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Give the IRS Some Credit

If you're in debt, it turns out that you've got a friend in the Internal Revenue Service.

No, really. BusinessWeekreports that the IRS has revoked the tax-exempt status of many of the largest so-called nonprofit credit counseling agencies, which purport to assist ordinary Joes and Janes in escaping oppressive debts.

Too often, they don't. Instead, as the IRS found, many scam their customers for millions, all told. Don't be surprised. Foolish friends Dayana Yochim and Selena Maranjian have covered these scammers in detail. Dayana said it best when she wrote that most credit counselors offer "heartache, high fees, and the runaround."

Here's how one scam might work: After viewing a commercial showing a frustrated consumer buried in paperwork, you make the call to ACME Credit Korner (Ticker: SCAMU). The voice on the other end is very sympathetic. "Don't worry, we can help" is what you hear. Soon after, the pitch comes: "Consolidate your loan with us!" Of course, you're not told that the fees for doing so are practically elephantine.

Or, even more insidiously, you're asked to pay a few hundred dollars for a "debt management plan," and then a monthly fee on top of that. But the so-called plan is hardly customized and does little to reduce your debt. Suddenly, you're like the addict who switched pushers expecting a better deal. Whoops.

Enter the IRS. The agency says that credit counseling is a $1 billion-a-year industry, and that the 41 firms in its two-year investigation accounted for 40% of the revenue. Yet many of them offered consumers little in the way of real help. Frankly, that may be because they can't. Credit card issuers often don't take kindly to consumers who work with credit counselors. Wells Fargo (NYSE: WFC  ) and JPMorganChase (NYSE: JPM  ) tend to jack card fees when a debt-reduction service gets involved.

Where does that leave you? Out in the cold? Hardly. Here at the Fool, we have many resources for helping you get debt-free, and many of them are available to you for nothing. Take this get-out-of-debt guide, for example. Or, if like-minded Fools are more your thing, read any of the personal journeys Fools have taken at the Credit Cards discussion board. My own -- a $45,000 multi-year trek -- was concluded in 2002.

Regardless of the road you take, the destination needn't bring you to a huckster's door. If you do suspect you've been swindled, check with the IRS first. It may be the best thing you ever do with your tax dollars.

Money matters keeping you up at night? We're offering anexclusive teleseminarwith Motley Fool co-founders David and Tom Gardner. They'll tell you when tobuy and sellstocks in this uncertain market.

Fool contributorTim Beyersreally was $45,000 in debt, until he met some Fools who helped him escape. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out which stocks he owns by checking Tim's Foolprofile. JPMorganChase is aMotley Fool Income Investorpick. The Motley Fool has an ironcladdisclosure policy.


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Tim Beyers
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Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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