and the founder's software company. Those arrangements supported findings of private benefit and private inurement. The IRS revoked the organization's section 501(c)(3) status and stated that contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Did the credit counseling organization remain operated exclusively for charitable and educational purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170 and 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), (c), and (d); Rev. Ruls. 65-299, 69-441, and 70-186

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Taxpayer Identification Number:

Date: FEB 02 2012 | Person to Contact:

Number: 201614040
Release Date: 4/1/2016 Tax Period(s) Ended:
— June 30, :

UIL: 0501 .00-00
Certified Mail

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal
Revenue Code (the “Code"). We determine that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code effective July 1,

The revocation of your exempt status was made for the following reason(s):

You have not demonstrated that you are operated exclusively for exempt purposes within
the meaning of Internal Revenue Code section 501(c)(3) and Treasury Regulations
section 1.501(c)(3)-1(d). You did not engage primarily in activities that accomplish one or
more of the exempt purposes specified in section 501(c)(3). You are operated for a
substantial non-exempt purpose. You are operated for the benefit of private rather than
public interests and your activities resulted in substantial private benefit.

Contributions to your organization are not deductible under section 170 of the Code.

You are required to file Federal Income tax returns on Forms 1120 for the tax periods stated in the
heading of this letter and for all tax years thereafter. File your return with the appropriate Internal
Revenue Service Center per the instructions of the return. For further instructions, forms, and information

please visit www.irs.gov.

Processing of income tax returns and assessments of any taxes due will not be delayed should a petition
for declaratory judgment be filed under section 7428 of the Code.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues; 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for
filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write
to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication

892.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is

not a substitute for established IRS procedures, such as the formal appeals process, The Taxpayer
Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have
to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matter
that may not have been resolved through normal channels gets prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate

for more information.

If you have any questions, please contact the person whose name and telephone number are shown in
the heading of this letter.

Sincerely Yours,

Karen A. Skinder
Appeals Team Manager

Enclosure: Publication 892

ce:


Internal Revenue Service Department of the Treasury
Attn:

Taxpayer Identification Number:

Date:
Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

- Certified Mail - Return Receipt Requested

Dear Mr.

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt
status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office
consideration within 30 days from the date of this letter to protest our decision. Your protest should include a
statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations.
The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The
Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues,
explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information
on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue
a determination letter to you based on technical advice, no further administrative appeal is available to you
within the IRS regarding the issue that was the subject of the technical advice.

. Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F


If we do not hear from you within 30 days from the date of this letter, we will process your case based on the
recommendations shown in the report of examination. If you do not protest this proposed determination within
30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available
administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District
Court of the United States for the District of Columbia determines that the organization involved has exhausted
its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter.
We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the
Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot
reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a
United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been
resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and
ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to
contact you.

Thank you for your cooperation.

Sincerely,

Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F


_ Form 886-A EXPLANATION OF ITEMS Schedule or
. Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

[Note: In accordance with 26 C.F.R. § 301.6110-3(b), substitutions have been made in this
document with respect to certain information deleted pursuant to I.R.C. § 6110(c).]

FACTS:
(A) Background -— Incorporation of XXX & Founder, XXXXX — Exempt Status

XXXXX (XXX), formerly known as XXXXX (XXXX) was incorporated on XXXXX. We will use
XXX normally to refer to the TP, unless based on the circumstances using XXXX is more
appropriate. Regardless of the term, XXXX and XXX both refer to the taxpayer under audit.
XXXX filed Form 1023, Application for Recognition of Exemption, in late XXXX and received
their final determination letter on XXXXX. XXXX was originally organized to render financial
planning service(s) to the public. During the application process, they changed their purposes
to meet Section 501(c)(3) requirements. Their current purposes are generic exempt purposes
within the meaning of § 501(c)(3), providing little information to explain their specific
purposes.

its first Board of Directors consisted of XXXX, XXXX, XXXXX, and XXXXX. The initial officers
were XXXX and XXXXX. However, it is very clear from this examination that XXXX was and
continues to be the force behind and the life blood of XXX.

XXXXX (XXXX) XXXX has worked in the credit industry for over XX years, primarily dealing
with debt consolidation. In [year], he started out working on the phones for other people, then
managed a few offices, and then became his own boss, starting his own business. His last
venture, which started in [year], was XXXX Inc., dba XXXX. That entity stopped operating in
[year], so XXXX could devote his full attention to XXX. He stated that he had been making
referrals of approximately 50,000 people per year to exempt credit counseling organizations.
He questioned why he should be referring all these people to other organizations, so he
started XXXX (XXXX). XXXX was re-named XXXX in XXXX. XXXX stated that he has never
been involved in any type of credit repair business.

XXXX explained the difference in a for-profit vs. an exempt credit counseling organization by
saying that an exempt organization (EO) deals with people in worse financial situations. With
that being the case, the EO can work on getting concessions from the creditors, providing
more assistance to the clients than what a for-profit can. This is also because a for-profit has
to take the profits and pay the owners; they are not reinvested in providing services.

XXXX also indicated that from the time XXX was incorporated in XXXX, until XXXX, he
continued working for XXX. He said he didn't feel that if the people could pay their debts, they
should be allowed to get the concessions negotiated by XXX.

Page 1 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A . EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXK XXXXX

He developed software through a company called XXXX (XXX), which he owns 100%. XXX
holds all copyrights for the software. This software was being developed in [year], for use with
his for-profit companies. This software, in its latest version, runs the entire operations of XXX,
_ and XXX is its only current user. —

XXX also produced the XXX budgeting software. This is the personal financial management
software provided to the clients and is available from the website. They also claim that this
software is used in other educational activities.

XXXX has stated that his passion and main interest in continuing to work (his XX birthday
coincided with the start of the examination) was the financial education and financial literacy
aspects of the business; otherwise, he stated that he would have retired by now.

(B) XXX Board of Directors, Officers and Key Employees — Management Structure

The XX member board of directors is composed of insiders, relatives of the CEO,
compensated individuals, long time and trusted friends of the CEO, and 4 other people with
unknown relationships to XXX and the CEO.

The following dollar amounts were taken from XXX’s Form 990 to which we have added
familial relationships to the CEO, XXXX:

Ending June 30,...... XXXX = XXXX XXXX_ Relationship
. to CEO

XXXX XXX,XXX -XXK,XXX XXX, XXX —----- CEO--------

XXXX . XXX,XXX —_XXX,XXX —- XXX, XXX XXXX

XXXX XXX,XXX_ —_XXX,AXK —-XXX,XXX XXXX

XXXXX X, XXX X,XXX_—-XXX,XXX XXXX

XXXXKX XXX,XXX -XXK,XXKX —- XXX, XXX

XXXXX* XXX,XXX XXX, XXX X,XXX

XXXXX X, XXX X,XXX XX, XXX XXXX

XXXX X,XXX «X, XXX X,XXX  XXXX

XXXXX X, XXX X,XXX XX, XXX

XXXXX X,XXX XX, XXX XX, XXX

XXXXX XX,XXX XK, XXX X, XXX

XXXXX ‘ X,XXX X,XXX X, XXX

XXXXX X, XXX X, XXX X, XXX

*Cash Payments to XXXX or XXXX PC were $XXX,XXX, $XXX,XXX, and $XXX,XXX for Fiscal Years
XXXX, XXXX, and XXXX respectively.

. ; Page 2 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXXK

During the years ending June 30, XXXX and XXXX only 38% were compensated individuals.
In the next year, one of the board members who was also the CEO’s XXXX, was hired by
XXX, becoming a highly compensated person. Therefore in the last year of the audit 46%
received relatively’ large amounts of compensation from XXX.

In addition to the 46% getting compensated, out of the remaining 54% of people on the
board, one is XXXX’s relative, XXXXX, and one is XXXX's relative, XXXX.

Of the remaining 38% of members of the board, XXXXX has been the CEO’s friend for over
40 years. He was on the original Board of Directors. He is also a person that represented
XXX and received commission from at least one of XXX's Real Estate sales. In the building
prior to the current one, XXXXX received a commission of $XX,XXX for the sale of the building.
He was also paid as part of the development contract on the current building. This was a 4%
fee and included all costs except for the land. Since he only owned 50% of the development
company, XXXXXX, his portion of this fee would have been around $XXX,XXX. Therefore, due to
his financial interests and his longtime friendship with XXXX, we cannot conclude that he is
independent.

This leaves only 31% of board members that would appear to be “independent” of XXX and
XXXX; XKXXXKX, XXKKK, XXXKXKX, and XXKXKX.

XXXXXX has published numerous books on Banking, Bank Management, Producing and
Selling Financial Products, Financial Services, and Banking Across State Lines. His area of
emphasis would be helpful to allow XXX to provide better financial services or in a more
efficient manner. Additionally, XXXXX has received some compensation from XXX, directly or
indirectly, in excess of his director's fees.

XXXXX is a retired professor, specializing in Adult Education and has been a board member
since [year]. XXXXX provided a letter to XXX, then known as XXXX, on XXXXX, XX
letterhead dated XXXXX. This document was one of many used by the IRS to determine that
XXX would be conducting educational activities.

XXXXX has been a board member since XXXX. He is a retired president of XXXXX. XXXX
has been a board member since XXXX. XXX documents list him as a principal at XXXXX.

Minutes

XXX provided board minutes for the years XXXX to XXXX for review. Items discussed during
the board meetings included the following: the ongoing growth of the company, creditor

' Anywhere from 5 to 20 times the average salary paid by XXX of $XXXXX for [year] and [year].
Page 3 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXKXXK XXXXX

relations, fees, use of investments, D & O insurance coverage, the board’s concern on
rebuttable presumption and salaries to the chief executive officer, improving the company’s
ability to recognize fees, and the improvement of delivering DMPs. The minutes were void of
how XXX can provide direct education.

(C) Group Affiliations

BBB

XXX is a member of the Better Business Bureau (BBB). The BBB’s overall mission is to
promote the highest level of ethical conduct between businesses and the public through
voluntary self-regulation, business and consumer education, and service excellence. Any
organization can pay to be a member and can continue to be a member if they meet BBB
minimum requirements. _

These minimum requirements include 12 months of satisfactory operation, supplying required
corporate information, having required licenses, appropriately responding to complaints and
having a satisfactory complaint record, abiding by BBB decisions in arbitration, adherence to
various BBB standards, etc. The BBB.does not monitor or require that XXX, or any other
organization, be educational.

XXX

XXX is a member of XXXXX. The XXX “provides the information and opportunities necessary
to help XXXXX organizations succeed - both financially and operationally. They provide a
cooperative atmosphere for organizations in XXXXX to excel in total quality management
principles and organizational excellence. XXX addresses the very issues of efficiency,
productivity, and effectiveness through: XXXXX State Quality Awards Program, Informational
workshops, Networking opportunities, An educational library, Conferences, Seminars and
Workshops, Dynamic Website and Quarterly Newsletter, and Other topical programs and
activities.”

The XXX does not monitor or require that XXX, or any other organization, be educational. They
are concerned with quality, efficiency, productivity, and effectiveness only.

ISO

XXX is an ISO 9001 certified organization.

? From the XXX website, [date].
Page 4 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended
XXXXX

From the ISO website, “ISO (International Organization for Standardization’) is the world's
largest developer of standards... ISO standards contribute to making the development,
manufacturing and supply of products and services more efficient, safer and cleaner’

“ISO 9001:2000 specifies requirements for a quality management system where an
organization

1. needs to demonstrate its ability to consistently provide product that meets customer
and applicable regulatory requirements, and

2. aims to enhance customer satisfaction through the effective application of the
system, including processes for continual improvement of the system and the
assurance of conformity to customer and applicable regulatory requirements.“

The ISO certification results in a system that consistently handles the provision of services to a
customer base, in a manner that meets applicable regulatory requirements. A key concept is
customer service and constantly improving customer satisfaction. The ISO standards are
generic, such that the actual service or product is irrelevant in becoming or remaining ISO
certified.

To maintain their ISO accreditation, XXX has created and maintains policies and procedures in
a manual, or manuals, similar to that used by the IRS. The set of documents designed in a
pyramid fashion with different levels of procedures that have been set up. The First level is the
XXXX Manual; this is “what they do”. This is about 20 pages long. The XXXX Manual is the
instructions to management on what they should each do. This is much longer. The XXXX__
Instructions or XXXX are the “who, what, where, when & how’, used by employees to do their
work. This set of documents is very similar to the IRS's IRM. The last item in the pyramid is
forms and records that support the XXXX Instructions, they are prefixed with XX or XXXX.
Each of these levels has a numbering system, for example XXXX or XXXX°. We will be
providing many cites of this manual throughout this report.

XXXXX, the then current® ISO manager, also provided an additional explanation of why ISO
was necessary, providing 3 reasons. 1 - XXX was growing at an incredible pace and XXXX
wanted a system in place to control the quality during the expansion. 2 - The manuals,
instructions and procedures were random, hard to find, and generally consisted of emails; a
very bad system. A new system was needed to maintain control of the organization and its

3 ISO is the English Translated abbreviation. The abbreviation is not IOS.

* From ISO website, 10-10-05.
* The XXXX has only one XXXX.

° He retired in the middle of our audit.
Page 5 of 118

‘Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXKXK

operations. 3 ~- Some creditors required that they meet ISO 9001 requirements in order to do
business with them.

Note: XXXX, XXX's largest source of clients, requires that credit card companies have
rather specific accreditation. XXXX requires credit counseling agencies to be certified by
one of a few select accrediting agencies, ISO 9000 is one of those agencies.

So in order to avoid inconsistencies in quality service, XXX needed a way to communicate
policies and changes throughout the company. With ISO, XXX has a set of documents, the
manuals discussed above, approved by management, that are distributed throughout the
company. The most current revisions are always available on the computer system that users
have access to.

To further ensure compliance with |SO, they have an ISO department’ that performs regular
ISO audits. XXXXXX, explained an |SO audit as a standards based audit, which should lead to
a quality product and an efficient organization.

XXXX

XXX is a member of the XXXXX, which represents the newer commercial-type credit
counseling organizations.

“XXXXX is the credit counseling and debt management industry’s largest trade
association with nearly 150 members nationwide. It is an industry education and
advocacy organization whose mission is to promote and ensure the continued operation
and viability of credit counseling and debt management organizations. XXXXX provides
its members and the consumer public with information about the credit and debt
counseling industry. XXXX members are debt management organizations, consumer

_ counselors, personal finance educators, credit and debt information publishers, debt
pooling organizations, debt negotiators, debt adjusters, credit counselors, consumer

lawyers and many others.

XXXX provides timely and important information to members through our newsletter and
other publications that tell about the latest developments in sales & marketing, training,
economic trends, technology, accounting, legislation, and the topics that impact your
organization and its daily operations.

The information that you receive from XXXX is the most up to date information available

’ The chart below states this department has only one or two employees, depending on the year. However, other individuals

seem to have helped with the ISO audits during the years covered by of the audit.
Page 6 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


° TAR ] Schedule or
Form 886-A _ - EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer | Year Ended
XXXXX XXXXX

to help boost your bottom line. Our newsletter gives you important and timely
information on what's happening with creditors, the IRS treatment of non-profits, FTC,
‘small business regulation, credit reporting, the states, consumer credit protection laws
and debt collection practices.

"XXXXXX", the XXXX newsletter, gives you information about the most important
marketing and advertising techniques, growing your organization, customer benefits,
changes and advancements in technology, and strategic analyses of the issues that are
most important to your bottom line.”

XXXX does not monitor, audit, or otherwise ensure that their members conduct educational
activities.

XXKXXXK

XXX is a member of XXXXX. XXXXX is a national membership organization, established to
promote quality and consistent delivery of credit counseling services.

The following information was taken from their website:
Vision

The XXXXX represents the common interests of member agencies to ensure that all who
seek help with their debt problems receive the highest quality of assistance.

Mission
The XXXXX is a member-supported national association representing non-profit credit

counseling companies that provide consumer credit counseling, debt management, ‘and
financial education services.

THE XXXXX PROVIDES HIGH-VALUE SERVICES DESIGNED TO ESTABLISH
EQUILIBRIUM BETWEEN CONSUMERS, CREDITORS, AND MEMBER AGENCIES FOR
THE SUCCESSFUL REHABILITATION OF DEBT-CHALLENGED FAMILIES AND
INDIVIDUALS.

The XXXXX meets this mission by:

• Setting industry standards and providing consumer protection guidelines for its
members. It also provides compliance oversight and concentrates its efforts in the
best interests of its members and the consumers they serve. .

8 From the XXXX website, [date]. ‘
Page 7 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer oe Year Ended

XXXXX

• Representing its members before state and federal legislative bodies, supporting
consumer issues and industry initiatives with the media, championing consumer
financial education, and campaigning for equity and fair interaction between the

nation's creditors and the credit counseling industry.

• Providing informed leadership, advocacy, and value-added services to its members
by collecting data on member needs, measuring member satisfaction, and
continuously striving to improve association effectiveness.

XXXXX does not monitor, audit, or otherwise ensure that their members conduct educational
activities.

Both XXXX and XXXXX represent the newer, commercial type credit counseling agencies.
XXXX
XXX is NOT a member of the XXXX, a trade association that prescribed standards for its

member organizations. _

(D) Overview of operations

High Level Overview:

The following was taken from XXX's XXXX Manual. This was from revision X, dated XXXXX,

XXX Purpose of Organization

“XXXX provides debt management, budgeting and education services for individuals who
request the service or are referred by creditor institutions and others.”

XXXX Manual

“XXXX iis a process-based organization in which Customer Service Representatives (CSRs)
interface with clients and creditors resulting in a negotiated method of fulfilling the client's debt
obligations using single payment methodology. The client initiates contact with XXXX, either
voluntarily or by referral. The CSR in New Accounts gathers information, proposes an
appropriate solution to the client and establishes a pending account.

Page 8 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or.
Form 886-A | EXPLANATION OF ITEMS __ | Exhibit No.
Name of Taxpayer Year Ended
XXXXXK

When the client returns the signed debt management agreement package, the account is
activated / loaded and the system sends proposals to each of the client's creditors to obtain f
negotiate creditor approval.

The account is then transferred to Client Accounts where it is managed for the first 30-90 days.
Client Accounts uses negotiation skills to assist the client and the creditor to re-establish a
working relationship.

Client payments are accepted through the Payment Processing Department and placed in
trust. The payments are then disbursed to creditors either by check or electronic transmittal as
described and agreed to.

Once the account is stabilized, it is transferred to open accounts. In open accounts, a CSR
maintains contact as above with the client in order to facilitate /encourage the payment and
debt reduction process throughout the payment period. For the duration of the agreement, the
CSR continues regular contact with the client — assisting the client as needed.

Quality assurance randomly selects and monitors / measures CSR contact performance on an
on-going basis. Support and Payment Processing may intervene as required to perform other
services. Technology enhancements are used in telephone, computer and monitoring

equipment to continuously improve service efficiency.

Additionally, XXXX maintains an expanding relationship with the surrounding community in an
effort to provide credit management education at the community college through university
level.”

XXXX:

“XXXX, Inc. (XXXX) is committed to maintaining a highly trained professional staff that assists
consumers to achieve self-reliance, financial stability and financial independence.

XXXX is dedicated to enabling consumers to achieve these goals by providing education in
core values of budgeting, short and long term financial planning, and the proper use and
management of consumer credit.”

All of the above information, quoted from their XXXX, provides a very high level overview of
what XXX does. We will next go into more detail to describe exactly how XXX accomplishes

the above day-to-day activities.

Since their manual clearly states the importance of their “single payment methodology”, we will

take this opportunity to describe a debt management plan (DMP). A DMP is a tool used to
Page 9 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


| Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXKXK

restructure unsecured debt. Restructuring debt through a DMP allows a consumer to
consolidate unsecured debt; ostensibly lower his/her interest rates and monthly payments, .
obtain re-aging of his/her debts, and/or curtail collections calls, penalties and over-limit fees.
Typically under a DMP a consumer signed a contract agreeing to make monthly payments to
XXX, which then makes arrangements with the consumer's end-creditors and distributes
payments to them. XXX charges consumers an initial fee in addition to monthly processing
fees. In addition, XXX receives fairshare payments from many of the creditors receiving
payments from XXX through this process.

Detailed Description of XXX Operations

The XXX organization and its operations are categorized into departments, subcategorized by
exempt (salary) and non-exempt (hourly) employees. The total number of exempt employees
is XX and non-exempt, XXX, for a total of XXX employed by XXX during the first fiscal year of
this exam. Of these XXX employees, XX were in XXXXX, the remaining were in XXXXX.
Currently, XXX only operates in XXXXX.

Percentage breakdown, All years: to determine how XXX structured its personnel each
department is analyzed by its percentage of labor for each department:

# of # of # of Average
Dept employees % employees % employees percentage
6/30/XXXX , 6/30/XXXX 6/30/XXXX

New XXX 15.74 XXX 12.90 XXX 21.51 16.72
Open XXX 41.31 XXX 46.33 XXX 45.81 44.48
Training XXX 8.52 XXX 4.69 XXX 4.09 5.77
Executive . XXX 0.98 XXX 1.47 XXX 1.51 1.32
Support Services XXX 10.49 XXX 9.09 XXX 5.38 ‘ 8.32
File/Mail XXX 4.59 XXX 2.93 XXX 1.72 3.08
Accounting XXX 6.89 XXX 7.62 XXX §.38 6.63
Quality

Assurance XXX 1.64 XXX 2.35 XXX . 2.58 2.19
Com/sec XXX 0.66 XXX 1.76 XXX 1.51 1.31
Facilities XXX 0.66 XXX 0.59 XXX 0.43 0.56
ISO XXX 0.33 XXX 0.59 XXX 0.43 0.45
Operations ; XXX 0.98 XXX 2.05 XXX 3.23 2.09
HR XXX 1.31 XXX 1.17 XXX 1.08 1.19
Operators (tel) XXX 0.98 XXX 0.88 © XXX 0.43 0.76
Information Tech XXX 459 | XXX 5.28 XXX 4,73 4.87
Legal XXX 0.33 XXX 0.29 XXX 0.22 0.28

Page 10 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX
Totals 6x 100 7x 100 9x 100 100

Over the years of the audit, approximately 61% of the employees work in the phone center.
Another 6% train those employees. The Support Services area provides support for the DMP
only, the work of the File / Mail room handles call center correspondence almost exclusively;
QA monitors only the call center personnel. This demonstrates that approximately 80% of the
workforce is responsible for the activities of the call center operations. The remaining 20%
handle the administration and support functions for the company. Of the 61% of the employees
that deal directly with clients, none are required to have education or work experience with
providing financial counseling to people in dire financial situations. For the most part, XXX is a
fully contained credit counseling agency that does not contract out for front or back office

. service providers.

Obtaining Clients

To properly discuss how XXX operates, we need to start with its clients. A person’s
involvement with XXX generally starts with a phone call from the client, but how do they get the
phone calls? XXX obtains callers and clients from a variety of sources. These include their
contract with XXXX, referrals from other creditors, word of mouth, their website, other referrals,
and a negligible amount from advertising.

XXX has responded that XXXX referred XXXXX clients in FY XXXX, activating XXXX. They
also indicated that they counseled approximately XXXX other clients, activating another XXXX.
These other clients were explained as being sought out by the client, or referred from an
existing client, employee, friend or read their name in the newspaper’. Since we know they
receive some referrals from other creditors, this amount must either be mixed in with the XXXX
amounts, which is doubtful, or it is included in the other category.

The same information was provided by XXX for FY XXXX and XXXX, as follows:

Activated only XXXX XXXX XXXX
XXXX ; XXXXX XXXXX XXXXXK
Other creditors Unknown Unknown Unknown
Other XXXX XXXX XXXX
Total XXXXX XXXXX XXXXX

° XXX is quoted in the paper occasionally, making various statements about credit card debt. This is unrelated to their DMP,

and specifically is not a solicitation for potential DMP clients.
Page 11 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer . Year Ended
XXXXXK XXXXX

For the years of the audit, 89.54% of their activations came in as XXXX referrals. XXX was not
able to provide the total number of callers from the various other sources.

XXX has stated that their contract with XXXX a method they used to reach their intended
audience in an effective and efficient manner.

Advertising

Prior to their association with XXXX, XXX obtained most of their XXXX plus clients per year
through advertising. However, this pre-dates this audit and additional information on this was
not determined to be relevant.

In late XXXX, also outside of the audit period, XXX aired a single television commercial, but
the response, in terms of obtaining clients, was not favorable, and the commercial was
dropped after 4 weeks. Overall, they received.an insignificant number of clients because of this
TV commercial and advertising in general.

Once calls are received - How are they handled?

Now that we have determined where XXX obtains clients, we will now discuss what happens
when the clients reach XXX. XXX has a flowchart of how clients are processed through the
organization, which is XXXX, attached as Item 1.

New accounts’?

When individuals first contact XXX, they are routed to the new accounts area first. The calls
are somewhat different, depending on whether or not the calls come in from XXXX or not.

If the client comes in from XXXX, often times the clients budget will have already been input
into the XXX system by XXXX personnel. By filling out the software, XXXX makes an initial _
determination that the person may be qualified for a DMP. The XXX CSR will quickly go over
the budget with the client to make sure all items are covered. The CSR will also re-code or
otherwise re-work the creditors to make sure the monthly payments to each creditor are
correct.

If the client is not referred from XXXX, or otherwise has not provided financial information"’,
the CSR is required to take a budget from the caller. The CSR asks for all items of income and
expenses; and obtains information on the caller's unsecured debt.

10 All references to XXXX in the New accounts area reference items written within the New Accounts box on the flowchart.
Page 12 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A : EXPLANATION OF ITEMS ‘Schedule or

Exhibit No.

Name of Taxpayer Year Ended
XXXXX

The amount of secured debt is not obtained; however, the payments for such debt are
requested as part of expenses. Callers are not asked about assets at all. They do not talk
about the caller's employment or education. The CSR only requests to determine their monthly
income. If a caller volunteers additional information, the CSR will add or delete potential salary
changes. They do not discuss buying habits in a meaningful way. The CSR will probe to ask
line items related to the budget and will ask “is there anything else”. They do not discuss
significant past or anticipated changes in earnings, assets, expenses, or liabilities, or the
reasons for those changes. Questions are specifically related to line items to the budget. They
do not discuss health, habits and addictions, or other life issues that may affect their financial
situation. They may ask about tobacco or alcohol use for inclusion into the budget or if they
have prescriptions they pay on a monthly basis, but again only to get the information into the
budget. The CSR, after reviewing the budget, will set a nominal amount for savings, not an
amount that should be saved based on the caller’s potential needs for the future.

Instructions XXXX, dated XXXXXX, is attached as Item 2. This XXX provides the procedures
CSRs use to qualify a client for a DMP. On page X, it states that “living expenses should not
be inflated unnecessarily in order to qualify a client for a DMP.” Nevertheless, on page X, it
requires the CSR to look at income and expenses to see if any adjustments can be made to
qualify the client for a DMP, if it is a borderline case. So after the budget is provided by the
caller, the CSR may adjust amounts in order to qualify the caller for a DMP.

The XXX system then determines if the client is a XXXXX client. This is notated as “pre-qualify
client for program” on XXXX.

XXX's XXXX system was created to efficiently separate those debtors that will be accepted on
a DMP with those that will not. The creditors do not want a credit counseling organization to
send proposals on every single person; creditors have made their criteria known as to whether
or not a DMP proposal will be accepted. Therefore this provides efficiency for XXX, if they
recommend more clients than what will be accepted, they will lose money in the form of
additional costs. In the same respect, if they could have recommended DMPs to more clients
that would have been accepted by the creditors, they will also lose money in the form of lost
revenues. Therefore, XXX created the XXXX system to efficiently refine the clients that XXX
will propose a DMP, which will likely lead to acceptance by all creditors. '

XXXX signifies that the person cannot pay off their debts with the current levels or combination
of income, expenses, and debt. These callers’ budgets are not probed to determine if some

'"' Clients have the ability to pre-qualify for a DMP on the internet, by entering their financial information via the XXX
website. XXX was not able to provide quantitative data on the number of clients who started the process in this manner.

"2 XXX, of course, has procedures for when proposals are not originally accepted.
Page 13 of 118

Department of the Treasury - Internal Revenue Service ' Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.
Name of Taxpayer Year Ended
XXXXX

expenses might be lowered. The callers spending habits are not thoroughly discussed to
determine patterns of spending, or excessive spending. They are not given advice of a
substantial nature that would allow the person to help themselves get out of the situation they
are in that initiated the phone call.

XXXX signifies that the credit card companies will not offer concessions to the person because
they should be able to re-pay their debts with the current levels or combination of income,
expenses, and debt without concessions being offered. As creditors will not provide
concessions, they will also not provide fairshare payments. This means it is not cost effective
for XXX to put the caller on a payment plan.

Instructions XXXX, dated XXXXXX, provides guidance to CSRs, for when the clients are
turned down for a DMP. The CSRs are to advise the XXXX clients to contact creditors to set
up payments through an internal hardship program or to contact legal counsel to explore their
options. If the caller doesn't have enough debt, they are advised of the DMP fees and that they

‘do not have enough debt to qualify. The XXXX does not require the CSR to provide any
advice. If the caller is a XXXX client, they are to be “advised to readjust their household
budget, contact the creditors for solutions, and to make consistent monthly payments to their.
creditors.”

Once the caller is determined to be a turn down, the CSR provides almost no guidance to the
callers. Even though the caller is in a situation that they felt the need to contact XXX, or they
were transferred by XXXX for debt problems, XXX does not offer assistance to these people.
As we will show later, the CSRs do not have the capabilities to provide counseling and they
are not instructed to provide counseling to the callers.

The XXXX callers are those, based solely.on the information provided by the clients, should be
able to pay off their debts, but will need concessions from the creditors to be able to do this.
Instructions XXXX also states they must have at least 3 creditors, $XXXX of debt, and at least
$XXX as a monthly payment, otherwise, the fee to debt ratio will penalize the debtor. Once a
XXXXX caller is identified, XXXX shows the CSR is to proceed to the next step, notated as
“Explain services available”. .

However, if a caller is classified as a XXXX client, the only “service” or “solution” they are
offered is a DMP. If the caller does not want to get onto a DMP, the CSR generally tries to
persuade them that it is their best option. Different CSRs use different methods to do this and
will apply varying levels of pressure to persuade the caller to agree to a DMP. Minimally, the
CSR will ask to send them a package to get them started, which they state is not an .
agreement, but a proposal that they can review and either accept or not. If they agree to
consider this, the CSR moves to the next step, notated “spool agreement” on XXXX. Once the

Page 14 of 118

Department of the Treasury - Internal Revenue Service . Form 886-A


' Schedule or
Form 886-A . EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer - - Year Ended

client agreement is sent to the callers for review, they are generally given 7-10 days to review
the information. oe,

The new accounts CSR is then required to call the client to encourage them to sign up for a
DMP. Instruction XXXX, dated XXXXXX, describes the courtesy calling procedures that must
be done within the 7-10 day time period. This XXXX places a high priority on timely calling the
potential clients back. It also indicates that the CSR should always be aware of callers waiting
to talk to the new accounts area, which is indicated by signs hanging in the call center where
every CSR can see them.

When call volume is high, they are to stop making these courtesy calls and return to
“Available” status, which allows the phone system to transfer incoming calls to the CSR. The
XXXX informs the CSR, “This is an area of measurement that will be closely followed by
management, and will appear on your monthly feedback report to determine how you are
doing”, again stressing the importance of courtesy calls, while being available as needed
based on call volume. This XXXX is providing instructions to the CSRs that will result in the
most productive use of time, to meet the fluctuating volume of callers, and to overall create
efficiencies in the new accounts area.

Manual XXXX covers “Follow-up w/client for agreement receipt (activation calling)”. These
calls to and from the client relate strictly to the DMP, and whether or not the client will sign up
for the program. These calls will cover the benefits of the program and the requirements of the
clients while they are in the program. If the client does not wish to sign up for a DMP, their
relationship with XXX abruptly ends.

In addition to the XXX manual sections cited above, the new accounts area has many more
XXXXs that are important in doing their job. The following are some of those XXXXs, which
XXX considered important enough to provide to the new hires during their initial training:

Instruction XXXX covers establishing agreements start dates and EFT draw dates.

Instruction XXXX covers procedures on how CSRs are to retrieve voicemail messages by
prospective clients requesting applications.

Instruction XXXX gives procedures in obtaining missing Debt Management Agreement (DMA),
missing payment, or missing XXXX"* information on new accounts.

Instruction XXXX describes the credit report ordering process.

Instruction XXXX describes the procedure for faxing computer generated DMA packets
(XXXXXXX) to clients.

Instruction XXXX describes procedures for changing fees if a client moves.

'3 This XXXX refers to a schedule clients fill out and return with the DMP agreement and shows creditor information.
Page 15 of 118

Department of the Treasury - internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXKX

Instruction XXXX describes how funds are held and released by XXX near the start date of a
DMP.

Instruction XXXX tells CSRs what to tell clients about interest rates they will have on a DMP.
Instruction XXXX requires CSRs to determine the type of debt and describes the procedure to
add loans and lines of credit to a DMP.

Instruction XXXX describes the procedure to handle mailed in DMP applications.

Instruction XXXX describes how to handle XXXX fixed payment requests.

Instruction XXXX describes how to fix payments for medical bills.

Instruction XXXX explains who should be listed on the DMA and how 3” party agencies can
represent and or speak on behalf of clients.

These were all reviewed in their entirety; there are no items mentioning providing financial
education to the clients in any of these Instruction XXXXs._.

Instruction XXXX Review of XXXX documentation standards, dated XXXXXX, was also
provided during the initial training. Documentation standards explain how the CSRs will notate
the accounts for all situations. It shows the documentation standards are divided into broad
categories:

Identifying the issue(s)

Call Outcome

Client Goals & Objectives

Client Education

Budget Items

Credit Report

If ever on a debt management program before...

If client left a credit card off the DMP

Start Date/Changes

Payment Amounts/Changes

Alternative Phone Numbers

Of these areas of documentation, client goals and client education categories are to be the
most important, from an educational standpoint. However, the XXX sections do not address
education in a substantive manner (it states that account documentation should clearly indicate
the financial goals of the client and account documentation should clearly indicate any areas
that CSR feels client may need additional education on).

instruction XXXX, additionally states “if needed notes should indicate that education was given

to clients as well”. \t then gives examples that are unrelated to providing financial education.

Just below this, the standard for client education indicates the CSR should make a note if the
Page 16 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer | Year Ended
XXXXX

client needs education in any areas. The example then provided states, “Client not
understanding why she needs to include all her debt on program; needs more education on
possible implications...". Again, as XXX uses the term “education” in the XXXX, it essentially
means the CSRs are to explain the DMP to the client.

This same XXXX provides an example of account documentation. Page X of this XXXX is
attached as Item 3. This client happens to be a XXXXX client (too much money). It shows they
“educated” the client to keep a journal to help track expenses and that the XXX budgeting
software was offered but declined. It then notes the person was advised to meet with a
certified financial advisor to help adjust their budget to meet their goals. This is a specific case,
where XXX is advising its employees to advise the caller to go to somewhere else for financial
counseling.

Instruction XXXX, XXX Website Application Process describes how New Accounts CSRs are
to handle client applications for a DMP via the internet:

• During the application process, the XXXX states that if a client is not interested in
completing the application at all, the CSR will status the account “Client not
interested” and document the account accordingly.

• A flowchart to show how the application works is enclosed in the XXX. At no point in the
XXXX is the CSR required to provide the client with counseling. See flowchart attached
as Item 4.

Additional XXXXs were reviewed that provide procedures for situations the new accounts
CSRs must deal with. However, we do not know if these were provided to the new hires during
training. For example:

In instruction XXXX*4, documents XX - New Accounts — Payment Returns (requested by
clients changing their mind about the DMP), XX — Removal of Creditors, XX — Removing
Duplicate Accounts, XX — New Accounts — Resend EFT only, XX — Spooling Agreements in

' Error, XX — Transferring Calls, XX — Unassigned Accounts / Reassigns, and XX — New

Accounts Call Verification Requirements were reviewed in their entirety. There are no items
mentioning providing financial education to the clients in any of these XXXs..

In Instruction XXXX, documents XX - Account Closures: Client Request / Default / PIF / XXX
Closure / Letters, XX — Account payoff instructions, XX — Adding a Creditor, XX — Anniversary
Date Changes (End Dates), XX — XXXX Macros, XX — Missing Payment Research Procedure,
XX — Client Reassignment — Client Request, XX — Correspondence Processing, XX — Creditor
Address Changes / Creations, XX — Delinquent Account Courtesy Contact / Retention, XX —

'4 This list of Instruction XXXXs contains Instruction XXXX, Instruction XXXX, Instruction XXXX, etc.
Page 17 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
| Form 886-A . EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

Documentation Standards, XX — Fair Share Procedure, XX — Loan Letter Processing, XX —
Customer LAST name changes, XX — Removing a creditor (Open Accounts), XX — Account
Reopens, XX — Splitting Accounts, XX — EFT, XX — Frequently Asked Questions of Payment

Processing, XX — Large Item Processing and XX — New Accounts Setup were also reviewed in
their entirety. There are no items mentioning providing financial education to the clients in any
of these XXXXs.

Instruction XXXX — XXXX Macro’s Definition Sheet is 9 pages of macros. This is attached as
Item 5. As XXX is very concerned with efficiency, they have created macros that employees
use to notate the accounts of clients. Of the 98 macros, only one mentions “education” of a
client. However, as we have documented numerous times, whenever XXX uses the term
“education”, they are generally referring to educating the client on some aspect of the DMP.
The remainder of the macros deal with some aspect of the DMP.

In Instruction XXXX, documents XX — Bank-to-Bank Transfers and XX — XXXX Payments were
also reviewed in their entirety. There are no items mentioning providing financial education to
the clients in any of these XXXXS.

Part of the evaluation of New Accounts CSRs is evidenced by Instruction XXXX - its purpose is
to provide feedback to the CSRs on their performance and progress towards stated standards
and goals. The related forms used are:

‘-e New Accounts Months End Performance Review-XXXXX -
~ @ NA Phone Productivity and Staff Time Reports- XXXKK
ie NA- CSR Feedback Worksheet-XXXXX.

CSRs are rated on their individual performance on the following areas:

• Phone time-Is broken down into categories of call handling, adherence, service level,
quality, portfolio (number of clients, paid, percentage paid, dollars collected, number of
accounts, EFT setup and EFT percentage). Employee incentive pay is based on their
performance in each area.

‘e Phone Time- the measurement of the percentage of the CSR’s workday spent ready in
“Ready” or “Talk” time out of their total schedule work time for the day. The purpose of
reliable quality service requires our staff to be at work, available. and accessible to assist

~ our clients. The standard is 85% of the net total phone hours.'°
‘ e Conversion Ratio- is a measure of the total number of agreements an individual CSR
has activate out of the total number of agreements generated by the same CSR.

'S Instruction XXXX, Page X of X.
Page 18 of 118

‘Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A . EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer -| Year Ended

• Quality- ‘is a measurement of the customer contact experience scored against

established criteria. Calls are monitored using the XXX call monitoring software. Five
_ Calls are randomly captured by the system, reviewed and scored by a QA analyst to

insure that the developed call quality standards have been upheld as well as to identify
training needs. Each call receives a score and then the calls for the month are averaged
for the individual counselor’s monthly score. The monthly scores are averaged into a 3-

_ month rolling average for the individual and the team average’®

_ © The review then considers the manager’s comments factors. That is to provide timely
feedback on progress, educational opportunities, and devise plan to achieve
improvement in areas where opportunities are found to exist. (The XXXX does not
mention financial counseling).

• Other areas of concern in the New Accounts Department are: account management,
communication (skills with clients, one another and management); Job knowledge
(Each CSR's knowledge of on the job skills and suggestions for process improvements
are considered in this category. QA and team meeting involvement can be addressed
with the CSR to improve topic knowledge and idea development.)"’. Leadership &
Interpersonal Effectiveness, Dependability, Adaptability, and Attendance.

In summary, the new accounts area is responsible for pre-qualifying callers for a DMP. Once
classified in XXXX, XXX has very little contact with the callers, and furthermore, any future
contact would only be initiated by the caller, or at the caller's request, a very abrupt ending to
their “relationship”, as confirmed by Instruction XXXX.

If the caller is classified as XXXX, the DMP is explained and offered to the caller. They will try
to sell’? the DMP to the caller. If the caller wishes to start a DMP with XXX, they sign the
contract and send this in to XXX with the first payment. The new accounts department then
completes the next step in the flowchart, “Hand-off to Acct. Loading & XXX”, as notated on
XXXX. Also, proposals are sent out per the “Proposals” block on the flowchart. This is the end
of the new account area’s involvement with the callers.

Once accounts leave the new accounts area, they are transferred to the open accounts area,

where they are handled by XXX CSRs for the first 30-90 days of the DMP. This time varies by
how much time it takes for all the proposals to be accepted by the creditors.

XXXXX (XXX)

From Instruction XXXX, Purpose and Use,...

'® Instruction XXXX pages X and X of X pages.
"7 Instruction XXXX Page X of X.

'8 The person listed as taking the initial interview is listed as a sales person on the software system.
Page 19 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended

XXXXXK

“The XXXX (XXX) Team was formed to assist our clients through those first several months
while getting them accepted and set up on the Debt Management Program and making sure it
is operating smoothly before forwarding the clients account to the Open Accounts
Department”.

By creating the XXX area'®, XXX is creating a group of people that will specialize in helping
clients start the DMP process and ensure proposals are accepted. This specialization allows
XXX to efficiently begin this process.

From Instruction XXXX, Purpose and Use.,...

“Communication is a key component in order to achieve our goals. We have what we call that
“45 Critical Client Contact” phone call in which we go over our goal of having them debt free
and educated in their finances so they won't.find themselves in this predicament again.”

Several examples are given about what the CSR should discuss with the clients, including the
benefits of the DMP again and providing encouragement to the client to stay on the DMP.
None of the examples specifically mention, or hint at, the provision of financial education.

From XXXX, XXX initial client call, checklist, attached as Item 6.

Tne XXX CSR goes through introductions, explains XXX’s mission, and explains that they will
soon be assigned a CSR in open accounts. They explain how to contact XXX and what
happens when they call (they have an automated call routing system for efficiency). The XXX
checklist then has a large section entitled “Educate and Advise”. For the most part, the CSR is
to educate and advise on the DMP. However, they are also to “explain the educational
information available on the website and the XXX Budget software CD (to be distributed
soon”’), More specifically, they inform them of the website’s and software's existence. The
CSR is then to cover EFT and payment requirements and then do an account review and
follow some additional procedures. There are no items mentioning providing financial
education to the clients.

XXXX, dated XXXXXX, provides specific guidance to XXX reps in performing their XXX duties.
It contains two sections. First is the initial account review, to be done in the first 30-60 days.
This is also referred to as a XXX Review or Initial XXX review. In this review, the XXX rep
checks for duplicate accounts, account numbers, a trust balance, complete client information,
account balances, payment history, creditors and XXX getting paid correctly, proposal

'? These people are part of the open accounts teams, but they specialize in XXX work.

° The revision date of this XXX is XXXXXX. The prior version has the same comment and is dated XXXXXX.
Page 20 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


} IAT. ) Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
-Name of Taxpayer Year Ended

information, and they are to follow-up on any issues found. A thorough review of the initial
account review showed that there are no items concerning providing financial education to the
clients.

The second item on the XXX is account maintenance, to be done every 60 days following the
initial review. In this review the CSR is to check for low balances, for full payments received,
and the account notes. Again a thorough review of the account maintenance procedures
showed that there is no mention of providing financial education to the clients.

Management evaluations of XXX CSRs performance

XXXX, dated XXXXXX, which is after the audit period, is the review sheet filled out by the
supervisor, which is then signed by the CSR when evaluating a XXX CSR's performance. This
covers the procedures above that must be performed by the XXX CSR. While there are
basically 9 items that are covered, including the XXX initial client call checklist above, there are
no items mentioning providing financial education to the clients. While the above XXXX did not
exist during the audit years, the checklist did, which are the procedures this XXXX is
evaluating the CSRs against.

Items that were in existence during the period of the audit, include XXXX and XXXXX, both
dated XXXXXX. They are check sheets used by either management or the CSRs to make sure
all of the items covered in XXXX are completed properly. Again, these check sheets do not
mention providing financial education to the clients.

XXXX, Competency Validation - XXX Review, dated XXXXXX, while dated one month outside
of the audit year, reemphasizes the XXX checklist above. There is no part of this review that
discusses the provision of financial education or improving the financial literacy of the client.

XXX operations, in general, are a very important part of the DMP process and XXX makes
absolutely sure a XXX review is conducted on each account / client. This is ALWAYS notated
in the account notes on their account management system. Again, this creates efficiencies for
the XXX operation. By making sure the XXX reviews are notated, they make sure the DMP
starts smoothly. This entire area is meant to provide efficiencies in the processing of DMPs.

After the XXX CSR has completed working the account and the account is ready to transition
to open accounts, the XXX CSR sends a list of the accounts to be transitioned to the
Department Coordinator (DC). The DC assigns the account directly to an Open Accounts CSR
(Open CSR). The DC informs both the CAM and Open CSRs of the new assignment.

Open Accounts

Page 21 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX

The open account area is generally where an account/client will remain after going through the
XXX process until they finish the DMP and pay off their debts, unless the client stops paying
their debts. Since new accounts has a client for generally the first 30 days ina DMP and XXX
has them for the next 30-90 days, the remaining time that clients are in a DMP they are in the
open accounts area. This period is not supposed to be more than 5 years.

Naturally, this area of XXX contains the largest percentage of employees of any single area;
44% of XXX's workforce is in the open accounts area.”' Per XXXX, the Open Accounts area is
responsible for Accounts Maintenance. This includes Portfolio Reviews, inbound and outbound
calls, delinquencies, trouble shooting, and correspondence generation. As noted in the XXX,
the Open CSR is to repeat these items until the account is closed.

Instruction XXXX, effective XXXXXX, discusses Key Processes on Competency Validation
Audits for both XXX and Open CSRs. While this document is outside of the audit year, all of
the processes existed throughout the audit period. By their classification as key processes by
management, they have been determined to be important enough to monitor on a consistent
basis. The XXXXX states its purpose, in part to be, “To review the counselor's complete
understanding and adherence with our instructions and procedures and to ensure consistent
service representation and proper administration of their job responsibilities.” Again, XXX is
striving for efficiencies in their operations.

The 6 “key” areas the above XXXX covers are the following: XXXX, XXXXX, XXXX?2, XXXXX,
XXXXX, and XXXXX. While the above XXXX is outside of our audit years, combined with the
other manual parts that were in existence during our audit, all of the items covered by the
XXXX are valid and important operations and procedures for the periods under audit. We will
discuss each separately.

XXXXXX?3

The purpose of the portfolio review is to make sure the DMP is working as it was set up to.
This means that the client is correctly paying into the DMP, the trust is properly dispersing to
the creditors, the client is receiving the proper benefits through the DMP, and XXX is collecting
the proper amount of fees for managing the DMP.

XXXX, dated XXXXXX, is a check sheet used by the supervisors to monitor whether the CSRs
are properly reviewing the clients accounts. This check sheet closely follows XXXX, dated
XXXXXX, XXXXXX, and XXXXXX on revisions X, X, & X respectively, entitled, “Working your

21 This percentage includes the XXX area employees, as XXX considers them to be in the open accounts area.
22 Discussed above in the XXX section.

23 This is sometimes referred to as a management review.
Page 22 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXKXX XXXXX

Portfolio — In Open”. This provides more detailed explanations on what the individual check
sheet items mean, and how the CSRs are to conduct their Initial Account Reviews and how
they are supposed to perform account maintenance.

In revision 3 of the above XXXX, they reduce the requirement that CSRs contact the clients |
from every 6-9 months to every 6 months. They also provide additional detail to explain these
regular contacts, in cases where no issues are present with the DMP. Previously, the XXXX
stated the CSR should provide encouragement to keep paying into the DMP. In this revision,
they refer to this as a courtesy contact, asking the client their satisfaction with the DMP,
providing positive reinforcement for continued success in the program, and to encourage
continued commitment to the DMP and to remind them of the benefits they receive through the
program. A thorough review of Instruction XXXX showed that there are no items concerning
providing financial education to the clients.

The above XXXs were updated, renumbered and expanded on in Instruction XXXX, dated
XXXXXXX.”4 As with Instruction XXXX, there is no requirement that the CSRs provide financial
counseling to the clients. Their responsibility is to keep them on the DMP, which will help the
clients get out of debt.

In question XX of Instruction XXXX, dated XXXXXX, they created another requirement that the
CSR should recalculate the 60-month program guidelines. It indicates that the CSR has the
ability to perform a calculation on their system to determine if the client will pay off the debt
within 60 months. If not, the CSR is to suggest an increased payment to the CSR. The
example shows that the increase in the payment is related to the 60-month requirement, not as
a function of the client’s ability to pay. There is no mention of reviewing the budget at a later
date, or providing financial counseling with the client that may change the budget so that a
higher payment can be made. It is simply a suggestion that an increased payment be made,
period.

XXXX, dated XXXXXX, was entitled XXXX. Future versions are entitled XXXX. This document
is used by supervisors, as a check sheet, to document whether the CSRs are properly
performing the Portfolio Reviews. The items are consistent with those discussed above. This
XXX references Instruction XXXX as providing detailed work instructions. Instruction XXXX,
dated XXXXXXX, also covers the same items as stated above.

XXXX, dated XXXXXX, is entitled XXXX. This contains a flowchart that follows the steps from
starting a Portfolio Review to notating the account, “Portfolio Review Done’. Again, the same
information, although in less detail is contained in this XXX.

24 Rev. X, is dated XXXXXX, Rev. X, is dated XXXXXX, and Rev. X is dated KKXXXX.
Page 23 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer _ | Year Ended
XXXXX

XXX obviously has numerous documents covering the Portfolio Review Process. The
documents are used by different levels, i.e. CSRs or supervisors or QA, but they are all
consistent in the information they contain. They are very clear about what is and what is not
required during the Portfolio Review process. Providing financial education or counseling to the
client is not a part of this process.

XXXXKXX

In section 2, Procedures of Instruction XXXX, XXXXX is discussed. This situation exists when
the client needs to lower their payment that they are paying into the DMP. This procedure only
covers lowering the payment, not increasing it. There are no procedures for this, even though
XXX claims to encourage clients to increase their payments if this is possible. While the CSR
is required to request a hardship letter in the procedures, the procedures do not require that
the CSR probe their financial situation in an attempt to provide financial education. This
certainly would seem to be an appropriate time for providing financial education, yet there are
no items in this part of the XXXX that even mention providing financial education to the clients.

Instruction XXXX, effective XXXXXX also covers restructuring payments. Again, this .
specifically refers to reducing a client's payment based on a client hardship. This XXXX is
consistent with the information from the XXXX, Instruction XXXX and again, there are no items
mentioning providing financial education to the clients.

XXXX, dated XXXXXX, which is outside of the audit year, provides additional confirmation of
the requirements CSRs must perform when “restructuring payments”. This document is
consistent with the above XXXs and again shows no indication that they are required to
provide financial education to the clients.

While XXX has designated this as a Key Process, the CSRs interviewed indicated they rarely
restructured payments. Evidently, while this is a rare © procedure, it must be important that when
this is done, it is. done correctly.

XXXXXX

A normal part of the open CSRs’ job duties include statement reviews. Every 4-6 months
clients are asked to send in their credit card statements for a review by their assigned CSR.
Instruction XXXX explains that the CSR is to timely review the statements to make sure the
client is receiving all the benefits they are entitled to based on each individual creditor's policy.
They are to notate this into the client's notes and update their balances, The client statements
are then sent to the file room to be put in the clients file.

Page 24 of 118 .
Department of the Treasury - Internal Revenue Service Form 886-A


-A |. Schedule or
Form 886-A _ |. EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended

| XXXXKX

In Revision X of the above XXXX, effective XXXXXX, XXX added an instruction that a follow-
up task be set for all items that needed action. The next revision, effective XXXXXX, further
adds that any action items not resolved immediately must be followed-up within 14 days. In
Revision X, effective XXXXXX, XXX added the comment, “If there are issues needing .
attention, call client to advise, request missing statements, and advise of any issues of follow
up that is pending.”

In Revision X, effective on XXXXXX, which is outside of our audit year, they have added a
section on the 5-year calculation tool. The XXXX states this “is an educational tool offering our:
clients timeline information” and “Offers the recommendation to the client explaining the
ramifications and then document their response to our recommendation.”

In Revision X, effective XXXXXX, also after the audit year, they change the name of the 5-year
calculation tool to the Debt Analysis tool. Other than the name, all comments about the tool are
the same as for the 5 year calculation tool. This “tool” is simply a tab in their software system
that calculates if the client will be done with the DMP within 5 years. It does not fend itself to
provide financial counseling to the clients.

XXXX, dated XXXXXX, which is just outside of our audit years, is used by supervisors as an
evaluation worksheet to make sure the CSRs accurately perform statement reviews. The
supervisor is to make sure the CSRs properly use and follow the statement review procedures |.
as discussed above. There are no items mentioned that show the supervisor is checking to

see if the CSR provided any form of financial education to the clients.

The statement review process is simply to review the statements provided by the clients to
make sure they are receiving the proper benefits from the DMP. This includes that the
creditors are properly getting paid, which includes the debt being reduced.

XXXXXX

XXXX, dated XXXXXX, outside of our audit year, is used by supervisors as an evaluation
worksheet to make sure the CSRs are competent in using the XXXX (XXXXXXX). It covers
items such as searching, sorting, and filtering clients. This form requires that CSRs be able to
filter/sort accounts by “unpaid, due accounts”, “updated by non-owner’, and “promise to pay”
status.

This “part” of the CSRs work is not specific to any required actions on the CSRs’ part. It is
simply an overall check to make sure that they can work with the system, which allows them to
assist XXX's clients in an efficient manner. While we did not expect to see education as a
requirement in an audit of what is essentially a review of how efficiently CSRs use the

Page 25 of 418

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXXX : XXXXX

computer system, it is important to confirm this. There are no items mentioning providing
financial education to the clients.

XXXXXX

This is a required procedure CSRs must follow when a.payment from a client on a DMP is not
received. one CSR we interviewed stated that he works his delinquencies every Monday,
Wednesday, and Friday. He filters information out on the system to find what accounts are

. delinquent. If an account is delinquent on Monday, he will check it on the above days, until it is
paid, taking the actions below as necessary. This is a critical process CSRs perform.

Instruction XXXX, dated XXXXXX, provides instructions for the CSRs that must be followed
when there is a delinquent account in their portfolio. This XXXX states that it is the CSRs
responsibility to call the clients and the responsibility of Call Center Management to monitor
the effectiveness of the representative to collect past due payments in an effort to help clients
be successful in reducing their debt and achieve their financial goals.

The CSR is to determine when the last payment was received, then must review the notes to
see if there is an indication of why the payment is late, and they will call the client if necessary.
This XXXX provides a script and suggested guidelines for the CSRs to use when calling the.
clients. This is attached as Item 7. The XXXX states the objective of this contact is “helping
them retain the benefits of our program”. The CSR is then to encourage the client to stay on
the program, by explaining the benefits of the DMP that the client will lose if they get off the
program. They also are to recommend the EFT, if appropriate.

XXXX, dated XXXXXX, outside of our audit year, is used by supervisors as an evaluation ©
worksheet to make sure the CSRs are properly handling delinquent accounts in their portfolio.
This XXXX is consistent with the instructions in the XXXX in a general sense, confirming
management checks that the CSRs are following the procedures in the XXXX.

There are no items mentioning providing financial education to the clients in the XXXX or that
the supervisors are checking to make sure that this is done, per the XXXX during the
delinquent account review process.

Additional Activities / Procedures

While the above 5 procedures were described as “key” processes, the open accounts CSRs
have many additional procedures they are required to perform as part of their duties.

Account Follow-up Procedures

. Page 26 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer - Year Ended
XXXKXX

Instruction XXXX, effective XXXXXX, discusses general guidelines on how calls are handled,
but especially how follow-up procedures are to be handled. It is applicable to all CSRs and
primarily is a XXXX to indicate to CSRs that the person handling a specific call has primary
responsibility for the call regardless of which CSRs’ portfolio the client is in. All items
mentioned in this XXXX deal with the DMP. There are no items mentioning providing financial
education to the clients.

Account Reopens

Instruction XXXX, dated XXXXXX, is used for reopening accounts that had been previously
closed, collecting on accounts that have a negative balance and calling customers that have
EFT that has been returned NSF. Procedures are provided for an EFT return (NSF, revoked,
stopped, etc.), collection calls, follow-up procedures, and reopen procedures. There is no
requirement that the CSR or CSS determine why the client is even in this situation; there are
no items mentioning providing financial education of any kind to the clients.

By the X revision of this XXX, dated XXXXXX, the procedure was scaled back to just the
reopening of accounts. It described when accounts will be reopened, when they will not be
reopened, and the circumstances when a new account has to be created. This 5 page XXXX
was thoroughly reviewed and there were no items found mentioning providing financial
education to the clients.

When counselors were interviewed, they did not indicate that this was something that was
regularly done. —

Instruction XXXX is the XXXX for XXX. This covers many of the situations that the open CSRs
deal with that may or may not be on a daily basis that do not appear to have warranted their
own XXXX. The table of contents is attached as Item 8: This desk guide covers contact
information, procedures dealing with the DMP, payment methods to the DMP, creditor policies
and miscellaneous items.

When the CSRs were interviewed, they did not bring the Desk Guide up as being a crucial tool
in completing their jobs”°, meaning something they commonly used or used daily. On the other
hand, one of the CSRs stated that he was not aware of any situations that exist that are not
covered somewhere in the XXXX. So to put this in perspective, these are things CSRs will deal
with, so XXX has to put them in the XXXX to met ISO standards, but they only deal with these
items occasionally.

25 We did not ask specifically about this, so as not to “lead them to-a conclusion”.
Page 27 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS | Exhibit No.
Name of Taxpayer . | _ | Year Ended
. XXXXX

Instruction XXXX, dated XXXXXX, is entitled “Keys to XXX Definitions Document and
Achieving QA Success, “Open / XXX Accounts”. This is attached as Item 9. This is a document
that explains what the QA department is looking for on each and every call, regardless if the
call is with a client or a creditor, and regardless of the purpose of the call.

Among the mostly customer service type issues this discusses, in handling every call, the CSR
is to determine the current and future needs of the caller. They are then to provide complete
solutions to meet the needs of the caller. By determining the future or unrealized needs of the
caller and responding to them, they can avoid unnecessary future calls. Again, they are striving
to be very efficient.

This XXX also discusses “taking advantage of available opportunities”. It explains the CSR
must look through the system, viewing F-2, F-3, F-5 client and creditor notes to make
recommendations and ask questions based on what was viewed.”

The XXX also states, “Describing XXX benefits. Offer information on the program to new and
existing customers; remember education is the key to success.” In context, education means
explaining the DMP process to the client.

Retention Group

The retention group is a separate department that reports to the Call Center Director. This area
currently has 10 members including the manager. This area is assigned cases to work if they
are 31 to 60 days delinquent. The cases are not actually transferred to the retention area, but
they are provided lists off the computer of delinquent accounts to call.

The retention group is a special group that works exclusively delinquent accounts. This is a
last ditch effort by XXX to contact the clients to encourage them to continue to make payments
to XXX in the hopes that they will continue with the DMP. They follow the delinquent account
review procedures previously discussed.

Hiring
Position description
When asked to provide the position descriptions and minimum qualification requirements for

their CSR positions, XXX provided numerous versions of what appear to be job
announcements and then some actual position descriptions from the current periods. The

76 In the next revision of this XXXX, dated XXXXXX, XXX has moved the “recommendation and ask questions” statement

to the heading labeled, “Provide complete information and solutions”.
Page 28 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

information for new accounts and open accounts is different, so they will be discussed
separately.

New Accounts

The job postings for XXXXXX, XXXXXX and XXXXXX contain the exact same information in
the body of the announcements. The essential functions, while brief, match the description of
their activities in this fact section.

The Knowledge, Skills, and Abilities (KSAs) required in the announcements cover general
computer skills, excellent communication skills, ability to build rapport, ability to collect
customer information and analyze needs, problem solving capabilities, patience,

comprehension of company procedures and policies, and the ability to work effectively in a
team environment.

The Education and Experience requirements include a High School Diploma or equivalent
preferred and Industry related experience preferred.

The job posting for XXXXXX showed some changes to the job description and minimum
requirements to include, as follows:

In the essential functions section:

- Provides an in depth budget analysis and credit counseling to potential clients
- Provides recommendations based on findings in budget analysis

In Education and Experience:

- H.S. Diploma or equivalent is now required & college course work preferred

- One year.credit industry or credit-related experience is now required

There were no changes to the required KSAs.

For the last job posting provided, the following changes were made:

No changes were made in the essential functions.

In the Education and Experience area: _

- . 12 months of continuous employment with 1 employer is now preferred.

The last change was to the required KSAs, establishing typing abilities at 25 wpm.

Page 29 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A os EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer a Year Ended
XXXXX

XXX also provided Position Description for XXX Job XXXXX, which was entitled Customer
Service Representative - New Accounts on XXXXXX and Counselor — New Accounts on
XXXXXX. These are both outside of the audit year and are dated over a year after our first
contact for this audit. They will not be considered as relevant.

Open Accounts

XXX provided job postings for open accounts dated XXXXXX, XXXXXX, XXXXXX, XXXXXX,
_ XXXXXX, XXXXXX, and 4 postings during XXXX. Through XXXXXX the postings are
substantially the same. They are also similar to the new accounts postings, except for the
following:

- An essential function includes, “Provides ongoing education with our clients regarding debt
management”.

-. Required KSAs, include excellent telephone skills.

- Education and Experience includes One year call center experience preferred and one year
finance, debt management, collections or banking experience preferred.

The job posting for XXXXXX is the same as prior versions, except the Education and
Experience requires H.S. or equivalent and college course work is preferred, the work
experience that was preferred is now required and they again prefer the one year of
continuous employment with one employer, similar to the new accounts area.

XXX similarly provided two versions of their position description for Open accounts. The one
dated within our audit period is dated XXXXXX, for a customer service representative. The
other, dated XXXXXX, has changed the title to Counselor and the Job to XXXX. The position
description dated XXXXXX is pretty much word for word when compared to the job posting of
XXXXXX: They contain the exact same information in the body of the announcements as the
job postings. The essential functions match the description of their activities in this fact section.

Employee Handbook

Like many employers, XXX provides an employee handbook to every employee when they are
hired. This handbook provides a brief description of the company, explains numerous
personnel and HR issues, and some of the expectations XXX and the employee have after the
employee is hired.

_ On pages X and X of this handbook, XXX describes itself to new hires. This is attached as
Item 10. The description XXX gives of themselves is focused on customer service,
improvement, and the customers themselves. There is no mention of the provision of financial

education to the clients.
Page 30 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX ; XXXXX
Training

XXX takes great pride in the training it provides to its employees. They expound that they led
the credit counseling industry in implementing independent 3” party certification of their
counselors. In XXXX, they established a relationship with XXXXX to provide certification for
their counselors, which enables the counselors to obtain training credits for the instruction they
receive. All classes are held at XXX Headquarters, XXXXXXXXXXXX. The certification that is
provided is a certificate in Credit Counseling Customer Service. It is not a certification in Credit
Counseling. There is no educational requirements necessary other than a high school diploma
or its equivalent.

XXX is very proud of the fact that in XXXX, they were awarded the XXXXX Quality Alliance
honors for its outstanding training and education programs. The honor provided was the
Showcase in Excellence Award, which recognizes organizations for excellence in specific
processes. This award recognizes the process of their training, not the content of it,

XXX, with few exceptions, hires people in two areas, New Accounts and Open Accounts. Even
though some things overlap, like customer service and the computer system, they have
different jobs and need to be trained separately.

Training — General

New accounts training is about 10-11 days in the classroom. They then have transitional
training which lasts approximately 15 days; a total of 26 days. Open accounts training is
generally 14 days in the classroom with transitional training which lasts approximately 20 days;
a total of 34 days. Once CSRs successfully pass the classroom and transitional training, they
are assigned to their team.

The new hires use the Training Module for the classroom training but they do not keep the
Training Module, since it talks more globally and would not be of great help in their actual
work. However, all CSRs have access to the on-line manual, XXXK & XXXX etc. discussed
above.

Training — New Accounts

In the new accounts training, XXX employees train the new hires on the following subjects,
Introduction to the Debt Management Industry and the Credit Industry, Customer Service,
Proper use of needed XXX systems, How to handle calls, and how accounts are processed
through the XXX organizational structure. Starting with the 5" day of the classroom training,

the new hires start side by side monitoring of calls and start practicing what they will be doing
_Page 31 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A_ EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
“XXXXX XXXXX

on the phones. For the first 8 days of class, the new hires take a daily quiz. On the to" day,
they take a final test. All these must be passed to remain employed by XXX.

Attachment 11 is the XXXXX, Course Syllabus for XXX. This shows that the New Accounts
training covers 4 courses and provides each participant with 12 training credits. The official
coarse descriptions emphasize 1) customer service, 2) understanding credit, finance charges
and payment history implications, and the last two courses emphasize 3) DMPs.

The syllabus then lists 46 different course competencies; only item 6 of the syllabus discusses
the topic of educating the client. Item 6 of the syllabus is directly related to page XX of Module
two. These pages are attached as Item 12. These pages show that education, as XXX defines
that term, means explaining how a DMP will benefit their clients, as we have stated numerous
times. The 45 other competencies have nothing to do with educating clients.

The Training Test for New Accounts is XXXX. This contains 25 true or false questions, a
question where you are to circle all items that can be placed on a DMP, 23 questions requiring
a written response, and two different questions requiring you to match terms with definitions.
There is not one question on the Final Test that assesses the ability of a new hire to provide
financial education to a client. This is attached as Item 13.

After they finish this final test, the trainees are moved into transition training for three weeks.
Instruction XXXX covers transition training for Open accounts and will be discussed more
below. However, transition training for new accounts is similar. This is a phase were they are
starting.on the phones with very close monitoring. They also are provided additional training
during this period, per the syllabus. At the end of the transition period, the trainees are fully
trained and are assigned to their team.

Training — Open Accounts

In the open accounts training, XXX instructors / employees train the new hires on the following
subjects, Customer Service, Legal Issues, Processes, XXXX, and Account Maintenance
Procedures. Starting with the 11” day of the classroom training, the new hires start side by
side monitoring of calls and start practicing what they will be doing on the phones. For the first
14 days of class, the new hires take a daily quiz. On the 15" day, they take a final test. All
quizzes and the test must be passed to remain employed by XXX.

Attachment Item 14 is the XXXXX, Course Syllabus for XXX. This shows that the Open
Accounts training covers 5 courses and provides each participant with 14 training credits. The
official coarse descriptions emphasize 1) customer service, 2) understanding credit, finance
charges and payment history implications, and the last three courses emphasize 3) DMPs.

Page 32 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXXX XXXXX

The syllabus then lists 65 different course competencies; only item 6 of the syllabus discusses
the topic of educating the client. Item 6 of the syllabus is directly related to page XX of Module
two”’. These pages show that education, as XXX defines that term, means explaining toa _
client how a DMP will be beneficial to the clients. The 64 other competencies have nothing to
do with educating clients.

The Training Classroom Test is XXXX. This is attached as Item 15. This contains 19 true or
false questions, two questions where you are to circle correct answers, 22 questions requiring
a written response, two different questions requiring you to match terms with definitions, 5
multiple choice questions, 6 fill-in-the-blank questions, a list that requires prioritizing tasks, 11
questions about a specific credit card statement, and then they are to highlight important items
on the credit card statement, as they would in a statement review. There is not one question
on the Final Test that assesses the ability of a new hire to provide financial education to a
client. After they finish this final test, the trainees are moved into transition training for four
weeks.

Instruction XXXX covers transition training for Open accounts. They are assigned cubicles,
workstations, and 10% of a normal portfolio, or 60 accounts. This is a phase were they are
starting on the phones with very close monitoring. They also are provided additional training
during this period, which they are then tested on.

in the transition training phase, XXX tests”® the new hires in the open accounts area on the
following areas:

Week 1 — Apropos, Viewing closed accounts, Customer Service Menu, F Screens, MS
Outlook, & Quality Assurance ,

Week 2 — internal Customer Service, F Screens, Statement Review, Creditor Information,
Quality Assurance, XXX Review, & XXX

Week 3 — Portfolio Review, Funds and Disbursement, Time Management, & XXX |

Week 4 — Creditor Information, Time Management, Delinquencies, XXX Review, XXX, & ISO
9001

?7 XXX provided their training modules. Module 1 was the same, except for the name, one was New Accounts, and the other
was XXX/Open. Module two was the exact same for both classes, they used the New Accounts title for both. All information
in the modules was the same for both.

8 Der Instruction XXXX, one per week.
Page 33 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
~ Name of Taxpayer Year Ended
XXXKXX

At the end of the four week transition period, the trainees are fully trained and are assigned to
their team, receiving full portfolios.

Compensation / Bonuses

During the review of employee benefits, we found that non-cash compensation was given to
employees for perfect attendance. Non-cash bonuses were items such as gift certificates to
Lands End Clothiers, and small gift items. In addition, bonuses had been identified to come
from several earnings descriptions that were reported as part of employee wages. The
separate line items that allowed employees to receive bonuses include: collection, EFT bonus,
and for employees in new accounts, on call, quality, and telephone service. The above areas
may relate to various Open, New and XXX groups.

New Accounts

Part of the evaluation of CSRs in the New Accounts area is covered by Instruction XXXX,
Quality Process Instruction: New Accounts Month End Performance Review

CSRs are rated on the following areas:

• Phone time

• Calls per hour

• Conversion Ratio - a measure of the total number of agreements an individual CSR has
activate out of the total number of agreements generated by the same CSR.

• Quality- ‘is a measurement of the customer contact experience scored against
established criteria. Calls are monitored using the XXX call monitoring software. Five
calls are randomly captured by the system, reviewed and scored by a QA analyst to
insure that the developed call quality standards have been upheld as well as to identify
training needs. Each call receives a score and then the calls for the month are averaged
for the individual counselor's monthly score. The monthly scores are averaged into a 3-
month rolling average for the individual and the team average”

Open
For compensation purposes, the open accounts CSRs are rated for handling, adherence,

service level, quality, portfolio size (each employee will handle approximately the same amount
of clients based on total debt per client), and attendance.

?° Instruction XXXX pages X and X of X pages.
Page 34 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer | Year Ended
XXXKXX XXXXX

Handling: handling is the number of inbound and outbound calls received, percentage of
inbound calls completed, talk time for outbound and inbound and is based on an average as
well as calls that are re-queued into the phone system. The CSRs are evaluated on how
efficient they are in managing a quantity of calls.

Adherence: is the ready time of each operator, including talking time, total time available and
unavailable, and a formulated percentage. This standard determines how the employee
handles and manages his time and if he or she makes herself available to answer calls.

Service level: determines the percentage of calls abandoned by the operator. Abandoned calls
for each sampled employee are less than one percent.

Quality: this standard measures the operator's accounts reviewed (which include follow up on
the operator's total client portfolio); this is measured in terms of portfolio and individual calls as
well as providing a three month average. Quality is generally measured by the QA staff and
looks to make sure the procedures in the quality manual are followed.

Portfolio: measures the number of clients, clients that pay, the related percentage and amount
collected and EFT setup. The EFT setup measures how many clients are on an EFT payment
system (Note: management was question about this area and it has been determined that
getting the client on an EFT payment method saves the client monthly money order fees or
money gram fees as well as providing convenience). Yes, there is an obvious benefit to the
XXX but this method serves the client proportionately more, since a monthly EFT is a savings
to the client of $10 to $30 per month.

Attendance: this measure the days absent from work, approved and unapproved.

All these factors. are compiled for each CSR and if they exceed the standard, they are given
incentive pay based on each of the standards. This incentive pay is measured and paid each
month in all the open account groups.

Retention

Retention team audit samples included the following characteristics: 1. call handling, 2. quality,

3. Portfolio- determines.the number of DMPs that have paid and the total dollars collected, and
the percentage of those DMPs that are serviced through electronic funds transfers (EFT), 4.
Attendance- this is a recap of the employees approved absences, tardiness, suspensions,
unscheduled absences, and total days work percentage. The retention sheets and statistical
data determines that CSRs are being provided incentive pay for their productivity and not
directly related to how much they can obtain from the client.

Page 35 of 118
Department of the Treasury - Internal Revenue Service | _ Form 886-A


Form 886-A EXPLANATION OF ITEMS _ Schedule or
Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX
Overall

Some of the above areas overlap, for example everyone is rated on attendance. It appears
that XXX provides incentive pay based on efficiency, responsiveness, and the amount of calls
being handled; signs of excellent customer service. While, collections are a part of the bonus
calculation, it is not the only or even the primary aspect. Generally, there is no direct bonus
earned by employees for getting people on DMPs or for collections as would be expected from
a collection agency; where pay is substantially based on collections made on delinquent
accounts. However, indirectly efficiency, productivity, and excellent customer service, all the
things XXX rates and rewards their CSRs for, all lead to an enhanced DMP operation.

Other claimed educational activities.

_ XXX claims many additional educational activities as their own. We have confirmed that XXX
has sponsored several off-site activities or has otherwise made grants for the purpose of
providing educational opportunities. Namely, XXX had provided an endowment to the XXX
XXXXXXXX XXXXX and they have collaborated with XXXXX (XXX) and other groups. These
activities were not conducted by XXX, its management, employees or at XXX’s place of
business. These activities include:

$67X unconditionally, up to $133X Dollar Donation to XXXXXXXX XXXXX (XXX):.

XXX made a commitment to donate $133X to the XXX for the creation of an endowment fund
which will support the establishment of the XXXXXXXX for XXXXX (XXXXXXXX). The |
agreement states XXX paid $13X upon signing and will pay $13X annually. The commitment
for the remaining $67X is contingent upon the Company's approval of the progress made by
the XXXXXX. No liability is reported on the remaining $67X.

The promise is reported per (SFAS) No. 116, Accounting for Contributions Received and
Contributions Made as Payable in less than one year: $16X (including 2.5X of additional
support and $44X payable in one to three years for $59X Total unconditional promise to give
(including additional $3.5X of additional contributions). Additional contributions are reported as
“less discounts to net present value ($6X).

The goal of the XXXXXX is.to become the premier institution for development and distribution
of research-based educational programs in personal financial management. Materials from the
XXXXXXX will be used to develop peer-to-peer financial counseling programs, similar to
XXXXX, discussed later, at colleges throughout the nation. Incidentally, any benefits made by
the XXXXXXX for research based education remain the property of XXX.

Page 36 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
xhibit No.
Name of Taxpayer Year Ended
XXXXX

XXXXXXXXKXXKXXKXXXKXKXXKXKXKKKXKXKXXKXXKKXKXXKXKKKX KKK,

XXXXX"?

XXX has provided grants to support this peer-to-peer student credit counseling which started |
at the XXXXX. Students apply for counselor positions and those selected are trained and paid
to offer services to other students. In addition to one-on-one counseling, the XXXXX also
provide group workshops and sponsor student competitions in the area of financial -
management. In [year], this was expanded to provide services in middle and high schools.

XXXX, XXKXKXK (XXX):

XXX gave an award of $1X to the XXX Foundation - to support a new project, the XXXXX
(XXXX), in the Department of Health and Human Development to promote personal and family
financial literacy in public schools. “This project will allow the development and distribution of
K-12 curriculum materials that weave personal and family finance literacy into a variety of
curriculum areas” 31

The initial goal was to have this curriculum available for every student in the state of XXXXX.
The curriculum created met all requirements for Family and Consumer Sciences National
Content Standards, and since it met National standards, they decided to make it available
nationwide. The curriculum has been completed and XXXXX at XXX has coordinated and
conducted numerous training opportunities to teach the curriculum both inside and outside of
XXXXX.

They have also done extensive research on the success of the curriculum in actual
operation. 32 In the tests where students were allowed to take the full semester course, scores
improved significantly. From additional interviews, it was determined that what was needed
was a presentation for school administration to get curriculum approved in the schools. As of

30 The XXXKX XXXXXXX / nickname is the XXXXX.
3 in News, XXXXX, XXXXX New Editor, XXXXX, [date].

» From an information meeting held with XXX and XXX at XXX offices in September of [year].
Page 37 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.
_ Name of Taxpayer Year Ended

the September [year] meeting, there were no concrete plans to disseminate or distribute the
program, which is basically their next step.

While there is no formal distribution method, XXX or the XXXXX has created a website that
allows downloads of the curriculum. As of [date], there were approximately 721 users of the
site and 16,928 downloads of the educational materials. The actual use of the materials of the
users is unknown by XXXXX, they simply know someone downloaded them.

XXKXX

XXX has provided grants to expand the XXXXX, XXXXX, a project of the XXXXX. XXXXX
focuses on the needs of low-income youth and families, working in the most economically
challenged neighborhoods to teach specific financial skill, character development and public
speaking.

XXXXX Mentors

XXX provides financial and intellectual support for the XXXXX mentors at XXXXX School
(XXX). The XXXXX mentors go into area high schools to mentor at-risk students. XXX claims
the advice, support, and attention of these students demonstrate the ability to decrease the
dropout rate among these students by providing them with insight into matters of money and
education.

Other

XXX employees also volunteer to visit local schools on work time to make age-appropriate
presentations to students on consumer finance and help with activities dealing with financial
issues. This is done at XXXXX Elementary School and XXXKK High School and others as
requested.

Financial instruction has also been provided by volunteers on their own time to local religious
organizations. This includes Sunday School classes, counseling church members with
financial problems. They also regularly teach the financial aspects of the marriage preparation
program for the Archdiocese of XXXXX. They have also offered a 3 week program in financial
improvement at a local Methodist Church.

XXX employees, usually XXXXX, have appeared in newspaper articles and on radio programs
in the local area. They also claim to have participated in a local bank seminar for first-time

homebuyers and visited local companies to address financial issues with employees. XXX also
claims to allow other community organizations to use their facilities. Most of this volunteer work

or “other” educational activities were not documented by XXX.
Page 38 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXXX eens

Financial Information
income

XXX's sources of revenue are fair share payments, member fees, interest income and
miscellaneous revenue. Almost all of their total revenue, over 90%, is a direct result of their
debt management plans offered to clients. Interest on investments and all other sources of
income account for less than 5% of their total receipts.

XXXXX XXXXX XXXXX Total %
Program Service Revenue $XXXXKX $XXXXXX $XXXXXX $XXXXXX >45%
Membership Dues SXXXXXX $XXXXXX $XXXXXX $XXXXXXK >45%
Interest SXXXXXX SXXXXXX $XXXXXX $XXXXXX <5%
Other $XXXXXX SXXXXXKX $XXXXXX $XXXXXX <5%
Total Receipts SXXXXXX SXXXXXX SXXXXXX $SXXXXXX

Program Service Revenues are Fairshare payments. As described on all returns prior to the
return filed in [month, year]*?, this was described as, “Revenue from Program Services is
generated by fees charged to banks, credit card companies, and other creditors on payments
collected from members that are then distributed to the members’ creditors.”

The term “fair share” refers to a payment made by the credit card companies who are receiving
payments from their debtors via XXX pursuant to a DMP. Typically, credit card companies pay
a fair share, which is a stated percentage of debt, to credit counseling organizations that set up
DMPs; the amount paid is determined by each creditor in advance. Credit card companies
generally will only make “fair share” payments to organizations recognized as exempt under
section 501(c)(3) of the internal Revenue Code. Credit card companies pay a percentage to
for-profit collectors or they will sell the debt out-right for a small percentage of the debt owed.

Membership Dues are described as “Amounts paid by members for creation of Debt
Management Plans and to disburse regular payments to members’ creditors.”

The other income is not significant enough to be relevant for this discussion.
However, it is important to note the lack of contributions from the general public. XXX receives

no government grants or donations from private foundations. They receive no donations from
community groups, churches, labor unions, or any other groups or private citizens.

33 On the latest return filed they have changed the wording from fees charged to banks to voluntary contributions.
Page 39 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXKXX XXXXX

Furthermore, they do not seek any type of donations and do not have plans to start a
fundraising program.

It should also be noted that XXX does not report amounts held in trust as income on the Form
990, because they are acting as the agent for their clients and the funds are to be paid to the
clients’ creditors.

Expenses

The following information was taken from Forms 990 as filed by XXX for the years ending
XXXXX, XXXX, XXXX, and XXXX."4

Fiscal Year XXXXX XXXXX XXXXX Totals %
Comp - officers $XXXXXX  $XXXXXX $XXXXXX SXXXXXX XXXX%
Other sal & wages $XXXXXX  $SXXXXXX SXXXXXX $XXXKXKXX XXXKX%
Other EE benefits $XXXXXX  $XXXXXX $XXXXXX SXXKXKX XXXX%
. Payroll Taxes SXXXXXX  $XXXXXX $XXXXXX SXXXXXKX XKKK%
Telephone $XXXXXX  $XXXXXX GXXXXXKX SXXXXXKX XXKXX%
Postage/shipping $SXXXXXX  $XXXXXX $XXXXXX $SXXXXXX XXKXK%
Occupancy $XXXXXX  $XXXXXX $XXXXXX GXXXXXKX XXXX%

Printing/publications $XXXXXX  $XXXXXX SXXXXXX SXXXXXK XXXK%
Educational Overhead $XXXXXX $XXXXXX $XXXXXX $XXXXXKX XXXKK%

Business
Development SXXXXXX  $XXXXXKX $XXXXXX SXXXXKXKX XXKK%
Total From Return _ SXXXXXX  $XXXXXK $XXXXXK - SXXXKXKXXK

The expenses on the return are generally operational expenses such as salaries, wages,
taxes, telephone, etc., substantially all of which are directly related to the operations of
providing the call center and debt management services. These percentages have been
somewhat consistent during the years of examination. Some expenses need some additional
explanation however.

Educational Overhead

This is an allocation made by XXX, not a direct expenditure. XXX allocated expenses from
indirect DMP costs, which included additional wages, operational expenses, development

34 It should be noted that not all of the expenses are shown, so the percentages will not equal 100%. However, the Total From
Return was taken directly off the return; so the percentages shown are the percentages of the total expenses, as shown on the

return. ;
Page 40 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS | Schedule or
Exhibit No.

Name of Taxpayer Year Ended
XXXXX

costs, electronic media materials (payments to XXXX), printed materials, administrative
expenses, etc. This was an allocation of indirect expenses that was computed by
management. Development costs included payments to the XXXXX school, XXX Foundation
and XXXXXX. For the year ending XXXXX, education overhead was $ XXXXXX of which
$XXXXXX was for the educational institutions mentioned above.

Overhead allocations for XXXX and XXXX are $ XXXXXX and $ XXXXXX respectively. In
XXXX, Gifts and grants to the XXXXX School Foundation, XXXXX School and XXXXX School
totaled $XXXXXX and in XXXX, $ XXXXXX to the XXXXX School, XXXXX School, and the
XXX Foundation.

Business Development

This is a fairly major expense on the return that must be covered. This is the amount XXX pays.
to XXXX with respect to the contract between the two entities. As was stated earlier, this is
how XXX obtains the vast majority of its clients, from the operation of this contract.

Compensation, Salaries and Related costs

The chart above shows that over the three year period covering the examination, wages and
related expenses, which includes other benefits and payroll taxes exceeds one-third of the
expenses on the return. Since we have already shown some of the expenses allocated include
wages, this percentage is actually higher.

Trust Account

As was stated above, XXX does not report income on the Form 990 for amounts held in trust
for their clients that are to be paid to the clients’ creditors. However, we still had a responsibility
to review the trust accounts to ensure they were being handled properly, as the funds going
through the account for the first year of the audit was approximately $XXXXXX dollars.

XXX has demonstrated proper internal controls and administration of the client's deposits and
payments of their debts, without any material mistakes. XXX maintains and reconciles the trust
accounts daily, determines each day how much goes in and out of the account. It prepares
adjustments each day and prepares reports which are reconciled to the clients’ accounts. The
trust account appears to be operated properly and there has been no indication of abuse or .
improper accounting of the trust.

An analysis of the trust account shows that XXX collected and remitted to XXXX $XXXXXX
dollars for the first year of the examination. They also collected and remitted $XXXXXX for

. Page 41 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-4. EXPLANATION OF ITEMS Schedule or
.. . Exhibit No.
| Name of Taxpayer Year Ended
XXXXX

XXXXX and $XXXXXXX for XXXXX, Those were the 3 creditors who received the most from
XXX as payments on their mutual clients’ debts.

Compensation of Relatives of XXXX, CEO:

XXX was upfront about the relationships of many of the executives at XXX. They include the
following relatives of XXXX and where available their compensation for the years of the audit.

Ending June 30...... XXXX XXXX XXXX .
XXXX XXXXXX  XXXXXX XXXXXK
XXXX XXXXXK  XXXXXK XXKXXKXX
XXXX XXXXXX  XXXXXXK XXXXXX
XXXX XXXXXX  XXXKXKXK XXKKKKK
XXXXX XXXXXX  XXXXXK  XXXKXKX
XXXXX XXXXXX  XXXXXX  XXXKXKXK

XXXXX XXXXXKX  XXXXXKX XXXKKX
XXXX XXXXXX  XXXXXK XKXKXX
XXXXX XXXXXK = XXXXXK = XXKXXK
XXXX XXXXXK = XXKKKK  — XXKKKK
XXXX XXXXXX — XXXKXKK = XXKKKK
XXXXXK XXXXXX  XXXXXK  XXXKXKXK
XXXX XXXXXX  XXXKXK XXXKXXK
Totals XXXXXX  XXXXXX  XXXXKXX

estimated salaries are in italics

Relationship
to CEO

XXX also hires other relatives in lower positions. For example, children of the executives work
during the summers or in other part-time positions.

Contracts:

XXXX

XXX has two contracts with XXXX. XXX is a software company that is 100% owned by the

CEO, XXXX.

The first contract is actually between XXXXX (XXXXX) and XXXX. XXXX and XXX have
informed us that XXXXX merged into XXX.

The contract for this agreement is dated XXXXXX and gives XXXX a limited, non-exclusive,

_Page 42 of 118

Department of the Treasury - Internal Revenue Service

Form 886-A


Form 886-A | EXPLANATION OF ITEMS Schedule or
Exhibit No.
Name of Taxpayer Year Ended
XXXXX

and non-transferable right to the XXXXX software; the software that runs the DMP program,
. from intake to all the payments made and all the notes taken in the system.

XXXX may modify this software per their needs, however, any modifications become the
property of XXXXX. The current version of this software is called the XXXXXXX.

The contract further states that XXXX agrees to pay $XXXXXX to XXXXX for the use of this
system. They are to be paid in XXXX installments in $XXXXXXX with interest at X%.

The term of this contract is 10 years and will automatically renew for successive 5 year terms
thereafter, unless 90 days prior written notice is made before the expiration of the contract.

The second contract is between XXX and XXXX and is dated XXXXXX. This agreement
gives XXXX a limited, non-exclusive, and non-transferable right to the XXX software —
package. This software is used as the “educational” budgeting too! provided to XXX clients.

The agreement is for XXXX to purchase a minimum of XXXX licenses per 12 month period at
$XX for the computerized version and $XX for the non-computerized workbook version.

XXXX is to maintain books of account of all programs distributed for a 3 year period and to
provide monthly statements to XXX.

The contract is automatically renewable for additional 12 month periods unless 90 days prior
written notice is made before the expiration of the contract.

XXXX

XXX contracted with XXXX, in their words, as a way to obtain access to debtors in need of
their services. The contract they provided is dated XXXXXX.

The parties to this Agreement are XXXX and XXXX and the agreement starts with the
following as the basis for the agreement:

The contract states that XXXX desires to help borrowers under their loan programs
who are experiencing payment problems, by encouraging them to seek debt
counseling so a payment plan can be worked out.

XXXX, as an individual has created information collection software that XXXX can use
to refer borrowers to XXXX. XXXX acknowledges that if XXXX collects the data, it will
save XXXX time, money, and resources and XXXX acknowledges this will enhance

their ability to manage its accounts.
Page 43 of 118

Department of the Treasury - Internal Revenue Service __ Form 886-A


, Schedule or

Form 886-A _ | EXPLANATION OF ITEMS Exhibit No.

Name of Taxpayer . Year Ended
XXXXX

Therefore, the purpose of this contract can be paraphrased as follows:

XXXX has a number of borrowers that are ‘unable to pay the full amount owed to them. XXXX
therefore is contracting with XXXX, and providing them with referrals, for the purpose of
XXXX putting them on payment plans.

Additional items noted in the contract (the number in parenthesis is the page # of agreement),
are as follows:

(X) -XXXX shall gather and compile information for use by XXXX in computing a Payment
Plan...if appropriate, XXXX will refer the borrowers to XXXX’s Financial Management
Services Unit who will collect the information required by the Client Information Referral Form
and submit this to the Account System (which is the software developed by XXXX).

(X) -XXXX will access the Account System daily and will prepare a payment plan for each
borrower, using its customary and usual procedures.

(X & X) -Both XXXX will use their commercially reasonable best efforts in the performance of
their obligations from this agreement.

(X) -XXXX is to pay XXXX, out of its general operating revenues, the Information Compilation
_ Fee, as calculated per Article XXX of the agreement and using Schedule One. XXXX will
provide monthly statements detailing the transactions used to calculate the Information
Compilation Fee.

(X) -XXXX. Both XXXX and XXXX understand the necessity of maintaining a reasonable
constant flow of activity and successful conversion. “In as much as the value of referrals is
connected with a reasonable volume, XXXX agrees to provide at least XXXXX Client
Information Referral Forms annually.” ,

(X) -XXXX. “With respect to program volumes, XXXX shall use its commercially reasonable
best efforts to convert to active accounts at least a minimum level of the referrals received
from XXXX.” Both XXXX and XXXX understand the necessity of maintaining a reasonable
constant flow of activity and successful conversion. “In as much as the value of referrals is
connected with a reasonable level of successful conversions, XXXX agrees to convert a
minimum of XX% of the Client Information Referral Forms to active status.

(X) -XXXX. XXXX has the right to approve certain levels of mergers, liquidations, sales, etc.
before the actions take place. This article gives XXXX the.assurance that if XXX is unable to

fulfill its obligations, XXXX has some recourse.
Page 44 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886- |

Form 6-A | EXPLANATION OF ITEMS Exhibit No.

Name of Taxpayer | Year Ended |
XXXXXK

(X) -XXXX. Exclusivity “Subject to the exceptions set forth in the second Sentence of this
Section, XXXX acknowledges that XXXX will have a competitive advantage in its industry
upon entry into this Agreement, and XXXX agrees not to plan, advertise, sponsor, aid,
develop, solicit or enter into any agreement with any other Person to provide services of the
same kind, variety or nature with respect to debtors, without the written consent of XXXX.”
“However, notwithstanding anything else in this Agreement to the contrary, XXXX shall not be
limited in any manner from entering into any agreement with any Person which involves a full
or partial wavier of fees or contributions which would otherwise be received by XXXX as long
as such agreement does not provide for the payment of any fee by XXXX to such Person for
services to be provided or for referrals.”

(X) _XXXX, The agreement expires on [date], with the last payment being [date].

The subsequent agreement with XXXXX is entitled “Administrative Services Agreement” and is
discussed below.

The subsequent agreement is dated XXXXXX with an expiration date in Article XX of
XXXXXX, with the last payment being XXXXXX. This agreement however may be terminated
without cause by either of the parties with 60 days written notice. This was not available in
the other agreement.

This agreement was written in a tone much more suitable for a 501(c)(3) organization. The
verbiage used is complete with comments about the educational activities of XXX. However,
XXX has not represented there was any substantial change in the relationship between the
two parties with the signing of the second contract.

In this agreement, for or on behalf of XXX, XXXX will provide the following services:

Identify distressed borrowers

Conduct extended information gathering interviews

Compile detailed financial and household budgetary information, as specified by XXX.
Provide case-specific advice and counsel to the borrowers on the importance of following
sound personal financial management practices and explain the education programs and
other resources that are available to the borrowers to relieve financial distress.

For these services XXXX will be paid $XX per borrower that they perform the services for.
Therefore, the contract characterizes the payment as a payment for services.
When discussing referrals, the agreement indicates XXXX may refer a borrower to XXX for

Page 45 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

: ; .
orm 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
KXKXXK _XXXKXK

counseling and other services with or without providing the services referred to in the
Agreement. It states specifically, XXXX will not be compensated for any referrals.

XXX. XXXX has and will continue to conduct its consumer lending business in compliance
with all material Requirements of Law.

As was stated previously, XXX has made payments of $XXXXXX in fiscal year XXXX,
$XXXXXX in XXXX and $XXXXXX in XXXX. In addition to the payment made to XXXX for the
contract, the contract also allows XXXX to forego paying any fairshare payments to XXX. If
XXXX normally paid fairshare of X%, in fiscal year XXXX, XXX gave up another SXXXXXX | in
fairshare payments in that year only, as a result of this contract.

DMP Defaults:

XXX has provided information on their default rate. XXX has defined the “default” as a
customer who ceases communication and payment of account without communicating the
intentions to XXX. XXX goes on to state that XXX will try to contact the individual and maintain
the account up to 60 days, at which point, XXX will deem the account closed. They have
provided the following information for the first year of the audit, as follows:

Year Ending June 30, « ------------> XXXX XXXX XXXX
Active Clients, Beg of Year XXXXX _XXXXX _ XXXXX
Additions XXXXX  XXXXX XXXXX
“Attrition XXXXX  XXXXX XXXXX
Active Clients, End of Year , XXXXX  XXXXX XXXXX |

XXX has provided detail describing the reason for those dropping out of the DMP:

Year Ending June 30, ------------ > XXXX XXXX XXXX

Client paid in full XXXX  XXXX_ ——- XXXX
Clients on program > 12 mos XXXX XXXX XXXX
and pd down debt > 50%

Total Attrition less full paid XXXXK XXXXK XXXX
Tot. Att. - full pd. As % of Beg clients 36.1% 34.2% 24.9%
Full paid as % of Beg. Clients 3.3% 4.2% 7.1%

Page 46 of 118
Department of the Treasury - Internal Revenue Service Form 886-A

Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXKX XXXXX

For fiscal year XXXX, XXX has stated that of the XXXX who left during the first year that XXXX
left the plan due to paying off creditors early. We assume this includes paying off the DMP
over the full period of the DMP, as that is much earlier than if the debtor paid the minimum
balances to all their creditors, and those that were able to pay their DMP off earlier. Then, XXX
categorized a subclass of XXXX as clients who stayed greater than 12 months and paid down
greater than 50% or more. This leaves individuals who left for unknown reasons, totaling
XXXX.

The chart above shows, the attrition rate over the number of clients at the beginning of the
year to be 36%. The average over the three years is 32%. Another important statistic is the
number of fully paid clients compared to the number of clients at the beginning of the year.
That percentage is 3.3%. Over the three audit years, the percentage is 5%.

Fee Waivers:
XXX charges different amounts for services depending primarily on the state lived in.

The taxpayer stated that the average monthly maintenance fee charged was $XXX with a
maximum fee of $XXX for account set up and $XXX for monthly maintenance. Exceptions
were in XXXXX $0, in XXXXX $0, in XXXXX- $XXX set up and XX% of payment monthly
capped at $XX and in XXXXX $XX set up fee and $XX maximum monthly maintenance.

XXX responded that they had XXXXX clients during the examination year (XXXX) of which
XXXXX were established as regulated DMPs; those that had limits to what XXX could charge.
This leaves XXXXX clients. representing a pool of 86% of the total client. Documentary
evidence to this assertion is a prepared spreadsheet which lists all the states with the total
number of DMPs that the organization had for that state.*° No additional documents requested
were provided. This response was a management prepared document from a review of their
database.

Relief of the Poor

XXX has never made any type of claim that their purpose is the relief of the poor. They do not
take any steps to focus their services or operations based on the income level of their clients.
While they do ask for income levels, they do not request documentation on them. They also do
not ask for or maintain any information about family size or compare the geographical location
of the family to determine what income level the family may be at. Therefore, we will not
discuss whether they are helping low-income individuals within the meaning of § 501(c)(3).

35 See IDR response, number 7, copy attached.
Page 47 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
/ XXXXXK

Credit Repair / Debt Settlement / Debt Consolidation

Credit repair is a service that claims to do one of two things: some credit repair agencies
contact the credit reporting agencies and obtain removal of inaccurate or outdated negative
items from credit reports; other agencies claim to be able to remove some or all negative
items, regardless of their accuracy.

‘Debt settlement is a service where an offer for less than the amount due is made to a creditor
to satisfy a debt in full. This can be done in a manner that is detrimental or beneficial to the
debtor, depending on the ethics used in performing the service.

Debt Consolidation is a service where a loan is provided or arranged for a debtor that will be
used to pay of most or all of a debtor’s unsecured debt. This will allow the debtor to have only
one bill and will hopefully lower the overall payment and interest paid by the debtor over the
term of the loan as compared to paying off the individual debts.

We have found no information that XXX is involved in any manner with credit repair, debt
settlement or debt consolidation. The help XXX provides to debtors is limited to their debt
management program.

(E) XXX’s Application for Exemption:

The Form 1023, Application for Recognition of Exemption, maintained by the organization is
grossly misrepresentative of the application on File with the National Office, the approving
office of the organization's exemption letter.*®

Before we were able to locate the application file, we noticed gaps in the letters that were sent
back and forth with the organization and letters in chronological order that did not seem to
respond to the questions asked in prior letters. .

After making additional attempts to get the application, we finally received a copy of the file
from the National Office. The file is more than XX pages, 3 to 4 times as large as what we
had been provided previously from the organization.

The application shows XXXX was created to provide financial counseling to low income
individuals at no charge. It represents that Rev. Rul. 69-441 is “totally on point” and describes
what XXXX does. Like the organization in Rev. Rul. 69-441, the application shows XXX

36 The name of the organization during the application is, of course, XXXX, not XXX. Sometimes the agent and/or TP

referenced XXX instead of XXXX. Again, for this report XXX = XXXX = XXX.
Page 48 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXKX

provides free counseling, assists with debt management when necessary, and conducts
extensive educational activities aimed at the general public.

The application further states that while the counseling is free in all cases, XXX will charge a
fee (substantially below cost because contributions cover about one half of XXX's expenses)
for the debt management aspect on a sliding scale. The scale starts at $0 for those unable to
pay and goes in steps of $XX, $XX, and $XX per month, depending on the number of creditors
involved. The organization in the Rev. Rul. provided free services and limited it to low income
individuals. XXX stated in its application that the fee they charged should not preclude
exemption because it is nominal, substantially below cost, and waived when necessary. The
assisting of anyone in financial need, rather than only assisting low income persons, should
not preclude exemption because these people are distressed financially. XXX represented that
the majority of their clients are low income as shown by the fact that even though the charge
can go as high as $XX, XX% are handled for free and more than half pay only the $XX fee (the
lowest), and only XX% pay the highest, $XX. The average monthly charge for services
rendered to all clients is only $XX.

The application states XXX is not controlled by creditors, not wanting their influence to be a
detriment to those in financial need. While XXX works with creditors, its concern is the helping
of the financially distressed person. While creditors are asked for contributions to help cover
XXX’s operations, such contributions are not required and the creditors will be treated the
same whether contributions are made or not. The creditor benefit is incidental to the benefit
provided to the financially distressed person and the furthering of the exempt purpose of XXX.

The educational materials are available to the general public. A person can specify which
items they want and can receive one a month for free. {f more are desired in any month, there
is a limit of 6 per month, a nominal handling fee of $XX per item is charged for the extra items
(topics). The list of available items (topics) is extensive and growing. While the application
represents that XXX is essentially the same as the organization in Rev. Rul. 69-441 doing all
‘the same activities, it goes beyond the organization in the Rev. Rul. in the education / research
area.

In an XXXXXXX letter from XXX, attached as Item 16, Item 5 of the letter states, “In addition to
the. debt management services that are offered, all members receive one on one budget
planning and general financial counseling at no charge.”

In item 6 of the letter, they discuss their nationwide clientele, discuss their reach into rural
America (a rural America that can’t otherwise be served), they discuss their “cooperation”
with the XXXXX @ XXXXX School, and the educational videos they will maintain in a library
that will be loaned to schools and professional organizations.

Page 49 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


£ Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer an Year Ended
XXXXX XXXXX

The XXXXXX letter from XXXX, for XXX, attached as Item 17, states:

“XXXX provides financial counseling to low income individuals and families
experiencing financial difficulties. The financial counseling, which is always provided
free of charge, includes information on the prudent use of credit, development of a

_ household budget, advice on living within the budget and consumer education on wise .
buying habits, repayment of debts and numerous other subjects. In each case, XXXX
assists the individual in preparing a workable budget. In its brief history, XXXX has
been able to help literally hundreds of thousands of individuals progress from
insolvency to financial stability through the use of these procedures.

XXXX also provides extensive educational materials to low income and financially
. distressed persons to increase their knowledge and to nurture the development of a
keen interest in their own financial well-being”

XXXXX also writes that XXXX has hundreds of publications and provides a list showing 288
possible publications that can be ordered.”

These publications are much of the missing application, as XXX maintains it. These
publications and other educational materials are approximately two-thirds of the application.

The agent who reviewed the application file, created a memo explaining why he approved the
application. A typed transcript of that memo is attached as Item 18.

Accordingly, XXXX received its letter approving its exempt status, dated XXXXXX.
PRIMARY ISSUE:

Should XXX's tax exempt status under 501(c)(3) of the Code be revoked, because:
Issue 1 — Its primary activities do not accomplish an exempt purpose?

issue 2 - More than an insubstantial part of XXX’s activities are in furtherance of a non-exempt
purpose? —

Issue 3 - XXX was operated for the purpose of serving private rather than public interests?

Issue 4 - XXX has allowed private inurement to exist in conducting its operations?

LAW:

Page 50 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXKXX XXXXX

Section 501(a) of the Internal Revenue Code provides that an organization described in
section 501(c) (3) is exempt from income tax.

Section 501(c)(3) of the Code exempts from federal income tax corporations organized and
operated exclusively for charitable, educational, and other purposes, provided that no part of
the net earnings inure to the benefit of any private shareholder or individual.

Section 6001 of the Code provides that every person liable for any tax imposed by the Code,
or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or
his delegate may from time to time prescribe.

. Section 6033(a)(1) of the Code provides, except as provided in IRC §6033(a)(2), every
organization exempt from tax under Section 501(a) shall file an annual return, stating
specifically the items of gross income, receipts and disbursements, and such other information
for the purposes of carrying out the internal revenue laws as the Secretary may by forms or
regulations prescribe, and keep such records, render under oath such statements, make such
other returns, and comply with such rules and regulations as the Secretary may from time to
time prescribe.

Section 1.501(c)(3)-1(a)(1) of the Regulations provides that, in order to be exempt as an
organization described in section 501(c)(3), an organization must be both organized and
operated exclusively for one or more of the purposes specified in such section. If an
organization fails to meet either the organizational test or the operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities
that accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) of the Regulations provides that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals. The words "private shareholder or individual”
refer to persons having a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides that an organization is not organized
and operated exclusively for one or more of the purposes unless it serves a public rather than
a private interest. To do this, an organization must establish “that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or

Page 51 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX

his/her family, shareholders of the organization, or persons controlled, directly or indirectly, by
such private interests.”

Section 1.501(c)(3)-1(d)(2) of the Regulations defines the term charitable to include, in part,
relief of the poor and distressed.

Section 1.501(c)(3)-1(d)(3) of the Regulations defines the term educational to include (a)
instruction or training of the individual for the purpose of improving or developing his/her
capabilities or (b) instruction of the Public on subjects useful to the individual and beneficial to
the community.

Section 1.501(c)(3)-1(e)(1) of the Regulations provides that an organization may meet the
requirements of section 501(c)(3) although it operates a trade or business as a substantial part
of its activities, if the operation of such trade or business is in furtherance of the organization's
exempt purpose or purposes and if the organization is not organized or operated for the
primary purposes of carrying.on an unrelated trade or business.

Section 1.6001-1(e) of the Regulations states that the books or records required by this section
shall be kept at all times available for inspection by authorized internal revenue officers or
employees, and shall be retained so long as the contents thereof may become material in the
administration of any internal revenue law.

in Rev. Rul. 69-441, 1969-2 C.B. 115, the Service found that a nonprofit organization formed to
help reduce personal bankruptcy by informing the public on personal money management and
aiding low-income individuals and families with financial problems was exempt under section
501(c)(3) of the Code. Its board of directors was comprised of representatives from religious
organizations, civic groups, labor unions, business groups, and educational institutions.

The organization provided information to the public on budgeting, buying practices, and the
sound use of consumer credit through the use of films, speakers, and publications. It aided
low-income individuals and families who have financial problems by providing them with
individual counseling, and if necessary, by establishing budget plans. Under the budget plan,
the debtor voluntarily made fixed payments to the organization, which held the funds in a trust
account and disbursed the funds on a partial payment basis to the creditors. The organization
did not charge fees for counseling services or proration services. The debtor received full
credit against his debts for all amounts paid. The organization did not make loans to debtors or
negotiate loans on their behalf. Finally, the organization relied upon voluntary contributions,
primarily from the creditors participating in the organization's budget plans, for its support.

The Service found that by aiding low-income individuals and families who have financial

problems and by providing, without charge, counseling and a means for the orderly discharge
Page 52 of 118

Department of the Treasury - internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended

XXXXX

of indebtedness, the organization was relieving the poor and distressed. Moreover, by
providing the public with information on budgeting, buying practices, and the sound use of
consumer credit, the organization was instructing the public on subjects useful to the individual
and beneficial to the community. Thus, the organization was exempt from federal income tax
under section 501(c)(3) of the Code.

Rev. Rul. 65-299, 1965-2 C.B. 165, granted exemption to a 501(c)(4) organization whose
purpose was to assist families and individuals with financial problems and to help reduce the
incidence of personal bankruptcy. Its primary activity appears to have been counseling people
in financial difficulties to "analyze the specific problems involved and counsel on the payment
of their debts." The organization also advised applicants on proration and payment of debts,
negotiated with creditors and set up debt repayment plans. It did not restrict its services to the
needy. It made no charge for the counseling services, indicating they were separate from the
debt repayment arrangements. It made "a nominal charge" for monthly prorating services to
cover postage and supplies. For financial support, it relied upon voluntary contributions from
local businesses, lending agencies, and labor unions. The reference to "lending agencies"
suggests that what are now called fair share payments were involved.

Rev. Rul. 70-186, 1970-1 C.B. 128, which relates to an organization exempt under section
501(c)(3) of the Code organized and operated to maintain and improve a lake as a public
recreational facility. In that ruling, the private benefits derived by lake front property owners
were found not to lessen the primary public benefits flowing from the organization's operations.
This case is distinguishable from a situation where an organization uses its funds primarily to
foster private interests and the benefit, if any, to the general public is only incidental.

In the case of Consumer Credit Counseling Service of Alabama, Inc. v. U.S., 44 A.F.T.R.2d
78-5052 (D.D.C. 1978), the District Court for the District of Columbia held that a credit

counseling organization qualified as charitable and educational under section 501(c)(3). It
fulfilled charitable purposes by educating the public on subjects useful to the individual and
beneficial.to the community. Treas. Reg. § 1.501(c)(3)-1(d)(3)(i)(b). For this, it charged no
fee. The court found that the counseling programs were also educational and charitable; the
debt management and creditor intercession activities were “an integral part” of the agencies’
counseling function and thus were charitable and educational. Even if this were not the case,
the court viewed the debt management and creditor intercession activities as incidental to the
agencies’ principal functions, as only approximately 12 percent of the counselors’ time was
applied to debt management programs and the charge for the service was “nominal.” The
court also considered the facts that the agency was publicly supported and that it had a board
dominated by members of the general public as factors indicating a charitable operation. See
also, Credit Counseling Centers of Oklahoma, Inc. v. United States, 79-2 U.S.T.C. 9468
(D.D.C. 1979), in which the facts and legal analysis were virtually identical to those in

_ Page 53 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A 7 EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer . Year Ended
XXXXX

Consumer Credit Counseling Centers of Alabama, Inc. v. United States, discussed

immediately above.

The organizations included in the above decision waived the monthly fees when the payments
would work a financial hardship. The professional counselors employed by the organizations
spent about 88 percent of their time in activities such as information dissemination and
counseling assistance rather than those connected with the debt management programs. The
primary sources of revenue for these organizations were provided by government and private
foundation grants, contributions, and assistance from labor agencies and United Way.

Outside the context of credit counseling, individual counseling has, in a number of instances,
been held to be a tax-exempt charitable activity. Rev. Rul. 78-99, 1978-1 C.B. 152 (free
individual and group counseling of widows); Rev. Rul. 76-205, 1976-1 C.B. 154 (free
counseling and English instruction for immigrants); Rev. Rul. 73-569, 1973-2 C.B. 179 (free
counseling to pregnant women); Rev. Rul. 70- 590, 1970-2 C.B. 116 (clinic to help users of
mind-altering drugs); Rev. Rul. 70-640, 1970-2 C.B. 117 (free marriage counseling); Rev. Rul.
68-71, 1968-1 C.B.249 (career planning education through free vocational counseling and
publications sold at a nominal charge). Overwhelmingly, the counseling activities described in
these rulings were provided free, and the organizations were supported by contributions from
the public.

The court held in B.S.W. Group, Incorporated v. Commissioner of Internal Revenue, 70 T.C.
352 that “It is with some reluctance that we conclude that petitioner is not an organization
described in section 501(c)(3) because its primary purpose is neither educational, scientific,
nor charitable, but rather commercial. Petitioner's officers, at least for the present time, serve
without compensation, and there is no indication in the record that their personal motives are
different from the stated purposes of petitioner. Furthermore, we are troubled by petitioner's
assertion, on brief, that commercial consulting firms have not, in fact, shown any inclination to
enter this particular field of consulting. Nonetheless, limiting our consideration to the materials
in the administrative record as we must, we are unable to find that petitioner's primary purpose
is educational, scientific, or charitable, rather than the conduct of an ordinary commercial
consulting enterprise in competition with other commercial firms.”

In addition, the court found that the organization's financing did not resemble that of the typical
501(c)(3) organization. It had not solicited, nor had it received, voluntary contributions from the
public. Its only source of income was from fees from services, and those fees were set high
enough to recoup all projected costs and to produce a profit. Moreover, it did not appear that
the corporation ever planned to charge a fee less than "cost." And finally, the corporation did
not limit its clientele to organizations that were section 501(c)(3) exempt organizations.

. Page 54 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXXX XXXXX

In St. Louis Science Fiction Limited v. Commissioner, T.C. Memo 1985-162, April 2, 1985, the
Court reviewed the annual convention of a science fiction organization. It held that while the
conventions may have provided some educational benefit to some of the individuals involved,
that social and recreational activities and private benefit predominated.

- In Church of Gospel Ministry, Inc. v. United States, 640 F. Supp. 96, 1986 U.S. Dist., due to
the taxpayer's failure to keep adequate records, the court held that the taxpayer failed to
sustain its burden to show that it was qualified for federal tax exemption as a corporation
organized and operated exclusively for religious and charitable purposes, as required under
IRC §501(c)(3), and that it was further qualified to receive deductible charitable contributions
under IRC §170(c)(2). The court found that the inadequate records failed to show that the
taxpayer's Operations did not inure to the private benefit of its officers, as provided under IRC
§6001. The court found that as a prerequisite to an IRC §6033 filing exemption, it was
necessary for the taxpayer to show it qualified as an IRC §501(c)(3) organization, which it

. could not.

In Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279 (1945), the
Supreme Court held that the presence of a single non-exempt purposes, if substantial in
nature, will destroy the exemption regardless of the number or importance of truly exempt
purposes. Also, the existence of a substantial nonexempt purpose, regardless of the number
or importance of exempt purposes, will cause failure of the operational test. The Court found
that the trade association had an “underlying commercial motive” that distinguished its
educational program from that carried out by a university.

Similarly, in American Institute for Economic Research v. United States, 302 F.2d 934 (Ct. Cl.
1962), the Court considered the status of an organization that provided analyses of securities
and industries and of the economic climate in general. The organization sold subscriptions to
various periodicals and services providing advice for purchases of individual securities.
Although the court noted that education is a broad concept, and assumed for the sake of
argument that the organization had an educational purpose, it held that the organization had a
significant non-exempt commercial! purposes that was not incidental to the educational
purpose and was not entitled to be regarded as exempt.

In Easter House v. United States, 846 F. 2d 78 (Fed. Cir. 1988), affg 12 Cl. Ct. 476 (1987), the
court found an organization that operated an adoption agency was not exempt under section
501(c)(3) of the Code because it operated for a substantial commercial purpose rather than for
the exempt purposes of providing educational and charitable services to unwed mothers and
children. The services for unwed mothers and children were merely provided "incident" to the
organization's adoption service business. The agency's operation was funded completely by
the fixed fees charged adoptive parents. It relied entirely on those fees and sought no funds

from federal, state or local sources, nor engaged in fund raising programs, nor did it solicit
Page 55 of 118

Department of the Treasury - Internal Revenue Service ‘Form 886-A


Form 886-A | EXPLANATION OF ITEMS Schedule or
Exhibit No.
Name of Taxpayer | Year Ended

contributions. Moreover, the court found that "adoption services do not in and of themselves
constitute an exempt purpose.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the court relied on
the “commerciality" doctrine in applying the operational test. Because of the commercial
manner in which this organization conducted its activities, the court found that it was operated
for a non-exempt commercial purpose, rather than for a tax-exempt purpose. "Among the
major factors courts have considered in assessing commerciality are competition with for profit
commercial entities; extent and degree of below cost services provided; pricing policies; and
reasonableness of financial reserves. Additional factors include, inter alia, whether the
organization uses commercial promotional methods (e.g. advertising) and the extent to which
the organization receives charitable donations."

The Credit Repair Organizations Act (CROA), Pub. L. No. 104-208, § 2451, 110 Stat. 3009-
455 (Sept. 30, 1996), 15 U.S.C. § 1679 et seq., effective April 1, 1997 imposes restrictions on
credit repair organizations, including forbidding the making of untrue or misleading statements
and forbidding advance payment, before services are fully performed. 15 U.S.C. § 1679b.
Significantly, section 501(c)(3) organizations are excluded from regulation under the CROA.

The CROA defines a credit repair organization as:

(A) any person who uses any instrumentality of interstate commerce or the mails to sell,
provide, or perform (or represent that such person can or will sell, provide, or
perform) any service, in return for the payment of money or other valuable
consideration, for the express or implied purpose of—

(i) improving any consumer's credit record, credit history, or credit rating, or

(ii) providing advice or assistance to any consumer with regard to any activity or
service described in clause (i).

15 U.S.C. § 1679a(3). The courts have interpreted this definition broadly to apply to credit
counseling agencies. The Federal Trade Commission's policy is that if an entity
communicates with consumers in any way about the consumers’ credit situation, it is providing

a service covered by the CROA. In Re National Credit Management Group, LLC, 21 F. Supp.
2d 424, 458 (N.D.N.J. 1998).

Because 501(c)(3) organizations are exempt from regulation under the CROA, organizations
that are involved in credit repair have added incentives to be recognized as section 501(c)(3)
organizations even if they do not intend to operate primarily for exempt purposes.

Page 56 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A | EXPLANATION OF ITEMS Schedule or
. Exhibit No.

Name of Taxpayer Year Ended
XXXXX

In FTC v. Gill, 265 F.3d 944 (9th Cir. 2001), affg 183 F. Supp. 2d 1171 (2001), the appellate
court inferred that a credit repair organization that first promised a "free consultation,” but
charged fees in advance of the full performance of services was being operated as a charity
primarily for purposes of evading regulation under the CROA.

In Credit Counseling Centers v. S. Portland, 814 A.2d 458 (S. C. Me. 2002), the Supreme
Court of Maine denied state tax exemption to a credit counseling agency that provided
significant benefits to creditors. Credit card companies commonly make payments to credit
counseling agencies of a portion of the funds they receive from clients of the agencies. These
payments are known as “fair share” payments and are a source of substantial funding for credit
counseling agencies. In this case, the credit counseling agency received 60 percent of its
income from “fair share” payments from credit card companies, at the rate of 8.5% to 9% of
debt payments.

Prohibited private interests include those of unrelated third parties as well as insiders.
Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978); American
Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). Private benefits include an
“advantage; profit; fruit; privilege; gain; [or] interest.” Retired Teachers Legal Fund v.
Commissioner, 78 T.C. 280, 286 (1982).

In International Postgraduate Medical Foundation, T.C. Memo. 1989-36, one individual
controlled both a nonprofit that ran tours aimed at doctors and their families and a for-profit
travel agency that handled all the nonprofit's tour arrangements. The non-profit spent 90
percent of its revenue on travel brochures prepared to solicit customers for tours arranged
by the travel agency. The tours were standard sightseeing trips, with little of the alleged
medical education that was the basis for exemption. The Tax Court held the petitioner was
not tax exempt, finding that it was operated for the benefit of private interests, namely the
founder's travel agency. The court found that a substantial purpose of the nonprofit was to
increase the income of the travel agency. (In this case there was both inurement and
private benefit.) Also, its activities were directed at providing opportunities for recreation,
not education.

The inurement prohibition provision “is designed to prevent the siphoning of charitable receipts
to insiders of the charity... .” United Cancer Council v. Commissioner, 165 F.3d 1173 (7th Cir.
1999). . Reasonable compensation does not constitute inurement. Birmingham Business
College v. Commissioner, 276 F.2d 476, 480 (5th Cir. 1960).

The Tax Court holds in People of God Community, v. Commissioner of Internal Revenue, 75
T.C. 127, that “Part of petitioner's net earnings inure to the benefit of private shareholders or

Page 57 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A | EXPLANATION OF ITEMS Schedule or
. Exhibit No.
Name of Taxpayer Year Ended
XXKKXK

individuals. Accordingly, petitioner is not exempt as an organization described in sec.
501(c)(3), I.R.C. 1954.”

“The statute specifically denies tax exemption where a portion of net earnings is paid to
private shareholders or individuals. We hold here that paying over a portion of gross earnings
to those vested with the control of a charitable organization constitutes private inurement as
well. All in all, taking a slice off the top should be no less prohibited than a slice out of net.”

“In other words, section 501(c)(3) denies exempt status to an organization whose founders or
controlling members have a personal stake in that organization's receipts. Founding Church of
Scientology v. United States, supra. Such is the case here, where petitioner's ministers, and
Donhowe in particular, completely control its affairs. Petitioner therefore fails to qualify for
exemption under section 501(c)(3).”

GOVERNMENT POSITION:

Audit Observation Limitations

Before we discuss and analyze XXX operations, we first need to provide some clarification
about what was available to be reviewed. As in most audits, we are not able to go back in time
and actually observe an organization conduct the actual activities that they were conducting
during the audit period. We must rely on documented evidence to show how they conducted
their activities during the period of an audit. We also look at their current activities and try to
determine how the prior activities would have been in comparison. This is the historical
approach to examinations. This case is no different to other audits in that respect, with a small
exception. |

XXX as part of their operations constantly records phone calls and the actual computer
screens the CSRs use in performing their work in the phone center. However, even though
XXX is required to maintain records to show they are meeting the operational tests under
501(c)(3), they chose not to maintain any of these historical recordings. This was undoubtedly
a choice they made by considering the costs involved with maintaining such records.

In Church of Gospel Ministry, due to the taxpayer's failure to keep adequate records, the court
held that the taxpayer failed to sustain its burden to show that it was qualified for federal tax
exemption. Since we are unable to observe the calls in the past, we don’t understand how or
why XXX is claiming that it is unfair to listen to the current phone calls to determine what they
did in the past. Their argument seems to be that they don’t have records to adequately prove
what occurred on the phone calls to show how their call center operations worked, which as
we will show is a critically important part of their operations.

Page 58 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
. ; Exhibit No.
Name of Taxpayer Year Ended
, | XXXXX

However, during the audit, we did have access to a great volume of the manual XXX uses
which documents how XXX was operated. We were provided various versions of the manual,
as it is constantly being updated. The number of documents or versions we didn’t have access
to is unclear to either XXX or to us, but we feel it provides a fairly complete picture of how XXX
historically instructed its employees to perform their duties.

Additionally, upon interviewing the executives early in the audit, and the CSRs much later in
the audit, we were told that XXX’s activities have pretty much remained constant over the
years, as far as the phone center operations go. XXX has just become much larger because of
the agreement entered into with XXXX, which occurred before the audit periods. The individual
Phone calls with the individual clients have remained the same from the periods under audit to
the current period.

We also had access to the client files and the notes taken in the XXX computer system. At the
suggestion of the XXX's CFO, we looked at client files from the time period covered by the
audit and compared them with the client files of current clients. We also looked at the notations
made in the past and compared them with notations made currently. While every single client
they talk to is different, we were able to determine that the same basic documentation was
available for the past and the current clients. This led us to the conclusion that it would be
appropriate to listen to calls from the current period to determine how they were operating in
the years under audit.

Therefore, during our audit, we felt that we were able to get a full understanding of how XXX
was operated from July XXXX to June XXXX, and into the present.

Another observation that should be made is the “image” projected by XXX during our audit.
They have consistently represented that they were educational, above and beyond, the rest of
the industry. They have constantly tried to set themselves apart from other credit counseling
agencies, as the model in the industry; a truly educational organization.

XXX executives have been on notice since before®’ this audit began. The CEO and XXXX, are
both members of XXX with the CEO being on the Advisory Board of XXXX. Their in-house
counsel and XXXX, XXXX, is the chairman of the XXXX for XXXX. Throughout the audit, XXX
executives made several trips to Washington DC to keep informed of Industry developments.
When the July 2004 Office of Chief Counsel Memorandum 200431023 was issued, XXX
executives were immediately aware of this and even discussed it with us briefly.

37 We use the term “before”, meaning XXXXXXXXXXX.
Page 59 of 118 -

Department of the Treasury - internal Revenue Service Form 886-A


‘Form 886-A | EXPLANATION OF ITEMS Schedule or
: Exhibit No.
Name of Taxpayer Year Ended
XXXXX

XXX has always been fully aware of the guidance that was available indicating how they
should be operating, mainly the two rulings and two court cases. They were also aware that
the probability of an examination of their organization due to their size was extremely high.
They were actually anticipating the initial call informing them of the audit. From the time we first —
sat down with them in the initial interview, they have stressed education as their main goal,
knowing that was the key to their exempt status.

So if there had been any change in the method in which they have done business since the
periods covered by the audit, it would surely be in favor of providing education. It is
unconscionable, that with the scrutiny this industry is under and the awareness of XXX of both
this scrutiny and of the educational requirements to remain exempt, that they would possibly
change their operations to be less educational.

Therefore, we have full confidence that whatever observations we made during the audit,
would show XXX to be as educational or. more, than the actual operations in the periods
covered by the audit.

issue 1 — XXX’s primary activities do not accomplish an exempt purpose?

To meet the requirements of section 501(c)(3), an organization must be both organized and
operated exclusively for charitable and other enumerated purposes. The term charitable
includes relief of the poor and distressed. Section 1.501(c) (3)-1(d)(2), Income Tax
Regulations.

XXX provides its services to the general public regardless of income. They have also never
claimed to be operating for the benefit of the poor, so this will not be discussed in any detail.
Additionally, the class of people XXX provides services to, debtors, have never been
determined to be a charitable class and XXX is not making this claim now. Therefore, they are
not operated for the benefit of the poor or any other charitable class. Section 1.501(c) (3)-
1(d)(2) of the Regulations.

However, educational organizations are also classified as charitable. The term educational
includes (a) instruction or training of the individual for the purpose of improving or developing
his capabilities and (b) instruction of the public on subjects useful to the individual and
beneficial to the community. Section 1.501(c)(3)- 1(d)(3). In other words, the two components
of education are public education and individual training.

Whether an organization operates exclusively for charitable purposes depends on the
application of the operational tests set forth in the income tax regulations. The regulations
provide:

. Page 60 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXXX 7 XXXXX

An organization will be regarded as "operated exclusively” for [charitable] purposes only if it
engages primarily in activities which accomplish one or more [charitable] purposes specified in
section 501(c)(3).

Since XXX’s operations are so overwhelmingly consumed by the call center operations and
support for the call center operations, both in terms of time involved, employee resources, and
in terms of both revenue and expenses, this is clearly their primary activity. Therefore, we must
look at that activity to determine if it accomplishes an exempt purpose. We have previously
shown that 80% of the employees at XXX perform direct work and almost exclusive work in the
call center and the support for the call center. The other 20% perform work either as a result of
the call center operations, like the accounting department, or so the call center can operate,
like the Communications & Security, Facilities, H.R., & 1.T. Instruction XXXX shows how the
entire XXX operation supports the New, XXX, and Open Accounts areas. Therefore, almost all
of their employees, directly or indirectly, work to run the call center operations. We have also
shown that 99% of the revenues and substantially all of the expenses are spent on the call
center and its operations related to the DMPs. Looking beyond this to determine their primary
activity or purpose is not logical in this case.

XXX cannot argue that the intake of callers, the handling of callers, the processing of DMPs,
the servicing of the DMPs, and all the support services directly related to DMPs is the
overwhelming majority of the operations that XXX performs. Therefore, for XXX to be exempt,
we must find that the call center operations, and its supporting departments, are educational.

As we have indicated above, XXX is a member of several different organizations, including the
BBB, XXX, ISO, XXXX and XXXX. We have described what each of these organizations’
activities and purposes are. For the purposes of this discussion, we simply want to re-
emphasis what they do not do. None of the organizations have the authority or responsibility to
monitor and ensure that XXX is conducting educational activities. While membership in these
organizations may seem to be impressive on some level, the memberships have absolutely
nothing to do with whether or not XXX is actually conducting educational activities or operating
in an exempt manner, period. .

Additionally, while it is commendable that XXX is a member of the BBB, this simply means
they have been able to meet the requirements of the BBB, specifically in terms of complaints
from.the public. This is certainly more than some CCC organizations can claim, and does
provide evidence to separate XXX from the fraudulent and abusive credit counseling
organizations. Again, however, this does not make them an educational organization.

The high level overview provided in the fact section was taken directly from XXX's own
Manual. While they describe the purpose of XXX as providing debt management, budgeting

Page 61 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
. ) Exhibit No.
Name of Taxpayer . . Year Ended

and education services, we have found that what they actually provide is debt management
services only, a service that does help many of XXX's clients get out of debt.

When XXX describes what it actually does in the Manual, they describe only their debt
management plan, not budgeting or educational services. They state they are a process-based
organization acting as a liaison between client and creditor to obtain concessions whereby the
client makes one payment, instead of many. They describe how the new accounts area
screens callers for DMPs, proposes an appropriate solution and establishes a pending
account. Since pending accounts are only established for DMPs, XXX is stating in their Manual
that DMPs are the only proposed solution. It is actually more correct to say that the only
solution XXX helps clients with, in order to get them out of debt, is the DMPs.

The Manual then goes on to briefly describe the DMP process. In the simplest terms, XXX's
Manual acknowledges that the primary activity of XXX is the DMP. Again, a DMP is a tool used
to restructure unsecured debt, which allows a consumer to consolidate unsecured debt; lower
interest rates and monthly payments, obtain re-aging of debts, and/or curtail collections calls,
penalties and over-limit fees. The concessions and guidelines are pre-set by creditors, which
any consumer credit counseling (CCC) organization then uses to provide benefits to their
clients and to distribute payments to the clients’ creditors.

DMPs have been around in this industry for some time. They are referenced in both rulings
covering the credit counseling industry, Rev. Rul. 65-299 and 69-441. They were also
mentioned in the two main cases dealing with the credit counseling industry, CCCS of
Alabama and CCCS of Oklahoma. The simple fact that DMPs are offered is not the
determining factor, but in what context are they offered. This is what we will look at to
determine if XXX is operated primarily to accomplish exempt purposes, and we will have to
look at numerous factors to make that determination.

Counseling Sessions

We will start by looking at the counseling sessions directly. At XXX this starts in the new
accounts department or at XXXX. However, since we don’t have access to XXXX operations,
we are unable to evaluate those sessions. Since XXX doesn't control those operations, we
simply cannot assume that XXXX’s, one of the largest for-profit unsecured credit issuers in the
United States, operations will be more “educational” that XXX's own operations.

Additionally, XXX did not provide any information to support that XXXX was conducting
educational activities. As is required by Regulations Sections 6001 and 6003, XXX has the
responsibility to show it is operating in an exempt manner. Since they have provided no .
information to show XXXX is conducting their educational activities, they cannot now say, this

is how they meet their exempt purpose. Additionally, since they do not control XXXX
: Page 62 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A

6 EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

operations, they cannot claim credit for any claimed educational activities of XXXX°°. XXX
activities will have to show they are educational on their own.

New Accounts

The operations in the New Accounts Department were reviewed by interviews with the
customer service representatives, supervisors, and officers of the organization. We also
reviewed manuals (XXX, XXX, XXX and XXX), client folders, account notes and other source
documents, We also listened to a number of calls between new accounts CSRs and callers. All
of this information was used to create this analysis and to come to our conclusion.

h°? t*°

In the fact section, we established that clients come into XXX either with”~ or without™ financial
information already on the software system. If the financial information is not filled out, the new
accounts CSR does this immediately. When the items of income, expense, and unsecured
debt are covered, the software system determines if the caller is a XXXX client. XXX refers to
this as “pre-qualifying the client for a program’.

The financial items are accepted as given by the caller; they are not questioned at all. XXX
does not get a full financial history of a client, for example, the CSRs do not ask about assets
or secured debt balances. There is no discussion with the caller about spending habits. There
are no discussions of how the budget may change in the future, concerning either increased or
decreased income or expenses. There is no discussion of the client's educational background
or the client's health or other life issues that could impact the financial situation.

If the client is determined to be XXX or XX, and is close to being XXX, the CSRs are required
per their manual to go back over the budgets to look at possible adjustments that can be
made, in order to get them into XXX. From the top down, XXX feels that they can help people
out of debt, if they can get them on a DMP. Therefore, the CSRs are to look for “adjustments” :
that could be made to get them on a program, without being over zealous about doing so. We
listened to several phone calls where this occurred. This was not part of an educational
process, but simply a query to lower expenses or increase income, to qualify them for a DMP.
For example, a CSR might ask can we lower your clothing budget. They do not discuss the
clothing budget, to determine if it can or should be lowered. The CSR only wants to know, if
the caller will allow the CSR to lower the itemized cost of that item in the budget, to qualify the
client for a DMP. This certainly is not part of any educational process.

38 XXX also claims that the true education doesn’t really start with the initial phone call, as we will discuss later, so claiming
XXXX activities as their exempt activities is unlikely.
° From XXXX or from the Web application form.

4 All others.
Page 63 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS — Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

XXX knows that if the caller is too far out of the XXX ranges, they have little hope of being
accepted on the plan by creditors, if XXX, or have little hope of staying on a DMP for any
meaningful amount of time, if XXX. Having said this, we believe XXX operates basically in an
ethical manner, and truly attempts to help their clients out of debt. We have never stated that
XXX signs up, or attempts to sign up every single caller. However, they do try to sign up every
caller that is XXX and do make attempts to move XXXX and XX callers that are borderline, into
the XXX category. . |

After the CSR attempts to adjust the budget to qualify the XXX“ caller and he is unable to do
so simply by asking them to increase expenses or lowering income, the CSR is instructed to
dismiss the caller by telling them that they do not qualify for a DMP, to review their budget
closely for possible lifestyle adjustments, contact their creditors for a solution, and to make
consistent monthly payments to their creditors.

Again, this XXXX caller is calling because they believe they are having financial difficulties. By
operating in this manner, XXX does not probe the spending habits of the caller to determine if
education may be the only need of the caller. This really applies to all callers regardless of the
XXX they are classified in. There are many areas of education that could be provided to all
their callers to help improve their financial literacy and financial situation. Instead, XXX does
not offer assistance to these people. Again, the CSRs are not trained to or told to probe the
budgets to look at spending habits or discuss excessive spending.

The XXXX caller receives essentially the same services as a XXXX caller; XXX gets their
income, expenses, and unsecured debt and inputs this into a budget, the computer then
assesses them as a XXXX client and the CSR then recommends the caller seek legal advice.

While XXXX42 callers may be asked if some expenses might be lowered43, for the purposes of
qualifying them for a DMP, the callers spending habits are not thoroughly discussed to
determine patterns of spending or if excessive spending can be found, as part of an
educational process. The caller's assets are not reviewed to determine if a sale could be a
solution to their debt problem. There is simply no full discussion of all aspects of the callers’
financial situation that a true financial counselor could use to provide specific guidance or
education tailored to that individual. The CSRs are told, through their training and instruction,
and by the XXX manual, they are only to recommend the client seek legal counsel. That is the
end of these callers’ relationship with XXX.

41 Too much income for a DMP.
42 Too little income for a DMP.

43 Or possibly if income can be increased.
Page 64 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or

Exhibit No.
Name of Taxpayer Year Ended
XXXXXK XXXXXK

For both XXXX and XX callers, the XXXX suggests that the CSR should offer additional
assistance, but does not state what that assistance should be. The caller at this point realizes
that a DMP will not be provided and that whatever options may be available will not come from
the CSR. The document expressly tells the CSR that although XXXX and XXXX callers may
not receive a DMP, they are instructed that the caller need to look elsewhere for financial
counseling.

Additionally, XXX claims that all XXXX are provided a 1) copy of the financial assessment,
which is really just the income and expense figures that the caller gave to the CSR, and 2)
XXX's financial management software through their website. However, based on Instruction
XXXX it does not appear that they started doing this until 11/2/XX, which is after the audit
period. We also found that the current website states that only active clients can download the
software for free. Therefore, just like any member of the general public, the only thing that it
appears all XXXX get from XXX is access to their website, which has limited use for the
purpose, of providing education to financially distressed persons.

If after taking the budget, the caller is classified as a XXXX client, there is no additional
information discussed about the budget, spending habits, or financial situation of the caller.
They are simply offered a DMP. They are immediately explained that they qualify for the DMP,
and are explained the benefits of a DMP. Even though XXX calls this “Explain services
available”, we have already established that XXX has only one service, one solution, a DMP..
From here it is up to the client to decide if they want to be in a DMP or not.

Another area that XXX falls short in, is the options that it presents to the callers. As we have
stated before, the.CSRs only option to help a client with, is the DMP. Unless, the caller outright
refuses to sign up for a DMP, they would never be given another ‘option. If a XXX caller just
decides not sign up, they might never talk to a XXX CSR again”

Here are some examples of some additional options that XXX CSRs do NOT generally discuss
with clients:

Coaching clients on negotiating directly with creditors.

Discussing the mechanics and advantages of creating and maintaining a budget. 45
Recommending changing buying habits or strategies for saving money.

Discussing custom-designed payment plans.

“XXX procedures certainly provide that XXX will attempt to talk to the caller to encourage them to sign up for a DMP but
it is not guaranteed the caller will ever be reached again.
“® Remember, the budget that the CSR takes is simply Income and Expense information with limited analysis as to the

preparation of the budget; used only to identify the caller as a potential client. ;
; __ Page 65 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A | _ EXPLANATION OF ITEMS Schedule or
: Exhibit No.

Name of Taxpayer | Year Ended

• Presenting advantages and difficulties of all options including bankruptcy, DMPs, self-
administered payment plans, etc.

We did not hear any of these, or other options, offered to any caller, no matter the XXX that
XXX placed them in. There is no mention of any of these, or other options, in any of their
manuals. XXX simply has one solution, the DMP.

While the entire intake process may occur over one or more phone calls, this is what occurs in
the initial phone call that XXX claims is 45 minutes to an hour long, or as XXXX claimed in
XXXXX up to 2 or 3 hours long. We certainly do not have anything to refute that some calls last
2 or 3 hours, but we believe a 2 hour call would be extremely rare and a 3 hour phone call
would certainly be the subject of discussion with a supervisor. They are not the norm!

The new accounts CSRs are evaluated on phone time and calls per hour. The average call
times for a new accounts. representative is approximately 24 minutes in length. Based on our
audit though, that is just an average time. From our observations, we believe that a full intake
session, which may be one or more phone calls combined, does last 45 minutes to over an
hour. While this amount of time would indicate XXX allows adequate time to discuss education,
we did not find that the CSRs used this time to obtain a full financial picture of a client and
provide financial education. Instead, we found that the CSRs obtained enough financial
information to properly classify the caller into XXXXs, and then offer a DMP if XXXX.

In our review of the many, many XXXXs that cover the new accounts area, none of the XXXXs
contained any instructions or guidance for the CSRs to implement true education. The XXXXs
provide guidance in how the CSR obtains efficient call management by following a specified
procedure, not provide education. As we have stated several times, the only time education is
mentioned in the performance of any CSR duties, is in explaining the DMP. This was
corroborated by the XXXX | standards. For example, Identifying the issue, Call Outcome, and
Client Goals & Objectives,*° in reviewing these items listed in the XXXX, we found they state
the priority of management of phone calls, and the lack of instruction on how and why to
educate. XXX clearly demonstrates its primary object (DMP vs. education) by stating
“Ascertain and document any problems or concerns that the client may have”, “Approved client
for DMP, spooled agreement, sent EFT form” ...”Informed client that a DMP may not be in their
best interests as they have too much income left after paying debt”, and Account
documentation should clearly indicate the financial goals of the client”... “Client wants a debt
management program so that he can be debt free and financially stable within 5 years”,
respectively.

“S Instruction XXXX, page X of X.
Page 66 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A _ EXPLANATION OF ITEMS Schedule or
; Exhibit No.

Name of Taxpayer __ Year Ended

XXXKXX XXXXX

As it relates to the XXXXs and new accounts, we also want to go back and make some
additional comments about XXX's manual and the statements in them. In Instruction XXXX,
XXX emphasized the wording “if education is needed”. Not only were they only talking about a
DMP, but they are limiting this education, to only times when it is needed for time savings or
efficiency purposes.

Another statement that demonstrates XXX's lack of providing meaningful counseling is in this
same manual; they provide an example of notes written about a XXXX client. The example
shows they “educated” by telling the client to keep a journal to help track expenses and that
the XXX budgeting software was offered but declined. It then notes the person was advised to
meet with a certified financial advisor to help adjust their budget to meet their goals.

While the journal suggested certainly could be part of an educational process, they are not
telling the caller to call in to discuss the journal after the debtor maintains it over some period.
This is where the education would come in. XXX then actually instructs their CSRs to tell
callers to go to a certified financial counselor to help them adjust their budget to meet their
goals. This is precisely what XXX should be doing with every single caller. Instead XXX is
teaching and instructing the CSRs to tell financially distressed callers to go elsewhere for this
education and guidance.

The XXXX and XXXX are the reference points for all CSRs. These manuals, whether XXXX or
XXXX, are extremely detailed about every single aspect of a DMP, yet they have no
procedures that require any CSR to provide financial education, they are only to facilitate, ina
cost efficient manner, to determine if a DMP will fit each client (not due to educational or
financial preference of the caller) but to determine if the total income to debt will meet the
creditors’ acceptance. Surely, this is evidence that XXX's primary purpose is the DMP, not
education. -

All of this is further emphasized in the XXXXXX. This XXX multi-page document is a guide to
“complement the monitoring form by detailing our standards, providing rationale foreach
statement, and offering examples of positive verbiage that exemplify the standard”, as revised
on XXXXXX. This document provides insight to the communication between the new accounts
CSR.and client. The document provides a flow of communication to the caller. It tells the CSR
what should be said in each phase of the call. It also provides the detail and rationale. Clearly,
XXX has put a great deal of functional information together for the CSR, including the details,
and rationale; all of which excludes financial counseling or education.

The document instructs the CSR to suggest to the caller that they track daily expenses for the
purposes of evaluating where you may be able to. reduce your spending. While we reviewed
actual new accounts calls (we will refer to these as samples), no education was provided. The

CSRs did not even suggest the most obvious advice i.e. “spend less”. The samples did verify
Page 67 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


. | 7 _ {| Schedule or
Form 886-A — EXPLANATION OF ITEMS | | | Exhibit No.
Name of Taxpayer — _ | | Year Ended

however that the job of the CSR is to determine income and expenses and evaluate the caller
to determine if they will qualify for a DMP.

The rationale of the document, as stated for a XXXX client is: “Asa counselor, you have the
unique opportunity to educate our customers and help them attain success. Sharing all
pertinent information with a customer that affects his or her account satisfies their apparent
and unrealized needs and decrease future unnecessary calls”...

However, the rationale, as stated by the document is different than its true emphasis. The
document's emphasis is on efficiency and the focus of limiting time with a caller who will not
qualify for a DMP. The document discusses the phases of a XXXX caller into a DMP and the
success of the new accounts CSR is getting that person into a DMP. To look at it differently,
consider Instruction XXXX which emphasizes a DMP to anything is stated on page X; “The
determining factor in qualifying for the XXXX debt management program is for the processing
agent to determine if the client has too much income to need a debt management program. In
certain cases, the client may have more income than what is required to meet the creditors
minimum payments through such a plan....” And “the creditors will not accept a debt
management plan, in most cases, if the client can meet the normal monthly payments to them.
Therefore, the client is turned down on the basis of having too much income and advised
to readjust their household budget, contact the creditors for solutions, and to make consistent
monthly payments to their creditors”. What more can you deduce from this other than, the
DMP reigns and its implementation done as efficiently as possible? By reading the XXXXs,
XXX is foremost providing DMPs and instills the procedures necessary to efficiently implement
them as the most important thing. Why else would procedure after procedure to provide
guidance to the CSR to operate and maintain the workload of each client's DMP, so vital? The
mere mention of “readjust their household budget” is in the most exaggerated way providing
education. By stating in the procedure to instruct the CSR to tell the client, “don't spend as
much” is not providing education.

As we stated above, we also listened to a number of calls between new accounts CSRs and
callers. This was the subject of IDR 7, dated 3-9-XX. XXX responded on 7-25-XX with a 3 part
response. One part discussed our sampling techniques, one part summarized’ and analyzed
the calls and the last part summarized their response. XXX has stated that our sample does
not reflect their communications with clients in New Accounts, yet every call listened to was
homogenous and supported the contention that XXX’s instruction to their employees and their
employee’s adherence to its manuals support the company’s objective, which ultimately is to
provide clients who qualify, with a DMP. Since we feel this is an extremely important aspect of
the examination, we are now submitting attachment 19, as a rebuttal to the XXX response
dated July 25, XXXX. The summary of the attachments and our review of the 31 actual phone

*’ Their summaries of the calls were more detailed that the ones we had provided to them.
Page 68 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX

calls between the new accounts CSRs and callers that we reviewed, confirmed that the new
accounts area was basically an area that pre-qualifies callers for a DMP. We found no
substantive educational aspects to any of the phone calls. The foremost objective of these
calls was to obtain potential DMP clients. This contradicts statements made by XXX executives
verbally and in letters to us during the examination.

XXX states in their July 25, XXXX response, that the goals of New Accounts calls include
establishing a relationship, assessing the client's financial situation, setting up a budget,
making appropriate recommendations, and to the extent possible, helping the clients obtain
short-term relief for their short-term financial problems.

We agree that the new accounts area establishes relationships with callers, takes a budget
from the callers, and classifies them into XXXXs. As we have stated before, there is no
assessment of the financial situation though, the CSR simple takes the numbers as the clients
provide them. We do not agree that the CSRs make appropriate recommendations. Their
recommendations are based on the software generated determination of which class of client
they fall into. XXX offers a DMP and little else, which we also agree is short-term relief for what
we believe is a long-term financial problem in most cases. The CSRs do not probe enough to
determine if something is a long or short-term problem. It is not what they are hired for, trained
for or retained for. If they did probe this further, and found some true short-term problems,
most likely a DMP would not be the appropriate solution, unfortunately that is the only solution
XXX gives its CSRs to help the callers.

While, they again claim that they provide counseling, budgeting, educational materials and
access to educational materials to clients not recommended a DMP, we have already covered
the fact that they do not do this in any meaningful manner.

We also ‘need to respond to additional comments made by XXX. They stated that when clients
first call into the organization, they are simply not at a point where they are receptive to
education. This statement by XXX provides confirmation of our discussion above, that
education is not provided to clients in the “intake” process. So regardless if the caller is
determined to be a XXXX, XXX, or XXX individual, they are not provided with education. Ifa
XXXXX individual is not in a good position to be educated, XXX is not in a position to claim
XXXX or XX callers are in a better situation to be educated, especially when they are
dismissed so quickly by XXX after they are found to be XXXX or XX.

Therefore, even though XXX has stated numerous times and documents on their Form 990
that they “reach” XXXXX to XXXXX clients in a year, this does not mean they educate that |
many clients every year. By their own admission, XXX agrees that the “real” education doesn't
start until a client is on a DMP and continues through the long-term relationship they have with

the client as they are on the DMP. This “behavior” modification is more forced than taught.
Page 69 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX

Clients who accept the DMP are asked not to take on new debt since their accounts will be
closed except for one major credit card for emergencies. New accounts CSRs’ duties are not
designed to provide valuable education on consumer debt.

In summary, by interviewing CSRs, supervisors, and officers of the organization, reviewing
manuals, client folders, account notes and other source documents, and in listening to 31 open
accounts calls we have determined that the new accounts area pre-qualifies callers for a DMP,
explains the DMP to the callers and attempts to get them to sign up for a DMP. We conclude
that the counseling sessions and contacts made during this period are not educational
activities or in furtherance of education as defined by the Code. New Accounts is the
“Gateway” of the distressed borrower to XXX. If they qualify for a DMP they are admitted for a
5 year relationship interested in the management of their debts. The rest unfortunately, after
receipt of the XXXX and XX brochures and the self directed invitation to their website, are
locked out. They in fact need to find their questions and needs answered elsewhere, hopefully
by a 501(c)(3) charity that performs counseling or by other qualified financial counselors.

Nevertheless, this does not conclude XXX's involvement with a client, we must look at the next
series of contacts a caller may have with XXX. These contacts are in XXX’s XXX area.

XXX contacts

The primary purpose of the XXX area is to make sure the clients’ creditors all accept the
proposals sent out by XXX and that the client fully understands what to expect when being the
DMP. The XXX area emphasizes the clients making timely payments and reviewing their
monthly statements. In order to reduce unnecessary phone calls, the XXX area also covers
numerous areas that will likely be of concern to the clients as the DMP gets started. For
example, they inform them the APR’s on some credit cards might not be reduced or the
accounts will not be re-aged for some time. They also let them know collection calls may
continue for a short period as well.

As we have stated in the facts section, the XXX manuals, checklists, and the reviews done by
QA do not discuss the XXX CSRs providing any type of counseling, discussions of buying
habits, discussions on the budgets or anything remotely resembling financial counseling or
education.

In our review of recorded calls, we were able to listen to 2 XXX calls. While those calls were
not from the years of the audit, the CSR we interviewed confirmed that the job of a XXX CSR
has been consistent over the time she has been with XXX, which goes back XX years covering
the period of the audit. Our review of the XXX calls showed that the calls closely followed the
requirements in XXX manuals and training materials.

Page 70 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXKXXK

As a normal part of their duties, XXX CSRs do not dig into the financial situation of the clients.
They do not discuss their employment, education, buying habits, significant expenditures, any
significant past or anticipated changes in their earnings, assets, expenses and liabilities, or the
reasons or causes for those changes. Remember, XXX has told the CSRs that , XXXXX we
are not concerned with the reasons our customer's are in debt. Our goal is to provide quality
service and assistance to help them manage their debt. Without discussing this information,
the XXX CSR is unable to provide basic financial counseling. .

Further without this information, they are unable to recommend additional help that may be
needed to help the client, which may or may not be directly related to their financial problems.
For example, the client may have a drinking, drug or gambling habit. They may need
employment assistance or training to obtain better employment. The list is veritably endless on
the other causes of their debt that XXX simply does not deal with.

In summary, in interviewing a CSR, a supervisor, and officers of the organization, in reviewing
manuals, client folders, account notes and other source documents, and in listening to 2 XXX
calls we have determined that XXX CSRs make sure all proposals are accepted and the DMP
is operating. smoothly before they transition the clients’ accounts to open accounts.
Furthermore, we conclude that the contacts made during this period are not educational.

Open Accounts

After clients make it through the XXX department, the clients remain with the open accounts
until they get off the DMP, for one reason or the other.“® Since, XXX claims that the education
they provide is a result of their long-term relationship with the clients; this is an area that
demands a very close examination and analysis. Since this relationship covers such a long
period, and covers so many situations, we feel being thorough in this analysis is required.

In the facts section, we listed numerous XXX manuals, checklists, forms and flowcharts that
explain how an open account CSR is to perform their job. We went into detail of how they are
to conduct portfolio reviews, statement reviews, delinquent account reviews, and many other
procedures. We found that there are no instructions that require or indicate that a CSR should
attempt to provide financial education to the clients. However, we need to be very clear here,
as XXX puts it, the CSRs are required to “educate” the clients.

This may sound like we are splitting hairs here, but this is simply not the case. There is a great
difference between providing counseling or financial education and “educating” clients as this
term is used by XXX. The best way to explain this, is simply by providing examples of how
XXX uses that term. ;

“*.This generally means they are paid in full or they stop making payments, either timely or at all.
Page 71 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


‘| Schedule or
Form 886-A }. | | - EXPLANATION OF ITEMS - | Exhibit No.
“Name of Taxpayer | ——- Year Ended

While.some of the XXXs indicate that CSRs should educate the client or indicate that
education is the key to success, this must be viewed in the context in which it is used. For
example, Instruction XXXX discusses this is several places. It explains the CSR should use the
F-2 key, F-3 key, F-5 key (client and creditor notes) to make recommendations and ask
questions. The description of the function keys was found in Module 4, page X, of the open
accounts training manual, attached as Item 20.

The F-2 Key is for Creditor File Inquiries. The purpose of this key is to view the client's
creditors and the last payment amounts. So here the CSR could educate the client on their
balance being reduced, that payments are being made timely to the creditors, or similar items.
This is not financial education or counseling.

The F-3 key is for Customer Receipts Inquires. Here the CSR can see the client's payment
history. The CSR can thus educate the client that they are making payments timely and
encourage them to continue or they can educate them to make more regular payments. This is
not financial education or counseling.

The F-5 key is the notes inquiry. This allows the CSR to review all the notes on the account.
They will be educating them on the progress of the DMP or possibly creditor issues. As with
the other times the word education is used by XXX in the XXXX, they are to be “educating” the
client on some aspect of the DMP.

All of the function keys discussed deal with XXX’s financial success just as much as the
client's success in paying off their debts. Any “education” provided as a result of following that
XXX deals directly with the DMP. This is not financial education or counseling.

This same XXXX under a different heading simply states “Describing XXX benefits. Offer
information on the program,... remember education is the key to.success.” Again, they are
equating education of the client to explaining how the DMP will benefit them. Moreover, they
describe this as XXX benefits, not DMP benefits. This is at the core of why XXX should not be
exempt. In their own view, XXX = DMP; their main purpose is to help people through DMPs,
not through education. The benefit of being a XXX client is the DMP, not education. This is just
one of many instances were this can be seen in the XXX manual.

In later versions of Instruction XXXX, discussed above, they have cut and pasted some of
these phrases to other sections to make it appear as if XXX does require the CSRs to provide
financial counseling. However, both the XXX executives and the CSRs interviewed have stated
the CSRs jobs have not substantially changed over time. As we clearly show, there is no
evidence whatsoever those CSRs provide any type of financial counseling required to maintain

XXX's exempt status.
Page 72 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


. Schedule or
Form 886-A - EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXKX XXXXX

Instruction XXXX, states “Our purpose at XXX is to better the lives of our clients. If the CSR’s
are not addressing and resolving the clients concerns, have we served our purpose?” This is
another example that confirms the purpose of XXX is to help the clients; it is NOT to educate
them.

Instruction XXXX, in question 10 concerning the XXX review portion, states “without this
initial/on-going conversation, XXX most likely will miss opportunities to educate the clients. The
information outlined in XXXX is critical information, which will help the client in the success of
the program.” We have previously reviewed this XXXX, and have stated that all items in the
QF deal with the DMP, and not with providing financial education to the client.

Another example of their use of the term “educate” meaning educating the client on the DMP is
in question 13 of Instruction XXXX, dated XXXXXX. The rationale for contacting the client
every 6 months is, “Through open communication, the clients can feel more comfortable in
discussing financial situation with XXX and in turn XXX can begin to educate our clients about
how to hand these issues and begin to plan for the future.”

The example that XXX provides to support their rationale discussed the DMP and stating that
providing a little education over the last 6 months could have avoided some missing payments
by the client. Again, this is an example of XXX's use of education consisting of explaining the
DMP to the clients.

One of the standards the CSRs must meet is labeled “Took advantage of all available
opportunities”. Since it is not evident what “opportunities” XXX is discussing, further
clarification is needed. This is provided in Instruction XXXX, dated XXXXXX. The details on the
XXXX Clarify that the opportunities and information provided to the client is to ensure success
with the DMP.

Additionally, the example provided with the XXX states the following, A client call in to advise
they have just sent.a Western Union payment. You take and notate the payment information,
but by not educating the client on missed and shorted payments from the past months, you
have missed the opportunity to offer EFT as a possible solution.” This is another example of
education meaning explaining the DMP.

Instruction XXXX, dated XXXXXX, also refers to “opportunities” while discussing satisfying
customer needs, giving the standard, “Takes advantage of available opportunities before
concluding call”. It then describes the rational as reviewing the account for opportunities to
correct standing issues or errors and/or anticipated future customer issues. Furthermore, the
examples provided discuss making sure the agreement is received, missing creditor

information or payments, or checking on requested lower interest rates. :
. Page 73 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

Instruction XXXX, dated XXXXXX, has many additional details that if not completely
understood, could be mistaken as describing, or potentially describing, educational activities.
This XXXX is entitled XXXXX.,

On page X of the above XXXX, a standard is presented as “Provides complete information and
solutions to customer needs”. The rationale also uses the terms educate and information. This
has been attached as Item 21. As can be seen on the attachment, in making these references,
XXX is discussing the DMP or items dealing with the DMP only. There are no items mentioning
providing financial education to the clients.

In this same XXX, on page X, a standard is presented as “Documents completely and
accurately”. This should specifically be mentioned as this standard is grayed in, indicating this
is a critical step, per page one of the XXXX. It explains that in every call, the CSR is to
document: Who, What, Where (when applicable), When, Why, and How. As this is considered
a Critical step, it is assumed that everything will be documented.

The next 4 % pages of this XXXX relate to “communication”. In this sense, communication
means verbal and nonverbal communication skills that related to effective communication. It is
certainly not referring to information that would be communicated that could by any stretch of
the imagination be termed, “education”. It covers items such as tone and pitch, Volume and
Grammar, and appropriate word choice. This “communication” is simply part of any good
customer service, and has nothing to do specifically with education.

We have found over and over references to the word educate or education from XXX in their
manual or in letters provided during this examination; only a few have been presented above.
Whenever, XXX uses those terms, they are referring to explaining the benefits of the DMP or
how the DMP works for the benefit of the client.

While there are numerous examples of educations used in the sense of explaining the DMP
vs. providing financial education in the XXXXs, there are also many examples of the omission
of an educational element in certain XXXXs, where it would naturally be expected. For
example, in Instruction XXXX we found XXX's desk reference guide.

In section 2, Procedures of Instruction XXXX, account closures are discussed. “**Our objective
is not to let the account close, so first try to get their issues resolved and assure them that they
are a valued customer of XXXX.” This is a situation where a client that is on a DMP is trying to
close the account. The procedures are clear that they are to try to keep the account active.
They do not discuss probing the situation to see if education is needed. There concern is
primarily the DMP. Again, there are no items mentioning providing financial education to the

clients.
Page 74 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-4 | _ EXPLANATION OF ITEMS Schedule or
. Exhibit No.
Name of Taxpayer - | Year Ended

In section 2, Procedures of Instruction XXXX, Loan Letter Requests are discussed. The
procedures are limited to explaining how to provide a loan request letter, what it contains, and
determining whether any of the loan will be paid to XXX through the DMP. First, this goes
against XXX’s claim that they encourage their clients not to obtain additional credit while on the
program. There is nothing in this procedure to instruct the CSR to determine if obtaining
additional credit is a good financial decision. They are not supposed to even probe for this type
of information. This is a sure sign education is not a priority. Again, there are no items
mentioning providing financial education to the clients.

In section 2, Procedures of Instruction XXXX, Re-opens are discussed. This situation exists
when a client on a DMP has stopped paying for some reason. The procedures here cover if an
account can be re-opened and how to get this client back onto a DMP. They are not even
required to find out why the person fell off the DMP. There is no attempt to find out the problem
and no attempt to determine if education is required. Without this knowledge, it is impossible to:
provide education to the client. Again, there are no items in this procedure requiring the CSR
to provide financial education to the clients.

In section 2, Procedures of Instruction XXXX, Restructuring Payments is discussed. This
situation exists when the client needs to lower their payment to the DMP. This procedure only
covers lowering the payment, not increasing it. There are no procedures for increases, even
though they claim to encourage clients to increase their payments if this is possible. While XXX
requests a hardship letter, the procedures do not require that the CSR probe their financial
situation. This certainly would seem to be an appropriate time for providing financial education,
yet there are no items in this part of the XXX that even mentions providing financial education
to the clients.

instruction XXXX, revision X, effective XXXXXX also covers restructuring payments. Again,
this specifically refers to reducing a client's payment based on a client hardship. This XXXX is
consistent with the information from the Desk Reference Guide, Instruction XXXX and again,
there are no items mentioning providing financial education to the clients.

In section 2, Procedures of Instruction XXXX, Splitting Accounts is discussed. This is an issue

_ in a divorce or a separation, a life altering event that has severe financial ramifications. The

_ procedures do require a new budget, but they are to advise the clients to fax this in to XXX. In

' this case, XXX is trying to avoid discussing the budget with the client by having them fax it in.
This.is a cost savings measure of XXX. There is no requirement that the CSR go through the

budget with the client. Again, there are no items mentioning providing financial education to the

Clients.

Page 75 of 118
Department of the Treasury - internal Revenue Service Form 886-A


Form 886-A - | EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXKXK XXXXX

In section 2, Procedures of Instruction XXXX, EFT NSF” and Restarts are discussed. This
situation occurs when the client doesn’t have enough funds in their account to cover their EFT
payment and may be indicative of additional or recurring financial problems. Another ideal time
or opportunity for a financial counselor to provide education to a client; unfortunately, XXX
does not do this. Again, there are no items mentioning providing financial education to the
Clients in this procedure.

This entire desk reference guide was reviewed. Since this XXXX is to provide procedures to
the CSRs in some common situations, either each section should have specific guidelines on
providing education or they should refer the CSR to another XXXX(s) that discusses providing
education to the client’®. There is no such reference, which is again indicative of the lack of
importance that education plays in the day to day operations at XXX.

in section 4, Creditor Policies of Instruction XXXX, on page XX, there is a short discussion
about advising clients not to accept additional lines of credit. The reasons they discourage this
is some combination of the following: 1) Obtaining additional credit often times makes it harder
for the client to get out of debt, 2) it may increase the clients debt service payments making it
less likely for the client to be able to pay off or qualify for the DMP, or 3) the creditors already
on the plan may decide to drop the DMP, because they will assume the client has the ability to
pay them in full without concessions. Therefore, while this discouragement may help the client,
it likewise helps XXX and its revenue producing capabilities. While this may seem to be the
provision of financial education, it falls short of this, because it is not put into context; it is just a
statement that they are to discourage this. It is possible, based on a client's complete financial
situation, which XXX never obtains, that obtaining additional credit would be an intelligent thing
to do.

Another telling quote from the same page is, “The goal of a consumer credit counseling
program is to help the client repay their debts, not to create more.” This comment also speaks
to the core of XXX, they are helping clients repay their debts; they are not providing counseling
or education to their clients.

We reviewed XXXX after XXXX, as mentioned in the fact section. We found no XXXs that
discussed providing financial education or counseling to a client.

In addition to all the XXXXs that provide procedures for how a CSR is to perform their work, we
also reviewed how the CSRs were evaluated and reviewed by their supervisors, QA and
management. This again is a formal process covered by the XXX manual. None of the reviews
or evaluations cover the financial advice that CSRs are supposed to be providing for their

4° EFT is Electronic Funds Transfer and NSF is non-sufficient funds.

°° There is no XXXX or other manual section that covers providing financial education to clients,
Page 76 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

F .
| orm 886-A -_ EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended

exempt status. It is simply not required to be done by any CSRs. So not only are they not
required to provide financial education by their manual, or as far as we found, any other
source, they are not evaluated on it either. If they aren't required to do it, and they don’t get
evaluated on it, it seems to reason that it simply does not happen.

During our audit, we also listened to 41 open accounts calls, which included 3 retention calls.
For detailed descriptions of those calls, please see attachments 22, 24, and 19.°" In listening to
these calls, we determined that the XXXXs are very complete in covering the type of work
done by the open CSRs and of the actual call content of the calls.

From attending training classes in the new accounts area and in reviewing the XXXXs, we
found that generally the CSRs are well trained, and perform their jobs in a manner that is very
consistent with the XXXX. In that respect, XXX has trained their employees very well and we |
certainly understand how they consistently do well in their quality reviews for their ISO
certification. _

Unfortunately, because our review showed that the CSRs so closely follow the XXXXs, we
found that the CSRs did not provide financial education or counseling. In a few cases, the
CSRs struggled to provide some advice to clients who desperately needed some guidance.
This was as much a result of the individual CSR’s compassion for the customer and their
stress on customer service as anything. Even situations like these generally ended with
comments like, | don’t know what else to tell you, just do the best you can or you might want to
consider trying to get some help with some free counseling™, or you should really look at your
budget to see if you can cut back anywhere. Ultimately though, the CSRs do not have the
training or experience to provide financial counseling. This is the blind leading the blind.

What we did find is that the CSRs are well trained on DMPs and are willing, able, and eager to
“educate” the clients on different aspects of the DMP. For example, they often remind the
Clients to pay timely and consistently, they ask them to review their statements every month to
make sure the creditors are still on the DMP and providing concessions, they recommend EFT
to make the DMP easier, better, and cheaper for the client, or simply provide encouragement
to continue on the DMP. Again, this is not financial education or counseling.

In reviewing the calls from open accounts, CSRs do not dig into the financial situation of the
Clients, their employment, education, buying habits, significant expenditures, any significant
past or anticipated changes in their earnings, assets, expenses and liabilities, or the reasons
or causes for those changes. Just as was discussed under the XXX area, XXX has told the

>! Attachment 22 is IDR 7 issued on March 9, XXXX with 4 attachments, 24 is XXX’s response labeled Attachment:
Summary and Analysis of Counselor Calls, and 19 is our rebuttal to XXX’s response (Item 24).

% For example, Call dated XXXXXX between CSR XXXXX and Client XXXXX.
Page 77 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form886-A | = == = —EXPLANATION OF ITEMS | Schedule or
oo o Exhibit No.
Name of Taxpayer Year Ended

CSRs that , “As an organization we are not concerned with the reasons our customer’s.are in
debt. Our goal is to provide quality service and assistance to help them manage their debt.”
Without discussing this information, the CSR is unable to provide basic financial counseling.

As before, without knowing why they got into debt, they are also unable to recommend
additional help that the client may need, which may or may not be directly related to their
financial problems, i.e. drinking, drug or gambling habit, etc.

All CSRs — New to Open

Another item we had access to were the client notes in the XXX system. While we only
listened to.a small percentage of calls, we looked at many more accounts. About 2 % days
were spent thoroughly reviewing accounts on their system.

The first % day that we were given access to the accounts, we reviewed 37 client folders,
having access to many of their client notes on the system. The objective was to determine if
the records maintained currently were substantially similar to the records maintained during the
year of the audit. This was done with the full knowledge of XXX, and the TP agreed that this
may be a way they could show their activities have not changed substantially over the years,
as they were representing to us. After this review, we agreed that the documentation was
substantially similar, giving some credence to their statements that their activities have not
changed.

The last two days were spent reviewing 12 different clients’ accounts, having full access to the
XXX system. This was an in depth review of the accounts, the payments, and especially the
notes. While we asked for the ability to print out the notes, we were not provided with this, and
because we continued to ask for this, we eventually lost access to their system based on their
POA’s recommendation that they have access to everything we viewed.

In the review of the notes on the accounts, we were unable to find that any of the CSRs,
whether New, XXX, or Open, documented that they provided basic financial education. There
is simply no proof of this.

Again, we refer back to Instruction XXXX and Instruction XXXX that explain to CSRs that
everything occurring during a phone call must be documented. We are also certain this is in a
number of other XXXXs too. In the initial training all CSRs receive before getting put into the
call center, they are told that everything must be documented. Additionally, supervisors’
evaluate the CSRs on how well they document the phone calls. In interviewing the CSRs, they
indicated everything was documented. There was no evidence that this is untrue. The folders,

*3 They also felt this enabled us to look at information until we found a problem.
Page 78 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.
Name of Taxpayer Year Ended

s we have ascertained were essentially, complete. Our analysis did not “miss something” of
material importance to show counseling took place. This again supports our analysis that
financial education is void.

With all of that information, there is only one assumption that can be made, that the CSRs do
not provide meaningful financial education to the XXX clients. Certainly if this was the primary
activity of XXX, it would be documented:

Instead, we found comments and notations in XXXXs and in the client account notes that a
CSR “educated” the client on reviewing their statements, or that they might get calls from
creditors when starting the DMP. The most regular “education” provided to clients was that
they should pay XXX every 30 days. This “education” is what anyone would find in any
financial agreement, “payment terms”. We are very sure that every single creditor told the
debtors they should pay them every billing cycle too. None of this is education, within the
meaning of § 501(c)(3).

Since we had already determined that the CSRs had been trained well, and perform the duties
as they have been trained, consistent with their written procedures, as well as in their
evaluations by supervisors, we know that if they are required to completely and accurately
document the accounts, the CSRs do this.

Therefore, in reviewing all aspects of the open accounts duties, by interviewing CSRs, a
supervisor, and officers of the organization, in reviewing manuals, client folders, account notes
and other source documents, and in listening to 41 open accounts calls, we have determined
that clients are not provided with education in this area either. The primary purpose of this area
appears to be to keep the clients on the DMP, to encourage them in their success or to
succeed, and to handle general customer service calls as they relate to the DMP.

In conclusion, we have determined that XXX does not educate its clients or the general public
through its counseling sessions. In the counseling sessions, XXX obtains just enough financial
information from the clients to determine if they qualify for a DMP. They do not discuss any
types of assets which could be used by the clients to help them get out of debt. They limit the
discussion of liabilities to determine if it is a debt that can be placed on the DMP, or if it simply
can or should be considered an expense for DMP purposes.

The budget is taken from the clients, it is not discussed with them. They do not probe the
budget to determine spending habits. They don't consider past or anticipated changes to the
budget. They don't even investigate why the person got into debt.

Based on the budget that the client provides, XXX determines if they qualify for a DMP or not.

They do not evaluate the situation further to determine if there are other options for their
Page 79 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A.-|: EXPLANATION OF ITEMS Schedule or

7 oo . Exhibit No.

Name of Taxpayer | Year Ended
XXXXX

clients. If XXX is to help the client, XXX’ s only solution is the DMP. If they determine they do
not qualify for a DMP, they will suggest legal help. If they make too much money, they actually
suggest they seek financial counseling.

' The discussions with clients do not include any educational material or counseling component.

Your primary focus appears to be helping debtors with the "sale" of debt management plans,
rather than the provision of substantial education to your clients. Therefore, in evaluating your
counseling sessions, we believe this is a strong factor showing XXX does not provide financial
counseling as its primary activity:

Counselor Education and Training

Another factor that we believe is important is the education and training of the CSRs. If the
CSRs are not able to provide financial counseling before they are hired by XXX, XXX would
have to train them to do this, before they start to perform in their jobs.

In the periods at the start of the examination, XXX did not even require a High School (H.S.)
diploma or its equivalent, although they did prefer it. Starting sometime between October and .
December of XXXX, XXX required H.S. or its equivalent for any new hires. Though not
required, they would prefer if the new applicant had taken some college courses. Even with
these limited requirements, there is no requirement that the people XXX hires have any H.S. or
college courses in any field related to finances, whatsoever.

XXX has different requirements for work experience in hiring its New and Open Accounts
CSRs, nevertheless both are deficient. Prior to the end of XXXX, XXX preferred the new
accounts recruits to have industry experience. This could pretty much be anything. After
XXXX, it was required that they have one year of credit industry or credit-related experience.

As part of our audit, we were able to attend the first week’s worth of training for the new
accounts CSRs. During the class, the new hires were asked their backgrounds. The most
common work experiences provided was from a credit card company or simply customer
service, working on the phones. We asked the trainers what the minimum requirements were
to be hired, and they explained they should ideally have one year experience at either a credit
card company or in some type of customer service capacity.

They actually stated they preferred not to have their trainees have credit card experience,
because they generally need to be retrained because they had picked up bad habits from their
previous jobs. The trainers preferred if the trainees simply had customer service experience
and / or good customer service skills.

Page 80 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A | EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended
XXXXXK

Therefore, we can state that the new accounts hires do need education or experience in
financial counseling or related fields that would prepare them to be able to provide financial
counseling to people with financial problems. This education is not required to be hired for a
New Accounts CSR position.

To be hired for an open accounts CSR position, the requirements for experience prior to the
end of XXXX, was that XXX preferred the recruits to have one year of call center experience
and one year of finance, debt management, collections or banking experience. Again, this
means there really aren’t any minimum requirements, because they were only preferences.
After XXXX, it was required that they have one year experience in any of the above areas.
However, there is no way that this requirement could possibly mandate that the new hires in
the open accounts area have the ability to provide financial counseling.

For example, a person that has worked in a bank as a teller would qualify or someone that
worked telemarketing for a credit card company would qualify or someone that worked for a
bail bondsman would qualify, as that is a Form of credit. The possible qualifications are
endless. There is no. specific requirement that they must have experience in providing financial
counseling. However, the requirements XXX has established to. work in Open Accounts, is
enough that the new hire should be able to facilitate the DMP operations.

Therefore, we can also state that the open accounts hires do not need education or experience
in financial counseling or related fields that would prepare them to be able to provide financial
counseling to people with financial problems, such as the people calling into XXX for help.

With a complete lack of required education or experience in financial counseling before a
person is hired by XXX, you would assume their training would be quite extensive. As XXX
would have you believe, their training is much more extensive than many in this industry. The -
CSRs actually earn training credits for attending this in house training. We agree that the
training is quite extensive, but that is not what is relevant. The question is, Does the training
that XXX provides and requires its CSRs to attend and pass, provide the CSRs the ability to
provide financial counseling to XXX’s clients?

First, as stated in the fact section, the certification that is provided from this training is a
certificate in Credit Counseling Customer Service. Even the certificate they get describes that
the training is for customer service. It is not a certification in Credit Counseling. The new
account CSRs also become certified for Consumer Data Industry Association- Fair Credit
Reporting Act. This training allows them to be able to pull credit reports.

While the New and Open accounts training is somewhat different, the official coarse
description of both emphasize 1) customer service, 2) understanding credit, finance charges

and payment history implications, and 3) various aspects of DMPs.
Page 81 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer . Year Ended

XXXKXX XXKXKXX

The entire training modules for both groups of CSRs were reviewed. The coarse descriptions
are 100% accurate. They primarily get trained on customer service and qualifying, marketing,
and setting people up on DMPs. In open accounts, the CSRs are trained on customer service
and maintaining their portfolio of clients on a DMP.

What the CSRs do not get trained in is any type of counseling skills, personal finance, or
budgeting tactics to help educate consumers. While they are exposed briefly to bankruptcy
information (in the class we attended this was less than 10 minutes of exposure) they are
simply taught that they do not and will never offer legal advice.

They are also exposed to debt negotiate, settlement, credit repair, etc. Again, these are
covered in a few minutes; just enough so the CSRs know what they are and that XXX does not
offer any of these as possible solutions to debt. They are not trained to develop options or
recommendations that specifically or generally address any of the circumstances that any of
the XXX clients may be experiencing.

None of the CSRs are trained to identify underlying personal problems that might contribute to
financial problems and on making appropriate referrals. As a part of signing people up for a
DMP, they are required to ask the client why they got into financial difficulties, but they do
nothing with that information other than to put it into the client notes.

As we have mentioned previously, the CSRs are actually told it is not their concern why the
people are in debt, their job is to help them by getting them in a DMP, if they qualify.

When we interviewed the CSRs, they made comments about attending continuing professional
training. They described the training as financial education, implying this was financial training
that they could use to educate the clients. Since this is current training, we did not attend any
of these classes or try to determine the purpose of the training. It is simply not relevant to our
audit years.

However, the need for this additional training may actually re-emphasize the fact that the
CSRs are not trained or experienced enough to provide financial education or counseling.
While they are very good at customer service and seem to truly care about their client's
success, they simply aren't equipped to provide the necessary education to their clients.

However, just because we are not considering the current additional training the CSRs may be
getting, we did cover this topic early in the audit. We discussed the training provided by XXX

; Page 82 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
F. -
orm 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Do Year Ended
XXXXX XXXXK

‘with XXXXX, who has been the training manager since at least XXXXXX.™ She stated that
historically they have concentrated on new hire-training, but they also do what she called “up-
training” or continuing training.

She then gave me some examples of this continuing training. As internet applications for
DMPs started, they had to train the New Accounts CSRs to work those. When XXX decided
they wanted the Open Accounts CSRs to stress EFT as the preferred payment, they had to be
trained on this subject. She did not mention any type of “financial training” as the CSRs
indicated in their interviews.

Additionally, in our initial request for information, we requested all employee training materials
used in FY XXXX, XXXX, and XXXX. We were only provided with the training materials for the
new and open accounts training discussed above. Based on the comments from the training

' manager, we understood that the up-training sessions that were held during the periods of the
audit did not have formal-training materials, which explains why we were not provided with
them.

Since we are discussing training, we believe some additional comments should be made about
the XXX training. CSR training module 1, page X, indicates, “As an organization we are not
concerned with the reasons our customers are in debt. Our goal is to provide quality service
and assistance to help them manage their debt.” This is attached as Item 25. This same
statement was also found in different locations in their manual. By not concerning themselves
with the reasons their customers are in debt, it is almost impossible for them to provide
relevant education to the consumer to teach them how to stay out of debt in the future. Again,
this emphasizes XXX's objective is the DMP, not providing education.

In module 1, page X, they discuss the structure of XXXX. This “structure” is how DMPs are
processed through the XXX system. It does not describe how clients will be educated. This
module then goes on to discuss customer service details, fairshare payments, types of credit
and whether it can be put on a DMP, finance charges and fees, account liability / ownership,
billing statements, and misc. items on the credit industry. These are not items that would need
to.be taught a person that is qualified to be a financial counselor. These are introductory items
that are taught to individuals with no experience that would allow them to provide DMPs to the »
general public, not to allow someone with no experience to be able to provide financial
counseling.

Also, since this is the introduction of the employee to XXX, if education was at the core, or
even if it was an important part of what they did, wouldn't this concept be introduced in the very

_“ The earliest dated Organization Chart showed her-.in this position as of XXXXXX. We found no earlier charts showing

anyone else in that position and all later charts show her as the training manager
Page 83 of 118

Department of the Treasury - Internal Revenue Service ; Form 886-A


Se * | - , ; Schedule or
Form 886-A _ | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer . - Year Ended

first module. As we have shown, it is not anywhere in the training materials that XXX uses to
train its new employees. It seems evident from this alone that education is not the primary
drive of this organization.

In conclusion, XXX does not require that the CSRs they hire have any education specifically in
providing financial education. They also do not require that they have work experience in
providing financial education. XXX then trains them primarily in customer service and to either
qualify people into DMPs or keep them in a DMP as long as they can, in hopes of getting the
person out of debt®®.

XXX CSRs therefore, do not have the abilities required to actually provide financial counseling
to XXX clients. Therefore, in evaluating your educational and experience requirements and the
training provided to your CSRs, we believe this is a strong factor showing XXX does not
provide financial counseling as its primary activity.

Outreach and Advertising

Other factors that should be considered to determine if XXX is primarily conducting exempt
activities are their outreach and their advertising. The reason this needs to be considered is
whether or not these are done primarily to bring in potential DMP customers, or whether they
emphasize the educational aspects of the organization. This will provide an indication of its
true primary purpose.

For this discussion, we need fo consider their website, any mass media advertising, and direct
mailings made to advertise XXX and whether they primarily discuss the educational aspects of
the organization or whether they mainly discuss the DMPs.

In this case, XXX does not regularly advertise or send out direct mailings. As for advertising,
XXX simply has not had to do this, since it obtained the agreement with XXXX to obtain
XXXX’s clients that were having debt problems as a ready source of potential clients for the -
DMP. Therefore, we believe their practically non-existent advertising is a neutral factor.

The XXX website, during the audit period, contained numerous educational articles that
appeared to be easily accessible without registering i.e. available to the general public. In
numbers alone, there website contained more articles than anything else. However, another
question that needs to be answered is whether or not the articles provide objective and useful
information on personal finance, credit, and budgeting.

55 This also makes KXX the most amount of income possible.

© The website has been updated drastically since we have started the audit.
Page 84 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer Year Ended

XXXXK . XXXXX

This requires a bit more analysis. The articles cover or are titled: purchasing stocks, protecting
yourself when purchasing online, getting turned down for a loan, have you checked your credit
report lately, choosing the right credit card for you, questions to ask about credit cards, FDIC
insured deposits, Are you better off today, Internet Banking, Mutual Funds, what is the best
way to pay, etc.

These articles certainly deal with various areas of personal finance and some deal with credit.
What they do not deal with is issues of importance to the debtors that XXX is supposed to be
educating. There were no articles about spending habits, budgets, etc. Therefore, even though
they provided numerous “canned” personal financial articles, they did nothing to further the
educational purposes of the organization.

The website also contained information explaining what XXX did and how to contact them for
an evaluation. The website, as it was first available in XXXX to XXXX, was mostly the
educational articles that had nothing to. do with the educational purposes of the organization.
On the other hand, the website was clearly not a blatant attempt to obtain additional DMP
clients. This was fairly neutral as well.

The website, as it was accessed on XXXXXX provided subtle information asking people to
apply for a “Free Debt Relief Analysis”. The “Apply Now’ link was the middle and top link of
most pages of the XXX website. The main page also mentions all the benefits of a DMP. If you
remember, the XXX training manager told us the new accounts CSRs had to be provided “up-
training” in order to learn how to handle applications that came from the internet. So the.
website does generate clients for XXX. :

However, overall we believe the website was NOT just an advertisement for DMPs. On the
other hand, we do not believe that the few static articles, that were mostly unrelated to their |
exempt purpose, provided meaningful education to distressed debtors either. Therefore, we
believe this is a. neutral factor.

Another aspect to consider in their outreach and advertising is simply to determine where XXX
gets its clients from. In analyzing this, we would look at referrals from employers, unions,
churches, other community organizations, or even creditors as being a positive aspect, if no
payments are made to obtain the lists of names or for referrals or the like.

in this. case, XXX receives substantially all of its contacts from XXXX through the negotiated
contract it has with them. Due to this contract XXX pays XXXX millions of dollars and foregoes
millions in fairshare, based on the amounts collected for and paid to XXXX.

The relationship between XXX and XXXX must be looked at to determine the contracts

purpose. As XXX has indicated, it allows them access to the class of people they are looking to
Page 85 of 118

Department of the Treasury - Internal Revenue Service | Form 886-A


F 886- . : Schedule or
Form 886-A_ |. EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer OC "| Year Ended
3 | | XXXXX

serve. On the other hand, we must weigh that against whether or not XXX has contracted with
XXXX to attract and sell DMPs to as many people as they can reach.

Since we believe that XXX is not providing education to its clients, the argument that they are
trying to reach a. certain class of people, so they can conduct their exempt activity does not
make sense.

Looking « at this from the opposite side of the coin, there are many indications that the intent of
XXX was simply to obtain as many clients as possible. For example, the statistics that the
CSRs are evaluated on generally are related to efficiency and production. The organization is
highly sensitive about attendance and tardiness (defined as one minute late). Every CSR can
see the signs in the call center, indicating the call stats for their group. XXX has created 98
macros for the CSRs to use in various aspects of their job. Macros are created to save
keystrokes in entering commonly used items. The Macros are essentially all related to the
DMP. The items discussed in the board minutes discussed the growth and expansion of the
organization. The entire culture of XXX is surrounded by efficiency, statistics, production,
procedures, and the like.

Additionally, and this is very important, in their original contract with XXXX, dated XXXXXX,
there are two very telling ‘sections to the contract.

XXXXX. ..."Both parties understand the necessity of maintaining a reasonable constant flow
of activity and successful conversion. In as much as the value of referrals is connected with a
reasonable volume, XXXX agrees to provide at least XXXXX Client Information Referral
Forms annually.” ,

and

XXXXX. “With respect to program volumes, XXXX shall use its commercially reasonable best
efforts to convert to active accounts at least a minimum level of the referrals received from
XXXX. Both parties understand the necessity of maintaining a reasonable constant flow of
activity and successful conversion. In as much as the value of referrals is connected with a
reasonable level of successful conversions, XXXX agrees to convert a minimum of 30% of
the Client Information Referral Forms to active status.”

These clauses in the contract, are fairly specific about the nature of the contract between the
two entities. This contract is not about providing education to debtors; for XXX, it is about
paying for referrals and obtaining potential DMP clients, which XXX hopes to convert into DMP
clients. A person can come to only one conclusion, which is that XXX's intent in contracting
with XXXX for their debtors was a method XXX used to obtain large quantities of clients for the

DMP program.
Page 86 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer ' | Year Ended

XXXXX XXXXX

Therefore, in looking at outreach and advertising, we have two neutral factors and one strong
negative factor. Therefore, when combining the factors in our evaluation of your advertising
and outreach, we believe this is a factor showing XXX does not provide financial counseling as
its primary activity.

Governance

‘Another factor to be considered, in determining if an organization is primarily conducting
exempt activities, is how the organization is governed. We will need to decide whether the
board is independent and community-based or whether it is a small, related board or a board
dominated by creditors or others with financial interests in the organization. This will give an
indication as to whether the board is looking after the welfare of the public the organization is
supposed to be helping vs. persons with financial interests in the operations of the
organization.

This company was founded by XXXX°’, who has worked in the credit industry for XX years,
primarily dealing with debt consolidation. Its first Board of Directors consisted of XXXX,
XXXX, XXXXX, and XXXXX. XXXXX is the only original director not on the board, as he
passed away in March XXXX.

Currently, the XX member board of directors is composed of insiders, relatives of the CEO,
compensated individuals, long time and trusted friends of the CEO, and X other people. As
was shown in the facts section, 62% of board members are either relatives of XXXX, receive
over $100,000 per year from XXX directly; and 4 meet both of those criteria.

XXXXX has received some compensation over the years, from real estate dealings of XXX,
but more so, he is a board member because he had been a trusted and respected friend of
XXXX’s for over 40 years. The common man would question whether XXXXX would be more
apt to represent his trusted friend or the general public.

This leaves only 31% of board members that would appear to be “independent” of XXX and .
XXXX; XXXXKX, XXXXX, XXXXX, XXX XXXXX. Based on XXXXX's experience and all the
books he has published, he would be a great board member for any organization that offers
financial services, but he doesn’t seem to have a background in financial counseling of the
type needed for an exempt credit counseling organization.

We have very little information about the other 3 board members. Based on just job
experience alone we feel that they may be independent and representative of the community.

5” The organization report indicates it was Formed by XXXX and XXXX.
Page 87 of 118

Department of the Treasury - Internal Revenue Service Form 886-A |


Form 886-A EXPLANATION OF ITEMS Schedule or
| Exhibit No.

Name of Taxpayer . Year Ended

XXXXX XXXXX

On the other hand, XXXX made it clear that he chose only trusted and respected individuals
for his board.

Certainly, the fact that XX of XX members, 62% of the board is made up of family and
persons making over $100,000 a year causes concern. The additional fact that there are
clear and close relationships between some of the remaining board members with the CEO
also Causes concern.

The only conclusion that can be reached is that the board is not an independent community-
based board. While this is not conclusive proof that the board and therefore the organization
cannot possibly be looking out for the best interests of the general public, it certainly gives the
appearance that it is not.

In the interests of providing a full fact pattern, we were told by the executives of XXX that
XXXX had attempted to put one or more representatives on the XXX board. While this
information was not verified, it is logical since XXX has such a close relationship with XXXX.
XXX refused to allow this to happen, indicating they did not want creditors to have too much
influence over the corporation.

In reviewing the minutes, we were able to establish how this small, related board actually
operated. Based on the review of the minutes, the organization’s primary focus that was
identified in the organization’s meetings was not the furtherance of charitable activities as
defined by IRC § 501 (c)(3); the meetings conducted emphasized the ongoing growth of the
company, and this was discussed on an on-going basis. The board discussed and was
concerned with the dialogue of creditor relations, fees, use of investments, D & O insurance
coverage”’, the board’s concern on rebuttable presumption and salaries to the CEO, and
improving. the company’s ability to recognize fees. Of the minutes reviewed from XXXX
through XXXX, the minutes were void of how XXX can provide direct education, other than
the improvement of delivering DMPs. The board had shown an alliance toward banks and
creditors rather than the consumer; which is, counter to the assistance and help to
consumers. The consumers are not represented, either by the board or by their attempts to
form special committees. There appears to be an organizational motivation to profit
(increasing resources). The organization's focus leans toward good creditor relations as
opposed to hearing the voice of consumer activists. From the available minutes, the
organization did not seek the input and assistance of consumer groups as it did national
banks.

*8 Directors and Officers Liability Policy: coverage includes $XXXX maximum for aggregate limit of liability for all claims

in any one year, Directors and officers are provided $XXXX for each claim (retentions).
Page 88 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.
Name of Taxpayer Year Ended
-KXXXKX XXXXX

On April 12, XXXX, we held an informal meeting with several executives of the taxpayer which
was informative as to their intent and philosophy in operating XXX. The purpose of this
meeting was to discuss education in general, provide feedback of our examination to date, and
to be a format to discuss potential solutions to the general lack of education in their operations
that we noted in IDR 7, issued to XXX just over a month prior to the meeting. It should be
noted that our audit was not finished at this point, and our investigation into their operations .
was not complete. The individuals present at the meeting were XXXX, XXXX, XXXXKX, XXXXX,
XXXXX and XXXXX.

We will limit our discussion to some of the important topics covered during the meeting, as
they are relevant to this issue. We explained that what we were seeing in our examination,
as confirmed by our review of the recorded calls, was that we perceived XXX as an
organization that offers DMPs as its primary activity with education as an afterthought. We
further expiained that in order to be exempt, it must be an educational organization first and
foremost that uses DMPs as an afterthought. | explained that is basically how the two main
revenue rulings and two main court cases have described exempt credit counseling
organizations.

In-a prior meeting, March 29, XXXX, XXX essentially asked us for a definition of education
and asked how they might change their operations to more fully comply with their exempt
status. It has always been their contention, that they are following the laws as they see
them. They have also indicated that if we feel anything needs to be changed for them to be
an exempt organization, they were more.than willing to do this, however, the IRS has not
provided enough guidance for them to determine how they would be required to change.

So for the April.12, XXXX meeting, we suggested a solution of creating another department
with the remaining space available in their building, which would be a pure educational area.
We explained it would have to be filled with individuals with more training, education, or
experience with financial counseling.

XXXX said they had thought about that, but basically that it was not economically feasible.
Additionally, he saw another department as being a disconnect, throwing the clients to
another person, separate from the other CSRs. He indicated that while he is willing to work
with us, he has to work with reality.

They then also explained that they have considered many similar types of additional
systems to perform their job better. They state they are in a constant state of change and
feel they have always had education at the heart of what they do. One example that XXXX
did bring up later in the conversations was possibly hiring 8 CFP’s to help out at a high level
in the organization or of hiring a CFP, or other more highly trained individual, and attaching

them to each of the current teams. While we were not sure our suggestion would even
Page 89 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


; Schedule or
| Form 886-A_ |. © - | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer : . | | Year Ended
XXXXX

provide enough education, it appeared obvious that their suggestions would allow for even
less. oe .

An analysis of this part of the meeting indicates that XXX has thought about this. They have
already concluded that it was not economically feasible to do this. Rephrased, it was too
expensive to provide too much direct education to their clients.

However, when you consider the fact that on the Form 990, XXX has shown profits of
$XXXX over the last 3 years and $XXXX over the last 5 years, the statement that providing
more education is not economically feasible seems to be a little ridiculous. If you throw on
top of those XXXX in reported profit, XXXX in depreciation, XXXX in XXXX Family
compensation, XXXX in payments to the CEO’s wholly owned software company, and that
statement starts to sound just plain greedy.

In the April 12, XXXX meeting, we also discussed the funding of the organization, being almost
all from DMP fees and fairshare. XXXX stated that without fair share payments, a credit
counseling company would fail financially. He replied to the Service's comment that a charity
be funded by the general public or through grants is unrealistic. He stated that the general
public or grants received from organizations such as the United Way, frown on providing
funding to “your neighbor's spending problem that he got himself into and shifting the
individuals burden to the general public”; this type of funding mechanism would take away from
other charitable funds for homeless shelters, curing diseases, etc., or other general well known
charitable causes. He stated that the credit industry has taken a role as to meet this challenge
by developing relationships with credit counseling organizations to provide some sort of
solution to debt management. Debt management per se, is not a viable charitable purpose that
the general public would be willing to donate to.

While much of what he said seems to be logical, and may have some truth behind it, it also
speaks to his philosophy in operating XXX. If you realize that XXXX was talking about his
organization specifically, XXX, it makes perfect sense. We would agree there would be very
few individuals willing to donate to XXX, if they knew that it was being operated as we have
come to realize, that it is a commercial operation, signing every qualifying person onto a DMP
that they possibly can, while benefiting numerous private individuals along the way, with profits
in the millions, with a state-of-the-art facility, with millions going to insiders. Why would anyone
want to donate to this organization? .

What XXXX fails to understand, is the nature behind a truly exempt credit counseling
organization. This organization has the support of the community, is run by community
members; it may have both volunteers and paid employees that seek to educate people with
debt problems. This would be an organization that may suggest one or several combined

solutions to help a person get out of debt, in a manner that doesn’t always enrich the
Page 90 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


. | Schedule or
Form 886-A EXPLANATION OF ITEMS. Exhibit No.
Name of Taxpayer Year Ended
XXKXKX XXXKXXK

organization or otherwise seek to maximize profits. This may be a social service worthy of
support from the community. XXXX, and therefore XXX, just doesn’t think in that manner.

In summary, we find that the board is full of family members and individuals with financial
interests in XXX. The remainder are mainly close associates of the CEO. Only one of the
board members has a background that is conducive to educating debtors or consumers in
general. The minutes of the board indicate they are more interested in making the organization
grow and in creating profits then they are about educating XXX's clients. Therefore, we find
that the governance of XXX, in composition and in their actions, is a factor highly in favor of
XXX not operating primarily to further education within the meaning of 501(c)(3).

Funding Sources

In analyzing funding sources, we are trying to determine whether the sources of funding
compromise the independence of the organization or compromise its focus on education and
the needs of the clients.

Over the period of the examination, XXX has obtained over 45% of their income from creditors
from fairshare and over 45% of their income from fees from the debtors.

With over 45% of the fees coming from creditors, the creditors are in a position to influence the
operations of XXX to a large extent. Furthermore, each creditor sets their own policies for the
DMP, which XXX must accept and pass on to its clients. An indication of this, was seen in the
training and in the manuals, which state how CSRs are supposed to explain the benefits
granted by creditors. CSRs are told they can provide estimates only, and not to provide |
specific creditor benefits, because the creditors can and do change their policies constantly.

Additionally, since over 45% of XXX's income comes from client fees, they are in a position
that they must constantly obtain additional clients to maintain their current levels of funding.
Since XXX operates with about a 30-35% attrition rate, they must constantly obtain new

clients. As we discussed above, the contract with XXXX specifically points out that XXX must
constantly turn over clients.

This constant turnover of clients certainly seems to suggest that DMPs are a primary objective
of XXX. Also, as XXX is operating with the intent of realizing high turnover and attrition, and
continually obtaining additional clients, it plays against the notion that they are attempting to
provide education to their clients.

The flip side of having over.90% of their funding.coming from DMPs, in fees and fairshare,
means they receive very little in the form of contributions, in this case, absolutely nothing. XXX

receives no government grants or donations from private foundations. They receive no
Page 91 of 118

Department of the Treasury - Internal Revenue Service oe Form 886-A


Schedule or

Form 886-A a | ; ' EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer - Year Ended
XXXXX XXXXX

donations from community groups, churches, labor unions, or any other groups or private
citizens. Furthermore, they do not seek any type of donations.

The credit counseling organizations that were found to be exempt, including those in Rev. Rul.
69-441 and 65-299 (and remember this one is a 501(c)(4)), and in both the CCCS of Alabama
and CCCS of Oklahoma, as well as the numerous rulings where individual (non-credit)
counseling is provided for free, the organizations were all supported by contributions from the
public. ,

-For-profit business enterprises are supported by fees paid by those who receive services.
While charitable institutions often do provide services to individuals; the cost is generally
subsidized by contributors who do not receive anything in return. In B.S.W. Group, Inc. v.
Commissioner, supra, the court cited lack of solicitation and sole support from fees as negative
factors for exemption. See also, Easter House v. United States, supra.

Due to those three reasons, we believe XXX’s funding sources are clearly indicative of a for-
profit operation and not those of an exempt organization. Therefore, in evaluating your funding
sources, we believe this is a strong factor showing XXX's primary activity is the selling of
DMPs in a for-profit business venture. It is not consistent with an organization that is providing
free counseling as its primary activity.

Educational Materials and Seminars

Other factors that must be considered in determining if XXX is primarily an educational
organization include their educational materials and seminars. There are many sub-factors we
will be looking at to make this determination. In making our determination, like many of the
previous factors, we will be comparing and contrasting the provision of the materials or
seminars as part of an exempt educational activity or whether its purposes are related to the
selling of DMPs. Do they promote exempt or non-exempt activities?

First we will look at seminars. XXX does not generally hold seminars as part of their
operations. Therefore, this can not be classified as an exempt or non-exempt activity, it is
either non-existent or insubstantial in nature.

Another item that we should consider is the publications”? that XXX distributes and whether or
not they contain material on financial management and budgeting or whether they primarily
promote DMPs.

°° We will be using this term loosely to cover numerous items XXX distributes or holds out to the public as educational

aspects to their activities.
Page 92 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

XXX has numerous publications and educational materials. The first educational source we will
discuss is the XXX website. As was discussed. above, the education materials on the website
deal with various areas of personal finance and some deal with credit. On the website, as of
[date], they had articles on, or titled, purchasing stocks, protecting yourself when purchasing
online, getting turned down for a loan, Have You Checked Your Credit Report Lately, Choosing
the Right Credit Card for You, Questions to Ask About Credit Cards, FDIC insured deposits,
Are you Better Off Today, internet banking, Mutual Funds, What Is The Best Way To Pay, etc.

Additional articles are shown on attachment 26. The articles are many of the same articles that
existed on the website in XXXX and XXXX, indicating they have had the same articles on their
website essentially since it was created. Also, as we have stated before, most of the articles do
NOT deal with issues of importance to the debtors that XXX is supposed to be educating.
There were no articles about spending habits, budgets, etc.

For example, in the article Shopping for a New Vehicle, it gives advice on how to choose a
new vehicle. While there are two sentences about not buying more of a car than you need, it is
mainly about choosing a new vehicle properly, and contains a lot of good advice about
shopping for a new car. Why would XXX want to encourage or provide information about
buying a new vehicle at all to anyone with serious financial problems? So while this is an
informative article, it just is not consistent with their exempt purpose.

Therefore, even though they provided numerous “canned” personal financial articles, they did
little to further the educational purposes of the organization.

Another portion of the XXX website that they are extremely proud of, is their XXXXX series. As
of [date], the only information that was available from the XXXXX was the “Diaries” on the
Website. These 13 articles discuss specific advice for a situation that is brought up in the
Diary. The Diaries discuss the following things:

• People getting married should have common goals and it discusses creating common
goals

• A person wants to move, but he hasn’t considered the financial aspects of the move, or the
fact that he would be moving from family and friends. It gives advice to consider.

• A person without any credit history wants to buy a car, house, and business soon. The
diary provides advice on establishing credit.

• An elderly couple is given advice not to play golf at $100 per round, if they can’t afford it.
The XX. gives them advice on the difference between entertainment and exercise.

• The XX. gives advice on the costs of raising a kid, so a person can make an informed

_ financial decision. He also provides advice on other areas that will have to be budgeted,

like sleep.

Page 93 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A_ |. EXPLANATION OF ITEMS | Exhibit No.
Name of Taxpayer Year Ended
XXXXXK

• The XX. gives helpful advice for someone purchasing a car. They discussed a budget and
made sure the budget allowed for insurance and other necessitates.

While most of the Diaries contain sound advice, and may be helpful if you are in that specific
situation, they still aren't necessarily the education needed by someone that is drowning in
debt. However, this is at least personal financial advice, and not the mostly irrelevant stuff,
from a distressed debtor's viewpoint, as in the other educational articles on the website, like
FDIC insured bank accounts and mutual funds. Based on the WayBackMachine.com, the
XXXXX Diaries first hit the Website in March of XXXX.

Therefore, in the 36 months of the audit period, they had these diaries available on the website
for 3 months. Since they were on the website less than 10% of the audit period, and the
articles are only vaguely helpful for individuals suffering a severe financial hardship, we would
have fo say, the educational aspects of the website provide a very weak, but positive factor for
XXX.

Unfortunately, the website also has DMP aspects. The website, as it was accessed on [date],
provided subtle information asking people to apply for a “Free Debt Relief Analysis”. The
“Apply Now’ link was the middle and top link of most pages of the XXX website. The main
page also mentions all the benefits of a DMP. In checking with the Waybackmachine.org, you
were able to apply online, as of XXXXXX.

We also discussed above that the XXX training manager, XXXXXX, told us the new accounts
CSRs had to be provided “up-training” in order to learn how to handle applications that came
from the internet. So the website does generate clients for XXX. It also seems evident from
and efficiency and production standpoint, if XXX did not believe they were going to get a
steady flow of applications from the website, they would not have spent the time or money to
train the CSRs how to deal with the website applications.

As we have previously stated, we believe the website was NOT just an advertisement for
DMPs. On the other hand, we do not believe that the few static articles, that were mostly
unrelated to their exempt purpose, provided meaningful education to distressed debtors either.
Therefore, we believe this is a neutral factor.

Another “publication” that XXX sends out is the folders, or packets of information, that are sent
to the callers after they call into XXX, and XXX has determined they are in a certain XXXX.
Instruction XXXX, dated XXXXXX, was updated to include "financial assessment and financial
software” for XXXX and XXXX. Therefore, XXX did not provide this information to all clients

© As has been noted, XXX has expanded the website greatly, especially in XXXX. Since this information is outside of the

audit period, we did not review this information.
: Page 94 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


F Schedule or

Form 886-A EXPLANATION OF ITEMS Exhibit No.

Name of Taxpayer . Year Ended
XXXKXX

during our audit years. Prior to this date, they only sent these folders to the XXXX, potential
DMP clients.

Since XXX now distributes these to all callers for XXX services, we feel we need to make
some brief comments about the relevancy of these educational materials. A major concern
with these packets of information is that it's a static product, not an interactive product for the
consumer. It would seem to be a fair question to ask, if the caller is a XXXX or XXXX person,
will they read the packet of information? Was the content helpful? XXX simply has no way of
knowing. It may know if the packets were accompanied with one on one instruction. This
however, is not a past or current XXX practice. These non clients are certainly individuals that
could benefit from some financial education and advice, whether they spend too much or will
be filing bankruptcy. Their habits or personal situations are inherently the basis for their _
financial distress. After it has been determined that XXXX and XX callers will not become |
clients with XXX, and since XXX does not substantially educate them during the phone call, it
appears that these individuals will not receive the financial counseling necessary for their
‘needs, —

By excluding this larger population of individuals from XXX's primary purported education, they
have effectively stated that education is a pay as you go plan. Why else would XXX exclude
them? This supports the appearance that XXX works as a for profit enterprise. XXX spends a
great deal of resources for the perfection of the DMP delivery. We agree, to help all those
individuals without a DMP would be costly. XXX's management has determined it is not
economically feasible to educate them. Therefore, those individuals will need to look
elsewhere for assistance. After all, XXX is not running its organization as a charity.
Additionally, XXX does not attempt to keep records on XXXX and XXeducation feedback,
especially when XXX does:-not contact. either the XXXX or XX people again. Call returns are
only for XXXX or potential XXXX clients.

The fact that XXX did not send these packets of information to the XXXX and XX clients during
the years of the audit, shows XXX's bias towards serving potential DMP clients only. Since it is
also unknown if any of the non-DMP specific. items in the information packet were read by the
XXXX persons, we can hardly classify this as educational material for this test either.

The fact is that providing packets of financial information to current members does not
demonstrate that education provided to this category of callers is a direct, educational activity.
Furthermore, since this didn’t occur until after the years of the audit, it cannot be determined to
be an exempt activity for the purposes of this report. Since during the years of the audit, the
packets were reserved for the potential DMP clients, we must conclude that this is a negative
factor in that the distribution of these packets of information was used to further their DMP
business, rather than to provide education to the general public.

Page 95 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A + EXPLANATION OF ITEMS _ ~ | Schedule or

- , , oo -.» | Exhibit No.
Name of Taxpayer is | —_— -| Year Ended

Another potentially educational factor to consider is whether classes are open to the public. In
this Case, XXX does not generally conduct classes for the general public. However, if we
consider some of the volunteer work done by XXX employees, we could answer this in the
affirmative. If some of the educational grants that XXX makes could be attributed to XXX
activities, we could certainly answer this in the affirmative.°' However, as we have stated,
these are activities of other organizations, not XXX.

Based on the few “classes” that are available to the general public, we would have to qualify
this as a positive factor. When compared to the other activities of XXX, these classes that
might be open to the general public are completely insubstantial and were not worth requiring
proof of the educational nature. Therefore, we would consider this a positive factor, but a very
weak positive factor for XXX.

Another factor that needs to be considered is the general assistance and education callers
receive, regardless of whether or not they sign up for a DMP. As we have stated above, if a
client does not qualify or chooses not to enroll in a DMP, they do not receive substantive
educational services. We have previously discussed that the initial call with the client is not
educational. Further, the information packet that is sent out is lacking in educational content
and actually was not sent out to the non-DMP callers during out examination period. The
website, which is available to the general public, does not offer substantive financial education.
They do not receive additional counseling or other services. XXX is not set up to allow callers
to simply call up and get advice from a counselor on financial matters, regardless if the caller is
a client or not.

If we go back to the experience and training of the CSRs, we know that they lack the
necessary abilities to be able to provide meaningful and substantial credit counseling. The
extremely limited suggestions that CSRs offer to clients that do not qualify for DMPs, can in no
way be considered as providing financial education.

Another factor to consider is whether all DMP clients become assigned to a financial counselor
who provides continuing counseling and support during the plan? All XXX DMP clients become
assigned to a CSR who regularly checks the client's account and updates the client's file. A
client will be able to depend on his or her CSR to maintain the account, encourage the client to
pay off the debts in the plan. XXX sends monthly statements showing the monthly flow of
money in the account and the progress of debt elimination. However, the client will not receive
financial education, advice or other educational information other than the dialogue related to
the DMP.

*! Grants used by a School to teach others, for example.
Page 96 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A | = = —EEXPLANATION OF ITEMS .| Schedule or

Exhibit No.

Name of Taxpayer | Year Ended
XXXXKXK

On the other hand, those clients who decline or fail to qualify for the DMP are not assigned
counselors. This decision is not arbitrary, but by design. The decision making process of XXX
to not assist clients who either fall out of the system for default or decline the service is
substantiated in the XXXs of XXX. XXX in making a profit motivated decision has decided the
less effort they expend on clients not on a DMP, the more profit they will make. Again, XXX is
extremely concerned with efficiency in its operations. Unfortunately, this means the non-DMP
Clients will receive little or no attention or education.

Therefore, in determining whether XXX's provision of educational materials and seminars are
more related to performing an exempt educational activity or are in furtherance or related to
the selling of DMPs, we have considered many items.

The neutral factors:

We determined that XXX's seminars are either non-existent or insubstantial in nature, and
therefore not a factor. Then we looked at the XXX website and determined that it contains
many informational articles, but that most are not relevant to educating distressed debtors. We
also found that the XXX website advised viewers about Debt Management, the benefits of debt
management, and allowed them with an online application, as well as their toll free number.
However, we also did not feel it was blatantly an advertisement for DMPs, we also believe this
is a neutral factor for XXX.

The positive factors: -

XXX has volunteers, some during work hours and some on their own time, that could be seen
as offering “classes” open to the public. We do not believe these were substantial in nature; so
we think this is a very weak positive factor for XXX.

The negative factors:

We analyzed the packets of information sent to callers requesting XXX services. We found that
since XXX sent these only to potential DMP clients, and was not part of a direct, participatory
educational activity, this was another negative factor in that they were used to further XXX's
DMP business, rather than to provide education to the general public. Then we considered the .
general assistance and education callers receive, regardless of whether or not they sign up for
a DMP. We determined that callers who are not potential DMP clients receive no measurable
or substantive financial education; another strong negative factor. We also considered whether
DMP clients receive financial education. While we found that they receive excellent customer
service, XXX CSRs are not qualified to provide financial counseling; another negative factor.
Finally, we looked at non-DMP clients and whether or not they are assigned counselors. They

are not. We found that in order to increase profits, these clients will receive little or no attention
Page 97 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


De oo, Schedule or
Form 886-A | . EXPLANATION OF ITEMS Exhibit No.
-Name of Taxpayer ‘| Year Ended

or education from ‘XXX, a negative factor in considering if their purpose is sto educate the
public. .

Overall, in both quantitative and qualitative terms, the negative factors far outweigh the positive
in regards to their educational materials and seminars.

Summary of Analysis — ‘Issue 1 Do XXX’ Ss primary activities accomplish an exempt purpose?

Therefore, we find that it is clear from our audit and review of the available information that
XXX does not meet the operational test required by Section 1.501(c)(3)-1(a)(1) of the
Regulations.

We determined that substantially all of XXX’s revenue and expenditures and employee
workforce hours related directly to their call center and DMP operation making this their
primary activity. We have established that their counselors ask only enough financial
information to pre-qualify callers into the DMP. The counselors do not discuss budgeting and
.finances, except to collect this information for DMP purposes. They do not discuss
employment, education, buying habits, significant future changes in finances, assets, or
secured debt in any meaningful manner. The counselors do not develop options or strategies
tailored to the needs of clients, and therefore are unable to discuss the advantages or
disadvantages of those options. The only option at their disposal to help clients is a DMP.
Furthermore, they are not trained to probe for or recognize other potential causes of debt that
should be referred to other appropriate social services or programs that may be needed by
clients.

Before they are hired, CSRs are not required to have education or experience in providing
financial education. While the CSRs are trained extensively on customer service and DMPs,
they are not trained in subjects that would allow them to provide financial education. They are
not trained to identify the causes of an individual's debt or other personal problems that may
contribute to the situation. Additionally, counselors are not evaluated on how thoroughly and
effectively they develop and present options to match the particular circumstances of any
client. While they are not compensated based solely on DMPs, they are compensated based
on efficiency, productivity, quality, and customer service, all related to the sale or retention of
DMP clients.

While XXX does not use the Internet, mass media and direct mail to advertise its DMPs to the
general public, XXX has contracted with one of the largest issuers of consumer debt
specifically for the purposes of obtaining potential DMP clients.

Our review of XXX's governance shows the board of directors is not an independent

community-based board, but a small, related board with a majority of the board being family
Page 98 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
Exhibit No.

Name of Taxpayer . Year Ended

XXXXX | XXXXX

members or persons with a financial interest in XXX. In operation the board's primary focus
was growth, creditor relations, fees and improving the company’s ability to recognize fees.
Overall, the board was motivated by profit and growth, and rarely considered their stated
exempt purpose of providing education to the public.

XXX’s funding sources establish that 99.7% of their income relates to their sale and retention
of DMP clients. They receive no charitable contributions and have no aspirations of attracting
charitable funding.

. This fact pattern shows a clear and decisive difference between XXX operations and those
organizations that have been determined to be exempt in the past.

Issue 2 - More than an insubstantial part of XXX’s activities are in furtherance of a non-
exempt purpose?

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities
that accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Only an insubstantial portion of the activity of an exempt organization may further a nonexempt
purpose. As the Supreme Court held in Better Business Bureau of Washington D.C. Inc. vs.
United States, supra, the presence of a single non-exempt purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly exempt purposes. Even
if we agreed that you were organized and operated for an exempt purpose, the fact that you
also have a substantial non-exempt purpose would be sufficient to deny recognition to you.
Specifically, the court in Better Business Bureau held that if education is conducted for a non-
exempt purpose, the organization will not be recognized as exempt. Based on all the facts and
circumstances of XXX, its operation of debt management plans is so pervasive that its activity
of providing DMPs demonstrates that you operate in a commercial manner.

No court or IRS ruling has indicated that the sale of debt management plans is a charitable
activity. Since the sale of these services to the general public has been established to be one
of your substantial purposes, in fact your primary purpose, we cannot conclude that you are
operating for charitable purposes.

Section 1.501(c)(3)-1(e)(1) of the Regulations provides that an organization may meet the
requirements of section 501(c)(3) although it operates a trade or business as a substantial part
of its activities, if the operation of such trade or business is in furtherance of the organization's

Page 99 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended

XXXXX

exempt purpose or purposes and if the organization is not organized or operated for the
primary purposes of carrying on an unrelated trade or business.

Any activities involving "authentic" credit counseling provided to a genuine charitable class or
the provision of credit education to the general public, would be purely incidental to your
predominant non-exempt purpose of operating and carrying-on an ordinary for-profit debt
management business. Since we have previously determined your call center and DMP
operations are not educational, we are unable to say that those operations are in furtherance
of an exempt purpose.

In addition, your organization shows none of the public involvement that characterizes
organizations serving a public interest. Your activities are carried out by paid employees rather
than volunteers.

Your board has a majority of members that are family members or those with a financial
interest in XXX, only a few members are selected from the business community. Your board
members are unlike the organization described in Rev. Rul 69-441, supra, in which the
organization's Board of Directors is comprised of representatives from religious organizations,
civic groups, labor unions, business groups, and educational institutions. In fact, your April 4,
XXXX board meeting discussed “Outstanding action items continued from the previous
meeting: Develop an advisory board including creditors, educators and current supporters”.
The advisory board was not developed and was discussed with bankers and creditors but
there has been little response or acceptance. Director of XXX, XXXXX stated a consumer
based advisory panel could be a helpful format with clients/consumers. XXXXX questioned
organization officer XXXXX “are there any constraints to board members regarding the
addition and composite of board that requires us to represent consumers. XXXXX responded
that we do represent the consumer because we are aware of the client needs and we do offer —
a cross representation of the industry”. XXXX, legal advisor and director stated that XXX has
no legal requirement for a board make up of consumer/credit industry”. In addition to other
comments made about the board previously, this provides insight into what XXX's actual intent
is. lt appears from the evidence that XXX's primary objective is to avoid public involvement in
XXX’s decision-making process and that XXX is carried on with more than an insubstantial non
charitable intent and furthermore, is carried on in a commercial, rather than a charitable
manner.

Similar to the organization in Easter House, which operated an adoption agency, we have
found that your organization is operated for a substantial commercial purpose rather than for
the exempt purposes of providing educational and charitable services to the portion.of the
public you serve, Any educational activities that you do conduct are merely provided "incident"
to your operations related to DMPs. Your funding is also similar to that of Easter House. You

are completely funded by fees related to your DMP operations and seek no funds from federal,
Page 100 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

= . ' ;

Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX . XXXXXK

state or local sources, nor engaged in fund raising programs, and do not solicit contributions.
Also like Easter House, no court has found your services in and of themselves to constitute an
exempt purpose.

Similar to Airlie Foundation, we believe you would fail the "commerciality" doctrine in applying
the operational test. Because of the commercial manner in which you conduct activities, we
believe you are operated for a non-exempt commercial purpose, rather than for a tax-exempt
purpose. Your multi-million dollar contract to obtain potential DMP clients with XXXX, your
efficient pre-qualification process, your concern for efficiency and productivity in your
operations, your emphasis on and evaluation of your employees using statistics on efficiency
and productivity, your boards emphasis on growth and profits, your payment of millions of
dollars to Family members and to the CEO’s software company, your concern about
competition and obtaining and keeping a competitive edge, and your realization of extensive
profits, as well as other factors allow us to conclude you have a substantial commercial
purpose. .

We believe your situation is also similar to FTC V. Gill. We believe a substantial purpose of the
organization obtaining exempt status was to avoid regulation under CROA.

Reviewing the history of the organization and its Founder, XXXX, we see that he was involved
with the for-profit credit counseling industry since the early XXXX’s. At the time XXX was
created, he continued in this portion of the industry up to XXXX, the same time as when CROA
became effective. In XXXX, XXXX closed his for-profit business to concentrate his efforts on
XXX.

Since, XXX charges initial fees which result in millions in revenue; they had a substantial
motive to avoid CROA. Therefore, we-believe that a substantial purpose of obtaining its
exempt status was to avoid regulation by CROA, which would be a substantial non-exempt
purpose.

In XXXX and XXXX, XXX’s growth skyrocketed as a result of its multi-million dollar contract
with XXXX. Without this 501(c)(3) status, XXX's growth would not have been possible. In the
contract with XXXX, XXX had to represent and warrant on a continuing basis that it was a
501(c)(3) organization. If XXX was not able to. maintain its exempt status, we do not believe
that XXX would have been able to either obtain or maintain the contract with XXXX. Therefore,
-we believe that a substantial purpose of maintaining its exempt status is to ensure its ability to
contract with XXXX to obtain an almost unlimited supply of potential clients on a continuing
basis. We believe this is also a substantial non-exempt purpose.

The XXXX contract and collection of debt for XXXX is a substantial non-exempt purpose.

This will be covered in more detail in the private inurement section below. In the fact section
Page 101 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
| Form 886-A. |. . .. EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer - . | Year Ended

and the analysis below, we determined that XXX formed a “strategic alliance” with XXXX. The
purpose for XXX was to obtain a constant flow of potential DMP clients and the purpose for
XXXX was to obtain a cost effective method to collect payments on their debtors at risk of not
paying amounts due to XXXX. The contract is obviously commercial in nature for both

parties. Therefore, the contract that provides 90% of XXX’s DMP activations was found to be
of a commercial, I for-prof it nature; or another substantial non-exempt purpose XXX.

Additionally, asa , result of this contract, not only is XXXX paid millions in referral, and/or
service fees, as the later contract states, XXXX has negotiated savings in the millions of not
having to pay fairshare payments for their clients that are referred to XXX for a DMP. Last,
but not least, through its operations, and as a result of this contract, XXX collects about
$1334X a year for XXXX for some of its doubtful collections. Even though XXXX is a very
large creditor, XXX's collections for XXXX are disproportionately high compared to other
creditors.

Overall, the contracts were not entered into and do not appear to benefit a charitable class;
we have already established that an educational purpose is not accomplished. They are
simply a for-profit trade or business contract, whereby XXXX will substantially benefit from
XXX acting as a collection agency for XXXX; again, a substantial non-exempt purpose of
XXX operations.

A substantial purpose of XXX is to employ XXXX and his family members. Again, this will be
discussed in more detail in the discussion of private benefit. To summarize that section, we
found that XXXX Family members and relatives earned in excess of $SXXXXXXX, SXXXXXKXX,
and $XXXXXXXX in fiscal years XXXX, XXXX, and XXXX, respectively. Of the Senior Vice
Presidents, 80% are family members. The only Senior Executive VP was the CEO’s relative,
XXXX. His duties do not appear to be as extensive or involved as those of the Call Center
Director, who is a non-relative VP.

One of the CEO's relatives, paid as a Senior Vice President (SVP) operated the mail and file
room, with absolutely no executive duties. Another relative, who.is over 65, also has a SVP
title; but performs essentially clerical work. Another brother is paid $.67X and $.80X in fiscal
years [year] and [year] for research duties that any intern could perform. Finally, XXXX’s
elderly relative, still works at XXX. He is XX years old, getting paid twice the salary of the
average XXX employee. Even though XXX has policies prohibiting relatives to report to other
relatives, XXX ignores those policies and allows XXXX Family members to report directly to
other Family members.

Therefore, we find that another substantial non-exempt purpose it to provide employment to
the XXXX Family members and that some of the pay provided to relatives is highly

questionable. The employment and hiring of relatives is a substantial non-exempt purpose.
Page 102 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A | EXPLANATION OF ITEMS | Schedule or
Exhibit No.

Name of Taxpayer Year Ended
XXXXX

Another part of XXX operations results in substantial payments to the CEO's fully owned
software company, XXXX. XXX purchased the software, the software system, which is the
backbone of XXX operations for $XXXXX to be paid in XXXXX installments of $XXXXX with
interest at X%. For a software contract, a product that becomes outdated very quickly, the 10
year contract is an extremely long contract period.

Additionally, XXX sold the XXX budgeting software to XXX to use as an “educational”
budgeting tool for XXX clients. The result of these two contracts is that during the periods of
the audit, around $26X per year is paid to the CEO’s company. Since we have determined
that XXX does not provide exempt educational services to its clients, we believe these
contracts provide a substantial benefit to XXXX, another non-exempt purpose.

In summary, we conclude that XXX is operated for numerous substantial non-exempt
purposes, including the following: 1) Your operations of a commercial, profit-motivated DMP
program, 2) Your avoidance of CROA by obtaining exempt status, 3) Your maintenance of
your exempt status to ensure your commercial contract with XXXX remains in effect, 4) The
operation of the contract furthers the non-exempt purpose of paying XXXX for referrals and
acting as a debt collector for them, 5) Your employment of numerous family members, some
with inflated wages, and 6) Your payment of millions of dollars to the CEO's software
company.

We believe that each of the above aspects of your activities is a substantial non-exempt
purpose, each of which preclude your organization from being regarded as “operated
exclusively” for one or more exempt purposes within the meaning of Section 1.501(c)(3)-
1(c)(1) of the Regulations.

Issue 3 - XXX was operated for the purpose of serving private rather than public
interests?

Section 1.501(c)(3)-1(c)(2) of the Regulations provides that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals. The words "private shareholder or individual"
refer to persons having a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides that an organization is.not organized
and operated exclusively for one or more of the purposes unless it serves a public rather than
a private interest. To.do this, an organization must establish “that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or .
his/her family, shareholders of the organization, or persons controlled, directly or indirectly, by

such private interests.”
Page 103 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-0 po | - 7 EXPLANATION OF ITEMS - | Exhibit No.
Name of Taxpayer . : , Year Ended
XXXXXK XXXXX

Creditors in general _

We must consider whether XXX provides substantial benefits to creditors, in general. As we
have stated, a result of the operations of XXX is the payment of large sums of money to the
creditors. They certainly have a private interest in its operations. Additionally, the individual
creditors set policies for the DMP clients that XXX must follow. Therefore, they exhibit at least
some indirect control over portions of XXX operations.

In considering this further, XXX provides substantial private benefit to credit card companies in
a manner similar to the organization in Credit Counseling Centers v. S. Portland. Fair share is
commonly defined as "that amount the organization receives from the creditors for each
payment remitted to them.” In the absence of any charitable or meaningful educational
activities, which we have established, you are operating as a collection agency for these
companies. The "fair share” paid by the credit card companies would undoubtedly result in
significant savings over the possible costs of not recovering any of the unpaid debt owed them.
Thus, these companies clearly realize substantial financial benefits through their business
relationship with you. We note that your contract with clients’ provides that if they drop out of
the DMP, they are still obligated to pay their debts to the credit card companies. This illustrates
‘ the close business relationship you have with these companies.

Your board minutes also stress the emphasis and management of the organization is geared
more towards continued dialogue with creditors, and good creditor relations, showing an
alliance toward banks and creditors rather than the consumers. This emphasis of the board
was also done with almost an exclusion of discussions on your purported exempt purpose of
providing financial education.

Since XXX has collected on debts of approximately $400 million dollars per year during the
examination period, as compared to clearly insubstantial educational activities, we believe the
benefit to creditors through your operations far outweighs any exempt purposes that are being
achieved. Therefore, the relative benefit to creditors compared to the benefits to charity or
charitable classes is substantial. They are also substantial in the qualitative sense because no
education is provided to your clients or the general public.

XXXX

In particular, we find your association with XXXX to be very troubling. In a letter, dated
XXXXXX, from a special committee of the XXX board of directors, they refer to this
association as a “strategic alliance”. We need to analyze this relationship to determine if this
is an impermissible private benefit. First, let's consider the contract.

Page 104 of 118
Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or

Form 886-A _ ' EXPLANATION OF ITEMS Exhibit No.
‘Name of Taxpayer Year Ended
XXXXXK

The contract states that XXXX desires to aid borrowers under various XXXX loan programs
who are experiencing trouble making payments by encouraging them to seek debt counseling
SO a payment plan can be worked out. XXXX acknowledges that the availability of up-to-date
information concerning its distressed borrowers will enhance XXXX’s ability to manage its
accounts.

While this is stating XXXX wants to help its clients, the contract also states and is intended to
get their clients into a payment plan, not to get them to get credit counseling. As a result, the
contract will enhance their ability to manage, or in other words “collect on’, its accounts.
Therefore, this contract for XXXX is a method to collect from its own distressed borrowers.

The contract also requires both XXXX & XXXX to use their commercially reasonable best
efforts in the performance of their obligations of the contract. The contract also states, both
XXXX and XXXX understand the necessity of maintaining a reasonable constant flow of
activity and successful conversion.

“In as much as the value of referrals is connected with a reasonable volume, XXXX agrees to
provide at least XXXXX Client Information Referral Forms annually.”

“In as much as the value of referrals is connected with a reasonable level of successful
conversions, XXXX agrees to convert a minimum of 30% of the Client Information Referral
Forms to active status. ,

“Subject to the exceptions set forth in the second Sentence of this Section, XXXX
acknowledges that XXXX will have a competitive advantage in its industry upon entry into this
Agreement, and XXXX agrees not to plan, advertise, sponsor, aid, develop, solicit or enter
into any agreement with any other Person to provide services of the same kind, variety or
nature with respect to debtors, without the written consent of XXXX.”

This contract is clearly very favorable to XXXX. XXXX, like any other large creditor, will have
a small percentage of their customers, who become unable to pay the amounts owed. .
Through this contract, XXXX has found a method to collect on doubtful debts in a manner
that has a competitive advantage in its industry. Not only is XXXX paid to provide clients to
XXX, they have arranged to forego having to pay fairshare payments to a credit counseling
_ organization, like so many of its competitors do, and that they themselves pay to other credit
counseling organizations who collect payments for them. XXXX has found, or was presented
with a system, that essentially allows them to benefit from the exempt status of XXX.

Overall, the contracts were not entered into and do not appear to benefit a charitable class;
we have already established that an educational purpose is not accomplished. This is simply

a for-profit trade or business contract, whereby XXXX will substantially benefit from XXX
Page 105 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


a : Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
‘Name of Taxpayer Year Ended
XXXXX

acting as a collection agency for XXXX. While the contracts assume XXX will also collect for
XXXX competitors, because XXX has an exclusive contract with XXXX, XXXX has. negotiated
what amounts to a negative fair share payment. No other creditors get this same deal from

XXXX receives a substantial private benefit from its association with XXX and this is
documented by this agreement and per XXX's tax returns. During the period covered by
exam, the returns show XXX paid XXXX $88X, $108X, & $70X in fiscal years XXXX, XXXX,
& XXXX, respectively. On top of this, XXX has collected around $4000X dollars for XXXX
over the period covered by this audit. If we provide a low estimate of 7% fairshare, this is an
additional benefit of $280X, the total combined benefit for XXXX is about $4533X over the 3
years covered by this audit.

Another point that needs to be made is the substantial nature of the benefit to XXXX in
comparison to XXX operations. The percentage of XXX payments to their total expenditures
was 25.2%, 21.8%, & 15.2% for fiscal years XXXX, XXXX and XXXX, respectively. In all-
respects, this is a substantial benefit to XXXX.

In Rev. Rul. 70-186, private benefits of property owners were found not to lessen the primary
public benefits flowing from the organization's operations. The ruling went on to distinguish a
situation where an organization uses its funds primarily to foster private interests and the
benefit, if any, to the general public is only incidental. We believe, XXX is more similar to the
second organization, in that the private interests are primary, and the benefit to the general
public is incidental. .

In determining if an organization serves a public rather than a private interest, the private
benefit must be considered incidental. To be considered incidental, it must be incidental in both
a qualitative and a quantitative sense. In order to be incidental in a qualitative sense, the
benefit must be a necessary concomitant of the activity which benefits the public at large, i.e.,
the activity can be accomplished only by benefiting certain private individuals. In this case the
operation of a true credit counseling organization would require creditors to be benefited,
because the education that is provided would hopefully lead to creditors that were paid back.
However, not in the sense that the credit counseling organization would collect the money for
them, as XXX does, but in that the consumers would learn how to properly manage their
finances and credit.

To be incidental in a quantitative sense, the private benefit must not be substantial after
considering the overall public benefit conferred by the activity. This is a straight comparison of
the private benefit, in this case the $4533X received by XXXX, with the public benefit conferred
by XXX, in this case we have shown that XXX has failed to perform its exempt function,

educating consumers. Therefore in a quantitative sense, the benefit to XXXX is substantial.
Page 106 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A_ |. EXPLANATION OF ITEMS . Exhibit No.
Name of Taxpayer | Year Ended
XXXXX

XXXX Family Benefits

In the fact section of this document, we have established that XXXX has many family
members employed at XXX. In more than one public relations “bios”, we found the following
comments, “XXXX and his family are still the heart and core of the business. Averaging over
20 years of service, every one of the original XXXX family employees is still working hard on
behalf of the many clients XXX now serves.”

XXXX relatives earned in excess of $14X, $16X, and $20X in fiscal years XXXX, XXXX, and
XXXX, respectively. While XXXX is the CEO of the company, his XXXX is the COO. Both his
XXXX and XXXX report directly to his XXXX. XXX does not follow its policy on the employment
of relatives when it concerns relatives of the CEO. Page XX of the employee handbook, states,

..relatives may not be hired or transferred to positions where they directly or Indirectly
supervise or are supervised by another relative.”

His XXXX, XXXXX, being the COO, has three Senior Vice Presidents (SVP) of Operations
reporting to her. Until just recently, one of those SVPs was XXXX’s XXXX, XXXX. XXXX was
in charge of the mail and file room, essentially working in a middle management position, with
absolutely no executive duties. As we mentioned, he recently stopped reporting to XXXX. In
making this change, another of the SVP of Operations took over all his prior duties, further
evidencing the lack of duties he previously performed.

As of the end of the audit period, XXX had X VPs. Of the X VPs, 72% were SVPs, where 57%
were relatives of XXXX. The only Senior Executive VP was his relative, XXXXX. At the end of
the audit period, XXXXX was in charge of the New Accounts area, an area with about 18% of
the workforce. The only VP, that is not an SVP or an SEVP, was XXXXX. He was the Call
Center Director, an area with over 44% of the workforce. Based on Responsibility Matrixes for
ISO and the Decision Matrix, XXXXXXX had similar if not more responsibly than XXXXX. They
are paid similarly, although their positions and responsibilities are not. The difference seems to _
be XXXXX's relationship to the CEO. It also seems apparent that XXXXX is being set up to

take over the business for when his relative retires.

XXXX’s XXXX, XXXX, who.is over 65,.also has a SVP title. He performs work in a limited
capacity making some basic data entry into the computer systems that any clerical employee
could do. He is getting paid based on his title not his duties.

Another of XXXX's XXXX, XXXXX, got paid $.67X and $.80X in fiscal years [year] and [year],
respectively for researching the credit counseling industry. He was not paid this much to
research and analyze, but simply to research and pass the information on. He is getting paid

for being XXXX's XXXX, not for his job duties, which any intern could perform.
Page 107 of 118

Department of the Treasury - Internal Revenue Service — Form 886-A


a — “Schedule or
Form 886-A | a 7 | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer Year Ended
XXXXX XXXXX

Finally, XXXX's elderly relative, still works at XXX. His XXXX is paid over $67X is each year of
the audit. He is XX years old. He gets paid twice the salary of the average. XXX employee. His
hours of work and job duties are unknown, as there seemed to be absolutely no reason to find
this information out, as arguing that a XX year old was receiving unreasonable compensation
at around $.67X would not likely be upheld at any level in or outside of the IRS.

While, we are not arguing that any XXXX Family members receive unreasonable
compensation, we do know that they are well paid. Regardless of duties, they are well paid for
their titles. As we have stated earlier, the entire family made in excess of $14X, $16X, and
$20X in fiscal years XXXX, XXXX, and XXXX, respectively.

In addition to the numerous relatives of XXXX working for XXX, XXX has also contracted with
XXXX, a software company that is 100% owned by XXXX. One contract is for the use of the
debt management software used by XXX for which XXX agreed to pay SXXXXXX in XXXXX
installments of $XXXXXX with interest at X%.

The term of this contract is 10 years and will automatically renew for successive 5 year terms
thereafter, unless 90 days prior written notice is made before the expiration of the contract. In
terms of computer software, a product that becomes outdated very quickly, this is an
extremely long contract period.

The second contract is for the software used as the “educational” budgeting tool provided to
XXX clients. The agreement is a minimum of XXXXX licenses per 12 month period at $XX for
the computerized version and $XX for the non-computerized workbook version. Since the
primary form that XXX distributes, this contract has a minimum value of around $XXXXXX

per year.

This contract is automatically renewable for additional 12 month periods unless 90 days prior
written notice is made before the expiration of the contract. XXX has automatically renewed
__ this contract with little or no documented discussion from the board of directors.

The payments to XXX during the periods of the audit average around $26X per year. Without
a discussion of the reasonableness of the payments to XXX, this is another substantial
benefit of $80X dollars to XXXX during the period of the audit.

In terms of determining if public rather than private interests are served, we must again weigh

the benefits the family receives with the benefits received by the general public and we must
consider the private benefit in both a qualitative and a quantitative sense.

Page 108 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Form 886-A EXPLANATION OF ITEMS Schedule or
| Exhibit No.

Name of Taxpayer Year Ended

XXXXX ‘ XXXXX

In order to be incidental in a qualitative sense, the benefit must be a necessary concomitant of
the activity which benefits the public at large, i.e., the activity can be accomplished only by
benefiting certain private individuals. In this case the operation of a true credit counseling
organization would not require family members to be benefited. As XXX became more
profitable, more members of XXXX’'s family were hired and they were paid at increasing rates.
In a qualitative sense, we do not believe that true credit counseling agencies require the
extensive software package that runs the XXX DMP program, the software system. We must
remember, this program does not help XXX provide educational services, it keeps track of the
DMP clients and their accounts. We are also unsure if true credit counseling would require
such a large purchase of budgeting software, since the financial counseling they provide is
generally performed by counselors. Therefore, in a qualitative sense, these payments to
Family members for wages and XXX for the software programs are not incidental.

To be incidental in a quantitative sense, the private benefit must not be substantial after
considering the overall public benefit conferred by the activity. This is a straight comparison of
the private benefit, in this case the $51X received by XXXX family members and an additional
$80X to XXXXs 100% owned company, with the public benefit conferred by XXX, which again
we have shown that XXX has failed to perform its exempt function, educating consumers.
Therefore in a quantitative sense, the benefit to the family members is substantial.

In summary — Issue 3 — Private Benefit

In conclusion, we find that when looking at the benefits provided to 1) creditors, in general, 2)

XXXX in particular, and 3) the XXXX Family; the benefits are substantial in nature. All of these,

separately, when considered in a quantitative sense and compared to the benefit received by
the general public through your exempt activities are substantial.

Any activities involving “authentic” credit counseling provided to a genuine charitable class or
the provision of credit education to the general public, would be purely incidental to the private
benefits your organization confers to the above "private shareholders or individuals" having a
personal and private interest in the activities of the organization. :

Therefore, XXX is not operated exclusively for one or more exempt purposes, because of
private benefit pursuant to Section 1.501(c)(3)-1(c)(2) of the Regulations.

Issue 4 - XXX has allowed private inurement to exist in conducting its operations?

Section 1.561(c}(3)-1(d)(1)(ii) of the Regulations provides that an organization is not organized
and operated exclusively for one or more of the purposes unless it serves a public rather than
a private interest. To do this, an organization must establish “that it is not organized or

operated for the benefit of private interests such as designated individuals, the creator or
Page 109 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


_ —T 7 — _ Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No..
Name of Taxpayer - ok Year Ended

his/her family, shareholders of the organization, or persons controlled, directly or indirectly, by
such private interests.

The inurement prohibition provision “is designed to prevent the siphoning of charitable receipts
to insiders of the charity .. . .”. United Cancer Council v. Commissioner. “In other words,
section 501(c){3) denies exempt status to an organization whose founders or controlling.
members have a personal stake in that organization's receipts. Founding Church of
Scientology v. United States,

XXXX as the creator, CEO, and Director of XXX is considered an insider for the purposes of
the private inurement prohibition. Since he owns 100% of XXX, XXX is also considered an
insider for the purposes of private inurement.

In this respect, we have concerns with one of the two contracts XXX has with XXX, the one
for the budgeting software, dated XXXXXX. This agreement gives XXX a limited, non-
exclusive, and non-transferable right to the XXX software package. The agreement requires a
minimum payment for XXXXX licenses per 12 month period at $XX for the computerized
version and $XX for the non-computerized workbook version.

As we have previously stated, the contract is automatically renewable for additional 12 month
periods unless 90 days prior written notice is made before the expiration of the contract. XXX
has automatically renewed this contract with little or no documented discussion from the
board of directors, and for a contract that could, and has, generated millions of dollars in fees
per year.

The software that is purchased is described on the XXX website as a “software program that
will allow you to develop your personal budget, analyze different debt liquidation strategies,
and simulate debt within your overall budget for long-term planning, plan for short-term
emergency savings, and plan for long-term retirement savings.” The website indicates that
only active clients (DMP client) are able to download a free copy of the software.

Additionally, during our initial meeting with the XXX executives, we were told that all callers
will be provided with copies of the software, regardless of whether or not they become an
active DMP client. While the records to establish the actual number of callers they receive per
year is not maintained by XXX, they believe this number is over 100,000 per year.

Based on the contract with XXXX, they were required to convert 30% of the XXXX referrals. |
Since they averaged about 24,000 new clients over the audit period, we believe this total may
be closer to 75,000 than 100,000 per year.

Since the costs to copy the software on to a CD or to have the software downloaded from the
Page 110 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A | | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer ; Year Ended
XXXXKX

website are much cheaper than a paper copy of the software would be, we believe that most
of the copies distributed by XXX will be for the higher cost software version, per the contract.

Therefore, XXX is now indicating that the costs for this contract will be closer to $XXXXXX
per year, which will be more than the amounts that were paid during the year of the audit,
which averaged closer to $XXXXXX per year.

XXX distributes this software for free to its clients, which certainly seems to be a common
price for this type of software. In a Yahoo! search for “Free Budgeting Software” on [date], we
got 2,580 hits. In a Yahoo! search for “Free Debt Elimination Software” on [date], we got
1,090 hits. Some of these were undoubtedly duplicates.

Budgeting software can be obtained from a variety of other credit counseling organizations
too. Access to free budgeting software does not seem to be at issue. So why is XXX willing to
pay $XX to XXX for each copy, simply to give it to their clients who could get other free
versions of budgeting software? We will come back to this.

In comparing budgeting software that is purchased at a retail store, Quicken Basic and
Microsoft Money Standard are two such budgeting software applications. Those are about
$30 in the stores or over the internet. However, XXX is purchasing in bulk, anywhere from
20,000 to over 100,000 based on XXX estimates, which should be much cheaper on a per
copy basis.

It is very concerning that XXX's board is renewing the contract on an annual basis, at a cost
of around $13X per year, if comparable products can be obtained for free or at very minimal
cost. The answer could certainly be the reason is because this is XXXX’s business.
Remember, XXXX stated on trusted and respected friends are on the board of directors.
Even still, there is no evidence in the minutes that the board knows the nature of this
contract, since it is not discussed in the board minutes. It is simply allowed to renew.

XXX has generally been very interested in making sure that they are protected from the
standpoint of rebuttable presumptions. For example, the board of directors has a rebuttable
presumption committee.

As we stated this contract was created in [month] of [year]. During the course of this audit,
XXX has provided several letters for various contracts to show their due diligence in
determining the reasonableness of those contracts.

In [month] of [year], Arthur Anderson wrote them a letter concerning the reasonableness of
the XXXX contract. This letter mentions a prior letter Arthur Anderson sent to XXX specifically

‘mentioning actions XXX should take to qualify for the rebuttable presumption with respect to
; Page 111 of 118

Department of the Treasury - internal Revenue Service Form 886-A —


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer . Year Ended
XXXXX
the XXXX contract.

In {month] of [year], the board of directors of XXX created a Special Committee on Software
License Agreement Valuation to determine the value of the contract XXX, then XXXX, had
with XXXXX. This letter limits its valuation to the software system, unrelated to the budgeting
software contract. This letter also discussed the rebuttable presumption requirements.

In [month] of [year], Arthur Anderson again wrote XXX a letter concerning the
reasonableness of the XXXX contract. This letter is substantially similar to the prior one for
this contract, also mentioning the rebuttable presumption. Another similar letter from Arthur
Anderson was written in [month] of [year].

It is obvious that XXX was well aware of their responsibilities with making sure they paid
reasonable amounts for their contracts, especially when insiders are concerned.” XXX also
has an in-house counsel that has been with the organization since its inception. Any claim
that they could make that they did not know about the rebuttable presumption would be
purely frivolous.

Finally, on XXXXXX obtained a letter from Deloitte Tax, which covers the budgeting software
contract. This letter specifically states that it covers the contract with XXX, effective XXXXXX.
While they analyzed the agreements and determined the payments were reasonable, it
indicated that they could not determine that XXX meet the rebuttable presumption
requirements, because they were unaware of how the board determined the reasonableness
of the contracts at the time they were signed.

Note: This letter refers to both contracts as XXX contracts. The actual contracts are with XXX
and XXXXX and | will refer to them as such. The contract at issue here is the XXX contract
for the budgeting software, whereas the XXXXX contract is for the software system.

However, a review of this XX page®™ letter leads to more questions than answers with respect
' to the XXX contract. The letter discusses this contract up to page X, as if they were going to
value the contract. However, our review of the letter indicates in their analysis, Deloitte only
considered the contract with XXXXX. They completely dismissed the contract with XXX in
their analysis. This letter is clearly in error. Therefore, XXX has never received an opinion on
the valuation of the XXX contract.

This contract is clearly overvalued and is used by XXXX to increase his income from the

® XXX also obtained studies to show compensation paid to Family members was reasonable, also showing their knowledge

of their requirements in this regard.

° XX pages with attachments XXXXX.
Page 112 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


; Schedule or
Form 886-A EXPLANATION OF ITEMS | Exhibit No.
Name of Taxpayer . Year Ended
AXXXX | XXXXX

substantial profits earned by XXX.

XXXX has created an incredibly profitable organization in XXX. The profits from XXX have
been $80X, $55X, $78X, ($13X), 55X in fiscal years XXXX, XXXX, XXXX, XXXX, and XXXX,
respectively”.

As we have stated earlier, XXXX has paid his family millions per year to work for XXX. He
even employs his XX year old relative at XXX. He has shown a propensity to increase his,
and his family’s wealth steadily in the forms of salary and in the amounts he pays through
these contracts, especially for this contract.

Based on the analysis above, we have determined that the contract price of at least XXXXX
licenses at $XX and $XX per license and the millions that XXXX has been paid through his S-
corporation, a flow-through entity, exceeds the FMV of the contract. Similar software could be
obtained for. from a multitude of places for free.

Over the counter software, with Brand names such as Quicken Basic and Microsoft Money
similarly priced as the XXX software, but that price is for a single copy, not purchased in bulk
as the XXX software is.

The fact that XXX has not been able to provide any documentation to support the valuation of
this contract with their extensive history with working to fulfill the rebuttable presumption in
other issues is also indicative of the overvaluation.

Lastly, we have not been provided any evidence that the board has considered this contract
on any of the renewal dates during the period covered by the audit. By its non-action, the
contract is automatically renewing annually, per the contract, and XXXX’s income is
increasing rapidly on an annual basis. Therefore, we believe that the amounts XXX pays to
XXXX, via XXX, his 100% owned S-Corporation are in excess of the FMV of the contract.

Furthermore, since XXXX is an insider, XXX is not being operated exclusively for one or more
exempt purposes because it is allowing its net earnings to inure to its founder and CEO,

Taxpayers Position: ©

The position of taxpayer has been presented in oral and written responses to the examiners,
in particular, and to our Washington Office, as well. There are many points of contention with

* The loss was because they booked a $XX million pledge, which is to be paid out over the next X years, which was made

after XXXX XXXXXXXXXXKXX.
Page 113 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer. oe - | Year Ended
XXXXX XXXXX

the Service and the results of the examination and will be addressed in part here and in
XXX's Responses to Information Document Request No. 7 (attachment 23), Summary and
Analysis of Counselor Calls (attachment 24), Letters written to the revenue agents
(attachment 27), and XOXOXXX0OOOOOOKKXXKKXXKXKXXXN (attachment 28), prepared by
XXXXX, Ph.D., Department of XXXXXXXXXXX, XXXXX University and XXXXX, M.S.
Department of Psychology, XXXXX University, which addresses the science of determining
an appropriate sample size and various communications with the agents handling the
examination. _

First, and probably the most contentious issue is regarding the standpoint on what education
means. The taxpayer believes that their activities are educational under Internal Revenue
Code 501(c) (3). Once XXX determined that the Service had an issue with its activities, they
requested what that definition is and how it applies to the services they provide. XXXX, the
taxpayer's attorney, wrote on their behalf, to the revenue agents. This letter is dated January
28, XXXX, (Attachment 29). XXXXX stated the letter was to:

“address industry issues raised by IRS, including whether debt management plans are
charitable activities and whether payments to creditors confer a private benefit. We
also hope to convince you that many XXXs do operate in a manner consistent with

their tax exempt status and hold out our company, XXXX (XXX), as an example of a
truly charitable organization dedicated to educating and counseling consumers and
conforming in every way to all of the 501(c)(3) requirements.”

The taxpayer also believes their method of delivering “education and counseling” leads the
industry. This letter further states:

“As an industry leader, we at XXX decided more than a year ago to become actively involved
in attempting to guide our industry down the right path. As you well know, this is a difficult and
often frustrating project. During this time period, we worked with state and federal regulatory
agencies, congressional committees and consumer advocacy groups. We are strong
proponents of increased regulatory oversight of our industry and support the adoption of
consumer protection legislation at the state and federal levels.”

It is also their position that they work with all regulatory agencies and promote adherence to
all necessary rules and regulations. It their position therefore, they are compliant and
proactive in staying that way.

Educational Aspects of Debt management Plans

XXX believes that the services they provide are essential in the development and education

in helping distressed consumers. Consumers are in need of assistance and to help them,
Page 114 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


c Schedule or

Form 886-A EXPLANATION OF ITEMS Exhibit No.

Name of Taxpayer Year Ended
XXXXX

relief is necessary from the immediate need from their debts...“It is difficult to teach long term
financial accountability to people in short term, immediate financial distress. Distressed
consumers typically seek immediate relief from their financial crisis, but what they really need
is long-term behavioral change. Behavioral change is undeniably an educational goal. A debt
management plan, when used appropriately, can service both these short-term and long —
term goals and is the best available educational tool for credit counseling.”

XXX states how necessary debt management plans are as they give debtors the opportunity
to catch their breath. The taxpayer explains that the debt management plan provides a
meaningful way to provide individuals a way to become in control of their lives.

XXX claims, “In the short-term, the debt management plan provides a “safe harbor” for the
distressed consumer, who is otherwise consummated by fears over unpayable bills, creditor
calls, collection agency calls, legal actions, late fees, over the limit fees, “default” credit card
interest rates and, more generally, the fear of being financially out of control, in free fall, and
on the verge of bankruptcy. This “safe harbor’ gives the consumer the short-term practical
stability necessary to begin to take long-term responsibility for the consumer's financial
situation, with the hope for the future. This stability extends to all aspects of the consumer's
life, including the consumer's family and employment...”

As stated by the taxpayer, debt management plans modify the distressed borrower's habits,
which are part of the educational process.

Beneficiaries of Debt Management Plans

This letter also states, “Through payments from creditors, often called. “fair share” payments,
creditors who have aggressively marketed consumer credit share some responsibility for the
explosive increase in the number of consumer in financial distress. It is perfectly appropriate
for these credit card issuers, as opposed to the public at large or charities such as the United
Way, to take financial responsibility for funding the efforts of creditor counseling agencies.
The voluntary agreement by credit card issuers to take financial responsibility for a side effect
of the product they market is certainly preferable to the approach of others, for example the
tobacco industry. who denied the existence of a problem caused by their product, and let the
public pick-up the tab until they were forced to take responsibility” .

“When XXXs (in-general) were first approved for 501(c)(3) status, XXXs were heavily
controlled by creditors, creditor representatives sat on XXX boards of directors, and creditor
“fair share” payments were typically set at 15 per cent of revenues paid through debt
management plans . Today, credit counseling agencies have never been more independent
of creditors. Creditor representatives typically do not (and should not) sit on XXX boards.

Creditors pay fair share or provide grants that are not only at an historic low percentage, but
Page 115 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


. — “Schedule or
Form 886-A |" | EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer OS Year Ended
XXKXXX XXXXX

also based on a wider range of factors more directly focused on the XXX's commitment to
education.”

Corporate Governance at XXXX

In the correspondence dated December 28, XXXXE. XXX's corporate governance was __
discussed, demonstrating its high standards of governance. This is attached as Item 29. The
taxpayer features a board of XX members, of which 62% are outside directors. The directors
provide a wealth of experience with backgrounds in financial management, business and
education. The board takes a hands on approach to overseeing the operation of the company
and that it functions as a group. Additionally, special committees are held to include
executive, audit compensation, education, rebuttable presumption and creditor and public
relations. Its governance also includes a conflict of interest policy; its current policy requires
annual disclosure of actual and potential conflicts. XXX also certifies its financial statements
annually with an independent audit; the chief executive officer and the chief financial officer
sign a document certifying the accuracy of the financial statements.

Arguments Related to the Exam Itself

There is an area of contention on the methods used by the government to select, sample,
identify and determine the content of education found in the taxpayer's phone calls with
clients and non clients. Once the examiners had selected and evaluated the phone calls, the
taxpayer had stated a disagreement with the analysis and methodologies; this was stated in
“Response to Information Document Request No. 7 (see attachment 23). In IDR No. 7, it
concludes that none of the calls selected contains educational content (and, by implication,
that the debt management plan does not serve an educational purpose). XXX's response
was to look at each of these components individually, and make some additional
observations.® The taxpayer states there was no scientific method of selecting calls from the
new or open account teams. The sample selection was improvised and not scientific. They
believe providing a larger sample, with a more formal approach, would provide a more
accurate outcome. Additionally, in reviewing the same calls, XXX did find educational
content. The taxpayer also states “XXX’s Educational Intent Cannot be Questioned”- it has

’ demonstrated its intention and commitment to provide education. In Attachment: Summary
and Analysis of Counselor Calls (attachment 24), XXX provides its own summary and
analysis of the 35 calls and provides a contrary position taken by the examiners.

As part of XXX's position on January 20, XXXX, the taxpayer provided their conclusion as

5° XXXXX, Re: Corporate Governance at XXXX, Inc., December 28, XXXX,

°° Response to Information Document Request No. 7, page | and “Summary and Analysis of Counselor Calls”.
Page 116 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


7 i Schedule or
Form 886-A _ EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer - Year Ended
XXXKXX

well as recommendations.®’ “There are a number of credit counseling organizations that, like
XXX, are properly focused on the educational mission of their work and that help thousands
of consumers in progressing from insolvency to financial stability and even prosperity. These
are organizations that do things the right way and are effective models of credit counseling
performed in a manner that is entirely in accord with the requirements of Section 501(C)(3).
We believe that when IRS examines in detail some of the model organizations that exist
within the overall group of XXXs, you will conclude, as we have, that credit counseling and
tax exemption are a good fit. We hope that this review will also clearly demonstrate to you
that the loss of tax exemption would undermine the effectiveness of the entire process,
eliminating the education and counseling that millions of consumers desperately need.

We recommend the following:

1. Ratification and endorsement of the conclusion that credit counseling, when performed
properly fits within the requirements for tax exemption;

2. The issuance by IRS of a comprehensive and practical guide to tax exemption for
credit counseling;

3. Continued aggressive examination of XXXs for compliance and revocation of tax
exemption for those that do not meet the 501(c)(3) requirements; and

4. The adoption of preemptive federal legislation focused on consumer protection to
create a tight new regulatory structure for credit counseling.”

In conclusion, XXX believes that their operations fall within the meaning of Section 501(c)(3).
A consumer who gets on a DMP learns that they must live within a budget, they learn to live
without a dependence on credit cards, and they learn to pay off their debts. In doing so, they
not only get out of debt, but through the behavioral change brought about by the DMP, they
have learned how to stay out of financial problems in the future.

XXX is claiming the consumers learn by doing. XXX is also claiming they provide their clients
with “education” throughout the DMP process. From the first counseling session, a working
budget is created with the client and continuing into the DMP process, the clients have
ongoing access to educational resources. This combination of living within a budget and
being constantly provided with education allows the clients to get out, and stay out, of their
financial distress.

Conclusion

Based on the examination of your actual activities in light of the applicable law, we find you are
not operated for exempt purposes.

67 January 20, XXXX XXX letter to IRS, XXXXX and XXXXX, on Page 20.
. Page 117 of 118

Department of the Treasury - Internal Revenue Service Form 886-A


Schedule or
Form 886-A ; EXPLANATION OF ITEMS Exhibit No.
Name of Taxpayer . Year Ended

XXXXX

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that, in order to be exempt
as an organization described in section 501(c)(3), an organization must be both organized and
operated exclusively for one or more of the purposes of such section. If an organization fails to
meet either the organizational and operational test, it is not exempt. Your organization has
failed to meet the operational test since you function for the intake and servicing of debt
management plans. This is your primary activity, which is non-charitable. This activity does not
accomplish an exempt purpose, to provide education and financial counseling. Further, your
debt management activities are not an integral part of providing education or financial
counseling.

We have also determined you are operated for numerous substantial non-exempt purposes,
including operating a commercial for profit business, operating to avoid regulation by CROA,
operating for the benefit of XXXX and other creditors and for the benefit of the XXXX Family.
As these are all substantial non-exempt purposes, your organization is precluded from being
regarded as “operated exclusively” for one or more exempt purposes within the meaning of
Section 1.501(c)(3)-1(c)(1) of the Regulations.

We have also determined you are operated for impermissible private benefits for several
private shareholders or individuals having a personal and private interest in the activities of the
organization such that XXX is not operated exclusively for one or more exempt purposes,
pursuant to Section 1.501(c)(3)-1(c)(2) of the Regulations. These private shareholders or
individuals include XXXX and creditors, in general, and the XXXX Family.

It has also been determined that you allowed private inurement to exist in conducting XXX’s
operations through its contract with the CEO's software company, XXXX.

Therefore, for the reasons stated above, your charitable exempt status should be revoked.
Accordingly, you do not qualify for exemption as an organization described in section 501(c)(3)

of the Internal Revenue Code and you must file federal income tax returns. Contributions to
your organization are not deductible under section 170 of the Code.

Page 118 of 118
Department of the Treasury - Internal Revenue Service Form 886-A