department of the treasury internal_revenue_service commerce street dallas tx bate date person to contact tax_exempt_and_government_entities_division release munbex release date legend org organization name xx date org address certified mail dear address address badge number contact telephone number contact address employer_identification_number deadline to petition_tax_court uil this is a final notice of adverse determination that your exempt status under sec_501 of the internal_revenue_code is revoked recognition of your exemption under internal_revenue_code sec_501 is revoked effective april 20xx the following reason s you are not organized and operated exclusively for an exempt_purpose as required by internal_revenue_code sec_501 you are not and have not been engaged primarily in activities which accomplish one or more exempt purposes you are not a charitable_organization within the meaning of sec_1_501_c_3_-1 rather your activities further a substantial nonexempt commercial purpose and serve private rather than public interests contributions to your organization are no longer deductible effective april 20xxx since your exempt status has been revoked you are required to file form_1120 u s_corporation income_tax return for all years beginning an or after january 20xx income_tax returns for subsequent years are to be filed with the appropriate service_center identified in the instructions for those returns tt is further determined that your failure to fite a written appeal constitutes a failure to exhaust your avaliable administrative remedies however if you decide to contest this determination in court you must initiate a suit for deciaratory judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia before the ninety-first 91st day after the date that this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment to secure a petition form write to the following address please understand that fing a petition for a declaratory_judgment under sec_7428 will not delay the processing of subsequent income_tax returns and assessment of any taxes due the last day for filing petition for declaratory_judgment is march 20xx you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access you tax information and can help you get answers you can call and ask for the taxpayer_advocate assistance or you can contact the advocate from the site where this issue was determined by writing to ‘taxpayer advocate assistance cannot be used as substitute for established irs procedures formal appeals processes etc the taxpayer advacate is not able to reverse legal or technically correct_tax determination nor extend the time fixed by law that you have to flle a petition in 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 this letter should be kept within your permanent records if you have any questions please contact the person whose name and telephone number are shown above sincerely nanette m downing acting director eo examinations enclosures publication a x sa tax exempt and org address department of the treasury internal_revenue_service sw 6th court plantation fl date taxpayer_identification_number form tax_year s ended person to contact lid number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 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 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 director eo examinations the appeais office resolves mast disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication 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 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 the appeals_office is independent of the letter alalog number 34009f if we do not hear from you within 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 days from the date of this tetter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 b 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 af 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 sec_6104 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 fite a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved thraugh normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at ifyou have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely michael d glass group manager enclosures publication publication report of examination letter gatalog number form 886-a examination_report of org attached to 30-day_letter the examination of org legend org organization name cpa cpa xx date city city state state attorney attorney vice president vice president secretary director director director a bm 1e bh 22m employees of lo lat g co-2 thru co-29 president president dir-1 emp-1 thru emp-20 1a ase sit zot secretary dir-2 dir-3 let 1st re companies 6th facts org hereinafter referred to as either org or sometimes as the organization is a state not-for- profit corporation allegedly organized to provide educational_services to the public org filed fonns information_return of an organization exempt from income_tax under sec_501 ona calendar_year end for taxable years 20xx - 20xx see attached forms as exhibit on november 20xx january 20xx and january 20xx the internal_revenue_service hereinafter sometimes referred to as either irs or service issued a letter of examination for the year ended december 20xx for the purpose of determining whether org is an organization exempt from income_tax under lr c sec_501 see attached exhibit attached to the examination letters were a detailed list of documents requested by the service from org in order to commence the examination see attached in exhibit ata later date the audit was expanded to include calendar_year ended december 20xx during the course of its examination the irs issued one additional information_document_request see attached listing of this request as exhibit also the irs issued summonses see attached listing of summonses issued for org in exhibit and made contacts with former employees officers directors vendors regulatory authorities and industry leaders see attached listing of third party contact list as exhibit this report details the service’s findings resulting from its examination of org tax_year ing december 20xx and 20xx issues presented whether org operated exclusively for exempt purposes described within internal revenue code sec_501 a purpose b ofa non-exempt purpose private_shareholder_or_individual d public interests whether org engaged primarily in activities that accomplish an exempt whether more than an insubstantial part of org activities were in furtherance whether any part of the vet earnings_of org inured to the benefit of any whether org was operated for the purpose of serving private rather than form 886-a examination_report of org attached to 30-day_letter background 'ormatio org was one of the precursors to org co-1 president the co-2 and the formation of clone co-1 companies including org org was formed as a clone entity of co- inc sometimes referred to as co-1 a oredit counseling organization formed by president clones of co-1 formed between 19xx-20xx see attached exhibit for the us senate report that illustrates the co-3 teferred to in this report as the co-1 clones all of these entities were formed by family friends and or business associates of president as discussed in greater detail infra emp-1 a former employee of co-1 and president's brother was instrumental in founding and operating org co-1 was the original company whose business model and practices were co-opted into clone organizations the common operational element in co-1 and its clones was the use of president's for-profit company co-2 subsequently named co-2 in 20xx for back office service customer service operations in which large amounts of fees were paid_by co-1 and its clones to co-2 see the us senate report in exhibit and co-1 bankruptcy examiner's report in exhibit when co-1 was formed in 19xx its mission allegedly was to provide credit counseling and educational_services to consumers with debt problems however co-1 quickly became involved in aggressively marketing to and establishing debt management plans for consumers with credit card debt accordingly co-1’s primary activity was the operation of a large call center in state along with offices in state and in state for a period of time whose function was to enroll consumers in debt management plans as a result of co-1’s aggressive advertising large lead inventories were being generated by co-1 org purchased surplus leads from co-1 due to the need to service the surplus time-sensitive lead inventories clone credit counseling organizations were formed by loyal close business associates friends and family of president these loyal associates to president contracted each cone credit counsel agency cca vis fulfillment agreements to have its back office services to be conducted by co-2 president’s for-profit company over years millions of president a native of state and a his graduate of the university of state founded co-1 through nominees s activities in i9xx through 20xx and see also exhibit emp-3's deposition ftc atand ownership many of his high school and college friends became his close business associates in virtually all of his endeavors including org wife emp-2 and the wives of his friends business associates president controlled and participated in co- see attached exhibit emp-3's deposition ftc 01-06-20xx page sec_35 sec_36 president through his employment ia credit counseling and loan companies had substantial experience in the debt consolidation industry page sec_218 and sec_219 -25-' a debt management plan sometimes referred to herein as a dmp is a tool used to restructure unsecured debt restructuring debt through a dmp allows a consumer to consolidate unsecured debt ostensibly lower his interest rates and monthly payments obtain re-aging of his 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 the eredit counseling organization which then made arrangements with the consumer's end-creditors and distributed payments to them co- and the subsequent clone organizations including org then charged consumers an initial contribution fee and monthly processing fees leads are defined as information on a potential client who could enter into a debt management plan initially co-1 used its own employees to conduct what can be referred to as back office account management functions which chiefly are administrative operations to implement and maintain payment processing and form 886-a examination_report of org attached to 30-day_letter dollars in fees were funneled to co-2 co-3 by co-1 and its clone co-26 see the senate report in exhibit co-1 and org executed separate fulfillment agreements with co-3 whereby co-3 provided back office administrative fulfillment functions in which co-1 and eventually org also paid substantial fees to co-3 for these services ’ accordingly co-2 handled all communications with consumers enrolled in dmps and the consumers’ creditors including setting up repayment terms fielding inquiries from the consumers making outgoing calls to creditors updating the consumer's information collecting payments from the consumer other than the initial contribution_payment and disbursing payments to creditors in addition to distributing payments to creditors co-3 solicited fait share contributions from credit card companies the term fair share refers to a payment made by the credit card companies who are receiving payments 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 sec_501 of the internal_revenue_code co-2 collected and disbursed fair share payments to org as stated the co-1 business model was duplicated in clone credit counseling organizations with the assistance of co-3 co-1 and other president companies staff and documents from co-1 co- 16t-up loans from president’s company co-4 and dmp leads from co-3 were co-opted to co-16t org org historical corporate information org was formed on april 20xx as a non-for-profit corporation in the state of state see the articles of incorporation attached as exhibit the acticles of incorporation assert that the organization's purpose is to assist needy debtors to improve their finances through educating them as to belter means of managing their money and through seeking for them if appropriate an extension or other reorganization of their debts on june 20xx org submitted a form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code to the irs the form_1023 bears the signature of emp- as president of the organization see the attached complete form_1023 with all attachments as exhibit the organization was granted exemption from federal_income_tax by the irs under the provisions of lr c section dollar_figure c by a letier dated august 20xx form_1023 application representations accounting and negotiations with ereditors for consumers on a dmp however in 19xx less than three years after co- commenced operations president incorporated a wholly-owned for-profit corporation co-2 inc sometimes referred co-2 or co-3 and co-1's back office account management functions were transferred to co-3 pursuant 1o an asset purchase agreement co-i and org fulfillment agreement terms are similar ifnot exact see co-i fulfillment agreements from the pederal trade commission files in exhibit and the org fulfillment agreements with co-2 co-2 in exhibit form 886-a examination_report of org attached to 30-day_letter in the form_1023 application part il line org stated thet it was formed to help reduce personal bankruptcy by i educating the public about personal money management skills and ii assisting needy individuals and families with their financial problems to accomplish these objectives org indicated in its form_1023 application that it planned to engage in three main activities asserted activity public information according to statements made in the form_1023 application org planned to prepare videos pamphlets and other educational materials on budget buying practices and the sound use of consumer credit and to disseminate this information to the general_public these materials were to be provided free of charge to religious organizations civic groups labor unions businesses and educational organizations in addition to the provision of educational materials the form_1023 also indicated that org planned to conduct financial planning workshops by providing knowledgeable speakers free of charge to these groups according to its form_1023 application org principal co-8s for this activity would be lower-to-middle income families after the first year the organization expected this activity to comprise of its time asserted activity counseling the application further states that trained financial counselors would provide personal financial counseling on budgeting and the appropriate use of consumer credit to consumers according to the application these individuals would also receive copies of the public information discussed above org indicated that it expected a substantial number of its clients to be low-income referred to them from clergy employers labor unions creditors finance companies and creditors the organization stated that after the first year it expected that this activity would constitute approximately of its time asseried activity budget plan the third activity described in the form_1023 application was making a budget plan available to its clients the activity was described as follows as part of the counseling program clients will receive information about the availability from org of budget plan services under the progeam org indicated that it would intercede with creditors in order to persuade them to accept partial periodie payments according to the form_1023 the clients would make fixed monthly payments to org who in turn would disburse these funds to the creditors org indicated that the clients would be requested to pay periodic fees to org for the budget plan service the fees will consist of per creditor per month up to a maximum monthly fee of dollar_figure per client these fees will be reduced or waived for any client who is financially unable to pay the full amounts the organization indicated that a maximum of or less of its counselors time would be devoted to budget plan preparation expected source of funding according to the form_1023 application org expected that mote than of its revenues were to come from contributions primarily from creditors participating in the budget plans and from clients with some contributions coming from religious groups civic groups labor unions businesses and educational organizations who would be participating in the public information activities org expected that approximately half of all creditors to make a fair share contribution of -15 of each monthly payment according to the form_1023 application org anticipates receiving substantial contributions from clients according to part il line of the form_1023 application org will ask clients to help defray the costs of its counseling and budget plan cost through a payment of of their outstanding indebtedness according to org the payment was form 886-a examination_report of org attached to 30-day_letter to be strictly voluntary and no one would be denied service for failing to make a contribution org expected that of clients would make some contributions according to the form_1023 application org anticipated receiving revenues in the form of fees to be charged to financially able clients who participate in the budget planning program it represented that the fees would consist of per month per creditor per client to a maximum of dollar_figure per month org indicated that these fees would be reduced or waived for indigent clients and that no client will be denied budget plan service due to an inability to pay any fees it expected that of org revenues will come from these client fees org indicated that the balance of its revenue less than of total revenue would come from investment and interest_income expected source of clients and criteria for participation according to the form_1023 application part if line org stated that in order to built its clientele it would place advertisements in the electronic and print media it also planned to obtain clients from its financial and budgeting workshops to be provided to religious organizations civic groups labor unions and businesses these groups were expected to publicize the workshops to its members through fliers and other regular membership mailings page of the supplemental information stated that org would conduct periodic mailings to community groups that were likely to encounter debtors in need of financial assistance according to the form_1023 application org also stated that it would assembled a group mailing from telephone and other directories of organizations located in the nassau and suffolk county areas of state org stated that referrals to its program was likely to be made from clergy employers labor unions finance companies creditors and interested individuals org expects that a substantial percentage of the referrals and those attracted by media advertisement would be low-income persons with some moderate income persons form_1023 filing the form_1023 application package was prepared and filed by org’s attomey attorney org consented via form_2848 power of attomey to have attomey represent org in its filings with the service see attached exhibit attomey handled the entire incorporation and exemption application process for org see attached exhibit detailing the letters and representation by attomey to the irs because org received an advance_ruling under sec_501 and a as a publicly_supported_organization it filed a form 872-c consent fixing period of limitation upon assessment of tax under sec_4940 of the lr c which allows the irs to solicit information on public support and determine if org meets the qualifications of a non-private foundation under sec_509 the form 872-c bears the signature of emp-1 as president of org see attached exhibit the examination of org’s activities org board members officers directors and board minutes forms form 886-a examination_report of org attached to 30-day_letter per the information set forth on the forms filed with the irs since inception the individuals who have served as the directors and officers of org are as follows see attached part v of forms for 20xx-20xx in exhibit 20xx emp-1 president 20xx emp-1 president vice president vice-president secretary secretary key employees and founder emp-i hereinafter emp-1 was the founder of org and the brother of president see emp-1 interview exhibit according to emp-1 he began working for president in 19xx as a counselor at co-5 co-5 co-5 was a for-profit company owned and operated by president in 19xx emp- began working as an employee of co-1 where he worked as a counselor org corporate minutes the formation of org resulted from the closure of one of co-1’s offices that was located in state and operated by emp-1 since the co- state office was closing emp-1 formed org and acquired co-1’s assets of computers cubicles and office equipments via an asset purchase agreement org engaged the same attomey as co-1 attomey who prepared and filed org's articles of incorporation on april 20xx with the state of state division of corporations gee attached exhibit in addition org hired several of co-i's employees and continued to conduet the activities that co-1 had been conducting no minutes were provided for 20xx a summary of org’s corporate minutes from july 20xx - november 20xx disclose the following see attached exhibit july 20xx written consent in lieu of organizational meeting of all the directors the following directors were elected - dir-1 and dir-2 october 20xx written consent in lieu of organizational meeting of all the directors emp-1 received a loan from co-4 irg to assist with co-16t up costs in the amount of dollar_figure see attached exhibit for copy of note emp-1 was also a former employee of irg a for-profit company owned and operated by president see attached exhibit for copy of interview with emp-1 president - written consent in lieu of organizational meeting of all the directors - secretary - secretary november 20xx written consent in lieu of organizational meeting of all the directors the following were elected officers of the corporation - dir-3 - vice president and the following directors were elected - dir-3 and secretary october sth 20xx form 886-a examination_report of org attached to 30-day_letter new accountants discussion pertaining to replacing the current accounting firm of co-6 with new accounting firm located in the state of state cpa the controller to be responsible for researching and hiring this new firm emp-1 dir-3 and secretary voted in favor board members involvement emp-1 explained during the interview that both cpa and secretary were asked to be on the board because they were childhood friends and they were interested in the business according to president there were only three people on the board - cpa secretary and himself the board members were to serve until they resigned or were re-appointed eventually both cpa and sectetary resigned and co-16 their owa ctedit counseling companies they were replaced by dir- and dir-1 who were seasonal employees of org both were in the landscaping bait and tackle business prior to becoming counselors per emp-1 he made the day to day business decisions for the company he stated that the board did not have any formal meetings see emp-1 president interview exhibit advertising marketing and solicitation activities identified during examination org was extensively involved in soliciting consumers via telephone to participate in its debt management program or debt management plan hereinafter dmps a debt management plan or dmp which was only available to individuals with unsecured debt allowed a consumer to make one consolidated monthly payment to org for disbursement to the consumer's various creditors most creditors generally offer reduced interest rates to consumers who pay through a debt management program an example of how a typical dmp in the year 20xx worked is as follows the consumer ha sec_4 creditors the consumer’s proposed monthly payment is dollar_figure computed based on debt load and guidelines established by the creditors the dollar_figure is the monthly amount that will be disbursed to the creditors in addition to the amount for disbursement to the creditors the consumer pays a monthly fee of dollar_figure for a total monthly payment of dollar_figure according to the dmp agreement the client agree to make a voluntary monthly contribution of dollar_figure per account that org is handling thus for this example the monthly contribution is computed as follows creditor payments processed per month at dollar_figure cach x dollar_figure dollar_figure monthly consumer processing fee the consumer is also charged a one-time contribution of dollar_figure the one-time contribution amount is equivalent to one of the consumer's monthly payment including the monthly processing fee org keeps the one-time contribution and all subsequent monthly processing fees see attached exhibit for a copy of the client information sheet based on records and information provided by org records provided by third parties and interviews conducted with third parties org engaged in a number of advertising and marketing activities during the years 20xx and 20xx specifically org utilized radio and internet ads to advertise its services org's clients were primarily procured through the process of lead generation a lead is a consumer response to an advertisement or promotion in which the consumer has provided aname address phone number and has a minimum of dollar_figure in unsecured debt see attached exhibit form 886-a examination_report of org attached to 30-day_letter for letter from co-7 which includes a definition of what constitutes a qualifying lead the leads were then used by org counselors hereinafter referred to as employees to contact the consumers with regards to org’s services org outsourced most of its advertising functions relative to radio and internet advertisements to co-7 a for-profit company owned by emp-4 also known as emp-4 in addition to co-7 org also used other vendors whose advertising services were procured through co-7 through these vendors org used radio stations to conduct advertising campaigns the radio stations were given copies of org setipts for advertisement purposes indicated below is a summary of its advertising marketing activities used to promote its services per co-7 letter dated december 20xx in 20xx org conducted a radio campaign with co-8 and response to advertise its services in 20xx co-7 conducted an internet ad campaign for org with co-18 see attached exhibit radio in 20xx org entered into a contract with co-8 and response for advertising purposes ‘according to the agreement co-8 and response would provide org exclusive direct marketing radio advertising service using radio stations networks and other radio programming services org was billed for each billable inquiry defined as any caller with a minimum of of unsecured debt who requested information from org and provide a valid name address and phone number see exhibit for copies of leads advertising agreements org is anon-profit credit an example of a second radio spot for org on a script dated xx see attached as exhibit consisted of the following do you find yourself just another day older and deeper in debt whether you're twenty- something and owe credit card bills or college loans or you're a senior citizen overwhelmed by medical bills there’s help at hand just call org pincite counseling organization that offers help for consumers like you who are ready to eliminate their debt if you owe creditors over two-thousand dollars just call org and they can help end harassing phone calls by creditors they can help you pay off your bills in as little as one-quarter of the time you normally could even reduce your monthly payments as much as 50-percent and consolidate them into just one manageable payment a month another example of a second radio spot with airdates of kx - xx is as follows are you scared of how in-debt you are if your new year's resolution is to get out of debt once and for all now there’s somewhere you can turn for help it's a non-profit organization called org they'll negotiate with your creditors for you they can get your payments reduced as much as percent eliminate or reduce your interest rates and much more just call to see what org can do for you even if you're not a homeowner org can help they can consolidate your multiple payments into one lower monthly payment and with their help you can pay off your debts in as little as one quarter of the time you'd be able to on your own if you have over two-thousand dollars in bills call org now for a free debt consolidation - it’s completely confidential and there’s no obligation see exhibit for copies of scripts for advertisements and interet banners form 886-a examination_report of org attached to 30-day_letter publications org also generated leads by placing advertisements in the classified section of various publications such as co-9 co-10 co-11 co-12 co-13 co-16 co-14 and co-15 an example of a standard advertisement taken from the co-17 read as follows debt consolidation regain control of your families finances reduce payments dramatically reduce interest rates no credit check home ownership not required free consultation non-profit organization see exhibit for a list of printed advertisements and for examples of advertisements that were placed ia various publications internet campaigns in 20xx co-7 also generated leads for org by conducting an internet advertising campaign with co-18 for org the campaign featured a banner advertisement on the internet on a cost-per-click basis according to co-7 the advertisements that ran on the internet were banner advertisements that linked consumers who clicked on the banner to org’s website as described ina memo dated december 20xx the advertisements were ‘simple text ads that cycled through two or three panels that said something like got debt we can help get out of debt now- org click here see exhibit for copy of co-7's letter for example one banner showed the following information org millions of people in the u s are stuck in debt if you're one of them we can help lower monthly payments reduce interest one monthly payment non-profit another example was as follows us only org a non-profit organization make one small monthly payment ‘ improve your credit rating consolidate your bills see attached exhibit for a copy of the print advertisement org also purchased leads from various lead generation companies that generated leads through a series of campaigns done via the internet the campaign primarily consisted of advertisement banners placed on various websites to attract individuals interested in debt consolidation by clicking on the banners the consumer was provided a form to provide information such as name amount of debt etc lead generation companies generally sell such leads on the market to buyers org purchased leads from several lead generation companies such as co-19 co-20 co-21 see exhibit for copies of lead agreements form 886-a examination_report of org attached to 30-day_letter according to the adjusted trial balance for period ended december 20xx org paid a total of dollar_figure for advertising and leads which represented approximately of org’s total expenditures see exhibit for copy of adjusted trial balance - accounts adv exp lead source exp enrollment of consumers in dmps by org’s employees employees’ qualifications and training leads that were acquired were distributed to org's employees for phone contact with the consumers org failed to provide us with copies of position description requested in a summons issued on june 20xx which would have provided information on the qualifications and responsibilities of the employees who were responsible for interacting with the consumers however copies of classified advertisements for such workers were secured and provided the basis for our determination of the employees’ duties and qualifications the following advertisement was noted in the co-22 dated june 20xx see exhibit for copies of classified advertisements and invoices inside sales high income potential stock broker collection experience a plus no cold calls leads provided paid training full medical another classified read as follows abc always be closing dollar_figurek pot'l top comm paid bonus free leads no cold calling full batts city location in response to idr deb-001 org provided us with a copies of information used in its training sessions a copy of their training manual was also received from state of state banking department see exhibit for copies of training materials the information consists of the following materials listed by title in the personnel file for emp-5 was a form titled potential interview questions which listed several questions used by org to screen potential employees for counseling positions see exhibit for a copy of emp-5 personnel file the questions include the following a do you have any prior sales experience b do you have experience with phone sales no minimum level of education was required for applicants to be hited no certification license or prior experience in the field of counseling was required who does or does not qualify for the program states that client must be able to afford the minimum monthly payment pay at least of their outstanding debt must be having difficulties with their current monthly bills must have desire to get themselves out of debt the page also provides a list of the types of accounts the org could or could not handle employees were to ask each consumer you want to consolidate are you current or falling behind in what appears to be an earlier qualifying your new client a page consisting of a series of qualifying questions that the questions include the following what type of bills do form 886-a examination_report of org attached to 30-day_letter version of this script which was received from state banking dept exhibit the following paragraph appeared before the qualifying questions these qualifying questions should be asked to each client before giving your sales presentation they will allow you to determine the clients wants needs and hot buttons take advantage of their responses by writing the answers down on the application if you don’t know exactly what the client wants to do its harder to close the deal once you've determined the clients wants and needs customize your presentation to fit their ueeds new client enrollment process provide a list of the steps involved in enrolling the clients in a dmp initial contact with client provides information on how to leave a proper message for a new account presentation consist of the presentation script which is the primary script consumer an example of the message was provided this script was previously titled initial sales used by the employees to interact with the consumer the introduction presentation copy received from state banking dept - included in exhibit paragraph for this script was as follows before you try to sell a new account you first must know what the client wants to do if you spent the time to qualify your applicant then you already know what their hot buttons are and you can continue never become generic with your presentation use the client’s hot buttons and customize your presentation to fit their needs program benefits listed the benefits of the program such include a one lower monthly payment b reduction in interest c improve credit d late and over the limit fees stopped end to creditor harassment convenience of only one monthly payment in an earlier version of this script teceived from state banking dept the following introduction paragraph appeared org inc isthe only company in the country that offers such a unique and beneficial debt consolidation program our six-month program has revolutionized the debt consolidation industry by providing clients with the benefits associated with working with a non-profit credit counseling company combined with the opportunity for a complete debt consolidation loan there is no other company or program available that can provide you with both these benefits and we are certain that once you begin working with org you will be as excited as we are about our revolutionary debt consolidation concept sending out agreements listed the various methods used to send out the agreements as well as the pros and cons of each the methods included facsimile org website and through the mail also provided was a list of rebuttals to encourage consumers to use the fax method which was org most preferred method of sending out the agreements tips for getting contracts back state banking dept copy included in exhibit emphasized to employees the necessity to persistently continue to call a client back until they actually get to speak with the client employees are reminded to use the clients’ hot buttons in order to gel them to return the completed forms several scripted paragraphs are also presented that could be used to convinced consumers to return the paperwork helping a client join include the following - provides hints on how to deal with the creditors that the consumer have referred to org to prevent a potential client from being scared by -ll- form 886-a examination_report of org attached to 30-day_letter the creditor into not joining the program techniques involving follow-up with consumers a series of questions and answers to respond to potential questions posed by the consumer for example what happens if the creditors do not accept my proposal is bankruptcy an option for me and why do i still get letters from my creditors calculate the consumer's monthly payment before calling consumer the creditor information page and compare the accounts with the program benefits book to obtain monthly payment also instructs employees to include monthly fee proposal enhancement to compute the monthly payment preparing a quote state banking dept copy included in exhibit - instructs employees to instructs employees to review how to solidify a deal provides the information on how to interact with the consumer after ll the enroliment forms have been retumed provides an example on how to handle the conversation with the consumer to ultimately receive a commitment of a payment_date within the shortest time frame as well as to get the consumer to make the payment from their account on the phone ot via western union creditor relations provides information on how to win the creditors’ trust and how to handle unfriendly creditors and collection agencies consumer payment verifying receipt of payment advised employees to daily check the payment list to verify sending an account to client services instruction to contact consumer to verify payment date and procedural instructions to forward the file to client services co-2 points to cover listed areas to address with consumers once the payment is received it includes setting up second payment_date inform consumer about the introduction package that will be mailed introduction package provides additional instruction about the debt management program and the process of issuing proposals to the creditors introduction package consist of several reminders regarding actions that are requited to be taken by the consumer and other information about the debt management program several pages of information sent to the consumer which appears to be a part of the how to handle clients that are already on the program questions and answers script consisting of a series of questions and answers for employees a copy of the package that is faxed to the consumer which includes the agreement and a list to use while interacting with the consumer of the benefits of the debt management plan along with the new account presentation script the employees were trained to use other scripts to address various situations they may encounter during the process of convineing the consumer to enroll in the debt management program for example the script titled questions and answers form 886-a examination_report of org attached to 30-day_letter provided several questions and answers scenarios for employees to use during contact with a consumer it includes some of the following how do i know that your company is legitimate response we ate a federally approved not for profit organization and are under strict guidelines we have a great relationship with many creditors who will verify our company once you complete the paperwork and before you send any money i will ask you to refer any creditors’ calls to me it sounds great and i can make my first payment in days from today response unfortunately there is no way for me to keep your creditors satisfied and not send out proposals for days if you cannot make a payment sooner i am going to have a difficult time assisting you and the interest will keep piling up isn’t this the same as bankruptcy response the program has nothing to do with bankruptcy the creditors would not accept the terms of the program if they thought that it was derogatory they would not give better repayment benefits if they did not support clients who go through our program t am going with another company that doesn't charge any fees response i realize that we are not the only game in town and every company has to charge something don’t forget that your credit is an important part of your life and if the program is not handled properly your credit could be damaged and you will be wasting money on interest and late fees every penny we take in gets re-invested back into our company to give you the best all around service our client service_department is second to none and is properly staffed to give you and your creditors the best service since we are a not a for profit organization any contribution becomes tax deductible for you anyhow tips for getting contracts back we are a federally approved not for profit agency they do not just give that title to anyone the company’s background was researched extensively before we got our approval if we were in business and ripping people off there would be complaints filed against ‘our company and then we would lose our not for profit listing if we were not a not for profit the creditors would not cooperate with us and therefore would be out of business it's a good system of checks and balances in place for your protection t cannot afford a contribution right now but maybe i can afford to contribute later response if you can afford to make a monthly payment you can afford to make a contribution because of the day negotiation period as jong as the creditor receives a proposal they will know of your intent to get out of debt and they will not expect any payment until the negotiation period is complete you may fall a little further behind by supporting this program but as long as you make all your payments on time your accounts should be re-aged that contribution is not going into our pockets it is going towards setting you up on the program explain all the departments that are involved would you tather have that payment go to us to help people like you out of debt or would you like it to go into the creditors’ pocket as extra interest because many of your accounts will not re-age until after months go over interest charts and savings with them without the contributions from our clients we could not stay in business would you rather support a non-profit company or help a bank get ticher form 886-a examination_report of org attached to 30-day_letter several questionnaires were sent by the service to former employees to obtain information which includes information regarding the initial training they received in response to question in the questionnaire what type of initial taining did you receive from org some of the responses were as follows emp-6 response - script learning see exhibit for emp-6 questionnaire response see emp-7 response a week of class training a week of listening to another counselor exhibit for questionnaire response from d e s emp-8 response trained with other counselors listened in on phone calls to understand customers questions concerns see exhibit for questionnaire response for emp-8 employees’ compensation in response to idr deb-001 question org deseribed its compensation arrangements as follows in order to reward employees for hard work we paid bomuses to counselors based on the number of consumers they assisted in joining the credit- counseling program we felt that by paying employces a lower base pay with incentives consumers received more attention from the counselors managers were compensated with bonuses based on their team’s performance in all cases the bonus program was not only based on client enrolment but algo on client satisfaction boouses would be withheld if it were found the counselor manager was not assisting already entolled consumers see exhibit for copy of idr response employees were required to sign a sales performance agreement at the time of employment the agreement states the following i do understand that if j acknowledge that at the time of my hire i was made aware of the salary ranges that are attain a certain salary commensurate with account achievements range and then fall below the standards to maintain that range management has the right to reduce my salary to the appropriate salary range based on my performance i understand that upward and downward mobility with regard to salary is based on the consistency with respect to the total number of monthly accounts that i achieve understand that the purpose of this procedure is to provide flexibility with regard to compensation and salary according to my production achievements i also understand that management reserves the right to base salary adjustments on not only the quantity of my work but also the quality poor work quality can result in salary reduction as well see exhibit for a copy of this agreement i understand that a teview of several personnel files for the 20xx tax_year showed salary adjustments based on for example number of enrolled clients and total contributions received by the employee personnel fle for emp-1 see attached exhibit showed that he received a salary increase of dollar_figure on may 20xx the explanation provided as the reason for the increase decrease was the showing ofa listing of monthly total enrollments and contribution from february to march in the personnel file for emp-13 see attached exhibit his payroll increase form dated kx showed an increase salary from to dollar_figure the reason for the increase was stated as follows promoted to manager as of dec 20xx on each team member above accounts of each blow form 886-a examination_report of org attached to 30-day_letter out received will be reviewed every months for increase or decrease on salary increases based on team performance of house accounts and blow-ins and assists the following commission schedule located in the personnel file for emp-9 see attached exhibit provides an overview of one of org incentive programs to compensate employees excerpts from the memo which bears the signature of emp-9 and dated xx state the following after the draw has been deducted from your prior months commission those on draw versus commission will have their second or third check of the month adjusted based on the previous month’s sales the first draw of the month will be your current rate of pay the second pay will be the difference if your commission is bigher than your draw you will receive your normal draw on the second pay and an additional check for the difference which will be taxed at four weeks however the reverse is true if your commission is not enough to cover your draw any shortage will be deducted from the second check of the month or carried to the next month when appropriate three-month pay situation in three-pay months you may find yourself in a negative situation which means you may not draw a check on the third payday management reserves the right to adjust your draw amount based on your sales performance for the preceding month if it is felt that your draw has been exceeding your sales the third check will be adjusted in the according to the computations in emp-2 file for the months of october 20xx to december his compensation was twenty-five the total amount of contributions that he brought in for the month for example in october 20xx he brought in a total of clients for a total contribution of dollar_figure his compensation_for that month was computed at dollar_figure total contribution of dollar_figure x see exhibit for october 20xx calculated compensation included in the personnel file for emp-10 as a payroll status change from counselor to manager his new compensation was stated as follows k a year dollar_figure for every counselor over accounts see exhibit for copy of emp-10 personnel file ‘thus based on information in employees’ personnel file employees’ compensation was based on the number of enrolled clients and the amount of contributions that the employee brought in from the personnel file of emp-12 the following comment was noted on the employee termination form dated xx see exhibit emp-11 could not close an adequate amount of accts each month employee telephone sessions with consumers org operated a call center staffed with employees whose only responsibility was to enrolled consumers into org debt management program primarily all of org initial contacts with consumers were done via telephone per employee's response to questionnaires question each employee was expected to make calls per day see exhibit emp-7 response exhibit for emp-13 response per emp-13 in response to questions and the average length of time for initial phone call with a consumer was minutes and manager’s expectation was to minutes form 886-a examination_report of org attached to 30-day_letter according to an email from co-23 dated 20xx see exhibit residents from state state state state and state could not apply for dmp with org thus it appears that in 20xx org conducted business in at least states in response to idr deb-001 question org provided various scripts used by its employees during phone contact with consumers the scripts were a part of the training package and are included in exhibit the process of enrolling a consumer in a dmp was listed by org as follows make initial contact with client program benefit concentrating on the clients’ goals disclose contributionsgive examples of savings qualify your potential client explain proper introduction go over goals with client arrange to have paper work sent out explain necessary steps answer any questions get commitment from client about returning about returning information information for quote confirm fax numbers before handling to administrators see exhibit for page titled initial presentation simplified the process listed above described all aspects of the interaction that occurs between the employee and the consumer from the initial contact to the consumer being enrolled in the dmp the employees first introduced themselves to the consumer by providing their names and the name of the company from which they are calling immediately after the introduction the employee then begins the qualifying process by asking the following question from the new account presentation script what types of bill ate they are you current or falling behind the note in the seript states that if'a client is current and making the minimum payments plus or only has secured debt the employee was to explain that org services would not be a benefit to them and to end the call how high are the interest rates are you still using the accounts what are your goals when consolidating if the consumer qualifies by having unsecured debt of at least dollar_figure and is falling behind in his or her payments the counselor would read the following from the scripts okay from what you've told me so far i think i can definitely help you please grab a pen and paper and write down my name and number the employee would then explained the program reading from the script what we do is take all of your bills and put them into one easy monthly payment because we ate not for profit organization and have a special relationship built with your creditors we should be able to lower that payment anywhere from because of that lower payment you will be left with a lot more money after paying your bills more importantly we can lower your interest rates from the usual average down to hopefully a to average this way you are paying your principal balance not the interest and wil pay the debt back a lot faster with less money your creditors may also waive any ite or over the limit charges that may be adding to your balance each month and if you're past due they may bring your accounts current without you making up the past due amount the employee still reading from the script would inform the consumer that paying their bills off on their own would take between years but by having their interest rate lowered their bills should be paid off in to years form 886-a examination_report of org attached to 30-day_letter in the script obtained from state banking dept employees also informed the consumers of the following also we work with a network of lenders that may be willing to lend you money considering you can meet their criteria and make your payments on time each month times in a row ifyou do get approved for a loan the lenders can negotiate a settlement with your creditors anywhere from to cents on the dollar saving you even more money the employee then provides information about any fees charged since we are a not for profit company we do not charge any fees for the service we provide we do accept voluntary contributions from our clients and sometimes their creditors to help offset the cost of administering the program we will ask for a contribution equivalent to your first payment on the program and dollars for each account we service monthly but will still assist you if you do not contribute please understand that the money will we collect is used to provide you with the best service we can and if nobody were willing to contribute it would be difficult for us to provide the service we do a thank you letter for thus upon completion of the call the employee faxed several pages to the consumers with instructions to return page sec_5 page - fax cover page page - applying to org the letter instructs the consumer to complete the forms and send them back and by doing that they are allowing org to provide a free evaluation of their financial situation and to determine their monthly payment and interest reduction page - benefits that the program provides page - consumer agreement page - authorization to release information page creditor information sheet and page org budget worksheet the four pages to be completed and returned were the following - a the last page of the agreement b authorization to release information c creditor information sheet list of bills for the program d a budget worksheet it appears that employee faxed a total of eight pages to the consumer for completion the new account presentation script state the following will have my administrators fax you a total of pages you only have to fill out of the the first page is an agreement that wil verify our not for profit status in the agreement it will state that we ask for dollars for each account for administrative costs it will also state tat we ask that your first payment go to our company for setting up your accounts every payment thereafter will go to your creditors at the benefits we can provide the next page is an authorization to release information form this form gives us permission to speak with your creditors the third page is a creditor list where you list who you owe and how much you owe them the last page is a budget worksheet where you list all of your expenses ‘the instructions regarding sending out agreements instructs the employee to refrain from using the mail and to persist and push for the other options which is primarily to have the consumer locate a fax where they can pick up the information and faxed it back to the employee consumers were asked to check their phone book for a convenient location offering facsimile transmission they were asked about checking with their boss family_member or friend for a fax machine they were told that by the time you receive the mail accounts will be even further behind don’t forget interest never sleeps if you want me to get you the program benefits you have to get me the agreement and creditor info pages and the mail is going to slow you down form 886-a examination_report of org attached to 30-day_letter employees were trained to persistently call the consumer to get them to retuen the contract according to one of the paragraphs in tips for getting contracts back - after you do get in touch with the client always assume the sale ask them if they have any questions and be sure to address any concerns they may have if they have no questions get the commitment from them when they can return the fax back not for your benefit but to help them accomplish their goals remind them of their hot buttons in another tip employees were instructed that if the client does not want to join you have to again go over their hot buttons and remind them of the benefits of the program once the information was received the employee used a script titled how to solidify a deal to continue with the enrollment process the importance of this script is underscored by the introduction paragraph of the script which states one of the most important conversations you are going to have with your client is after the fax comes back at that time you have to put on your best show and convince the client to continue with the plan upon receipt of the fax the employees were instructed to look over the account to remind themselves of the consumer's goals hot buttons and to take notice of the reduce interest rates and other_benefits of the program before contacting the consumer the script provided sample language to be used upon contact it read as follows hi sit hey it's over at org received your paperwork back and i would like to go over the benefits with you if this a convenient time great before we co-16t were there any questions you had with the paperwork we had sent you not about the payments or reduction of interest but just about the paperwork in general give them a chance to respond and answer any questions they have so far let’s look over your accounts together and i will let you know exactly what you can expect it will be helpful if you have your paperwork handy so you can take notes if you like if the paperwork is not available continue anyway according to my calculations your new monthly payment is going to be is that in your budget with that payment your creditors should also reduce the rates down f ___ isn t that a lot better than your rates now with that payment and lower interest rates we hope to have these bills paid back much faster ‘the employee would then proceed to obtain information on the client’s pay date to determine the earliest possible date that the consumer could begin to make the monthly payments employees were instructed to stress the urgency of them getting co-16 an offer is then made for the payment to be drafted from the individual’s account by providing the necessary financial_institution information over the phone consumers were also told that they could use quick collect offered by western union and that org do accept any type of certified funds such as money orders or certified checks from banks this script also provided information on matters relative to creditors contact with the consumer even after org has contacted the creditors consumers were told not to panic but to refer such calls to org consumers were told that if they could make a payment to their creditors and one to org then that would be great but if they could only make one payment then they should send it to org as soon as possible so they could begin speaking to the consumer’s creditors the final section of how to solidify a deal script instructs the employee to tell the consumer about a package that would be sent to them according to the script the package would inelude a form 886-a examination_report of org attached to 30-day_letter confitmation letter highlighting the payment dates pre-addressed envelopes and payment coupons to be used when making the monthly payments the next important step for the employee was to get the consumer to send in the payment the instruction in the script titled getting an account to pay was used for this step employees were instructed in this script it is very important to keep in touch with your clients so they can keep you informed as to how things are going for them you should call your client once a week until payment comes in once the payment was received the employee prepared the file which was sent to client services co-2 the training package provided information to the employees on how to handle calls from clients that were already on the program noted in the opening paragraph is the following every counselor that has enrolled a client onto the program knows how frustrating it is to get a call from a client that is already making payments and should be working with client services in a refund survey the reason for clients dropping the program was that they claimed their counselor never called back when they had a question or problem i realize that you didn’t apply for a customer service position and i don’t want you doing back end customer service work based on this paragraph it appears that employees no longer wanted to communicate with clients once they were enrolled in the program the budget worksheet faxed or mail with the agreement to the consumer asked for categories of monthly net_income and list of monthly expenses the form was not beneficial to the consumer with regards to budgeting or other aspect relative to control of spending since the employee did not use it has a tool to educate the customer on their personal spending habits or to assist the consumer to develop an effective budget per emp-13 sales manager in response to questions see exhibit org did request a budget worksheet because some credit card company required that they have the consumer fill it out he further stated that they never used the budget worksheet information because they were never told that they had to use it per emp-14 questionnaire response see exhibit he indicated the following in the beginning we did not ask for the budget worksheet but later on yes we did we asked for the work sheet to see what expenses the customer bad and what income to help us have a better idea of how much they could send on a monthly basis per emp-6 questionnaire response the budget worksheet was used to qualify the consumer for the program see exhibit thus based on the responses the budget worksheet was not used in an evaluative manner or any other manner relative to credit counseling based on the manager’s response org did not deemed this information necessary for the consultation process and neither did org utilized this information to determine eligibility for the dmp or to determine whether or not the consumer could afford the payment to the creditor or the one-time contribution or monthly payment to org the completion of the form was to comply with the requirement of some credit card companies that the form be completed it appears that some employees did review the form but primarily to determine how much monthly payment the consumer could send in as opposed to using the information to educate on how to develop good spending habits or to assist the consumer to devise a budget which would assist them to control their spending form 886-a examination_report of org attached to 30-day_letter during ali contacts with the consumers the employees were given various scripts to address questions or resistance that they may encounter such include the following the a ifa consumer asked what is my contribution used for response contribution is used to cover the cost of setting you up on the program and anything left over is put back into the company to provide clients with the best service possible b ifa consumer stated how do i know that your company is legitimate response we are a federally approved not for profit organization and are under strict guidelines we have a great relationship with many creditors who will verify our company once you complete the paperwork and before you send money i will ask you to refer any creditor calls to me c if asked if you are not for profit why do you ask for contributions response please understand that we are a federally approved but not federally funded a not for profit organization means that we cannot take in funds above and beyond what it cost to operate our business and we do rely on contributions from the consumer to cover our daily needs we get audited by the federal government to make sure we were not stock pilling money or operating lavishly if the government thought that we were not following the guidelines they would revoke our not for profit status and we would be out of business even a not for profit organization will incur cost while establishing an account in the first month there are administrative cost data entry and a lot of creditor service that must be done properly or you will not receive the true benefit of the counseling program our utility bills and this phone call have to paid for some of the lenders we work with may have some processing cost that have to be covered when applying you for financing org simply asks each consumer to donate the funds that are necessary to cover the cost incurred establishing your account which usually equals one payment on the program employees were asked in the questionnaire question to state the primary purpose of their contact with a consumer emp-14 response was as follows see exhibit for the customer to make a voluntary contribution to dcc and make regular monthly payment pay off their debt per emp-13 response see exhibit to get them to join the program per emp-8 response see exhibit - to introduce program available to them to get out of debt consolidation per emp-15 response see exhibit to see if they qualified for debt referrals of customers by org employees in response to the questionnaire item emp-15 see exhibit indicated that org did make referrals to co-24 co-24 for those customers who made at least months on time payment his statement is consistent with the seript in which org stated that individuals may be able to get a loan if they made consecutive on time payments a review of org’s website showed a link that said homeowners click here the link takes the consumer to a website which shows the name of co-25 consumers were provided an opportunity to apply online or to call a phone number to get pre-approved in minutes the copyright notes on site form 886-a examination_report of org attached to 30-day_letter stated the following noequityneeded com a marketing agent of co-25 see exhibit for copies of website information documents provided by org’s employees to the consumer for enrotlment to enroll in org’s debt management program consumers were provided the following forms and information via facsimile to be completed and returned to org a thank you letter to the consumer for applying to org the letter also instructs the a one-page document which touted all the benefits of org’s debt management a consumer to complete the forms and send them back because by doing that they are allowing org to provide a free evaluation of their financial situation and to determine their monthly payment and interest reduction b program such listed benefits included one lower monthly payment reduction in interest improved credit late and over the limit fees stopped and end of creditor harassment c d an authorization to release information form - allowed org to negotiate with the consumer's creditors e amount owed f creditor information sheet - requested a list of all unsecured creditors including the agreement provided the terms of the dmp a budget worksheet ‘see attached exhibit for copies of documents sent to consumers for enrollment purposes one page instructions - telephone number of client services provided and a one page list of do’s and don’ts and what ifs which include information such as - ‘once the consumer was enrolled in the program and the initial payment was received a welcome package see exhibit was sent to the new enrollee the package contained all or some of the following information a letter of congratulations to the consumer for making the decision to work with org the letter also informed the consumer that their files have been forwarded to org client processing center consumers were instructed to direct all future questions or concerns to client processing center co-2 also included in the letter was a reminder to the consumer to make timely payments and to monitor their statements b instructions to call client services with future questions the address to which all future payments should be made and payment form cashier's check money order etc a do mail your payment promptly b do not miss payments c do apply for additional credits d what if my payment is late e what if withdraw from the program what if lose my job the welcome package also included a two-page handout titled important which consisted of things the consumer needed to remember the reminder items were as follows a if creditors called ask them to call client services center b how to make monthly payments - cashier's check certified bank check money order or western union with name social_security mimber and address on the check call client services center if fall payment cannot be made information on the negotiation period -2h- form 886-a examination_report of org attached to 30-day_letter list of creditors that the enzollee must call to change their payment due_date a page document dealing titled helpful hints for handling third-party bill possible slight increases might be proposed by creditors f what do if client's financial situation changes f collectors g eft payments h authorization agreement to be completed by consumer if they choose to have their payments withdrawn directly from their checking accounts see exhibit for contents of a sample welcome package a one page document providing information on guidelines relative to authorization of customer service operations as provided by co-2 in august 20xx org contracted with a for-profit company co-2 to provide customer service to org’s clients per the agreement co-2 was retained to perform fulfillment back-office and customer relations services to org budget plan clients once the completed application and all related documents including the initial contribution had been secured from the consumer a package was prepared and forwarded to co-2 basically co-2 was the processing center for org during the years under examination and provided services such as submission of proposal to the creditors payment processing data entry and customer service to the clients co-2 also handled the fair share payment received from the creditors for distribution to org page of the agreement excludes intake and counseling services from co-2 obligations see the fulfillment agreements in exhibit the agreement also stated that org will have no further direct contact with the client other than telephone or face-to-face contact initiated by the client for the purpose of receiving additional counseling website operations according to part ii of schedule a of form_990 for the year 20xx org indicated that it incurred total expenses of dollar_figure relative to dmp services provided by co-2 see exhibit for form_990 disclosure and general ledger information in response to question on the interview questionnaire org employees emp-6 emp-16 and emp-13 all said they never called the consumer back to provide additional counseling as noted earlier in how to handle clients that are already on the program employees found it frustrating to have to deal with consumers who have already enrolled in the program ‘thus once an individual was enrolled ina dmp org's employees preferred to have no further contact with the consumer and did not initiate any subsequent contact with the consumer to provide credit counseling using the internet site for internet archive website copies of org website were retrieved from archive for several dates for 20xx and 20xx see exhibit for copies of websites an overview of the information on the website is discussed below the following categories of information as listed in org sitemap is as follows the beginning of each site shows the following statements org a non-profit organization counselors are standing by to help you erase your debt m-f a m to p m est call us at form 886-a examination_report of org attached to 30-day_letter debt load test - this portion of the website listed seven questions for it includes the following questions consumers to respond to do you pay only monthly minimums or miss payments on charge accounts combine debts by borrowing from a high-interest lender rely on overtime or a second job to cover monthly bills panic when faced with an unexpected expense such as car repairs hope that checks you've written don’t clear the bank before payday borrow from friends and relatives to cover basic expenses if you've answered yes to any of these questions you may be heading for financial trouble we can help about org - this section focus on the question what can org do for you in response the following are listed a reduce your minimum paymenis-as much a sec_50 b consolidate your multiple payments into one simple monthly payment c eliminate or reduce interest rates d eliminate late charges and over the limit fees e re-age past due accounts to improve credit rating f provide free consultation f home ownership not required also included in the section was the question who is org in response the following was indicated as a part of their response org offers the most beneficial programs in the industry we offer many unique solutions which include debt consolidation loan programs and or debt tmanagement programs steps ‘results - provides steps associated with the debt management program which includes a review of credit and budget information to determine eligibility for loan program or dmp b decision on date of first payment to org c negotiations with creditors d clients to make monthly payments on time frequently asked questions - includes questions such as why can’t i just negotiate with creditors on my own why can’t i just keep paying off my creditors on my own how much will it cost me to be on the debt management program how will joining org’s program affect my credit rating can i send in more money once i have better cash_flow will i still receive harassing phone calls the site provides a response for each question interest calculator feature to allow consumers to determine how long it will bills once the monthly payment interest rate and principle take them to pay off their balance is entered documents - permits only individuals who have already been contacted by org to enter a password given to them to obtain necessary documentation and applications _ existing clients - section is for clients who have already enrolled by making their first payment form 886-a examination_report of org attached to 30-day_letter the site also has a link to the application which asked for name phone number address email address amount of unsecured debt must be at least dollar_figure best time to reach consumer whether or not the person rent or own their home if their mortgage was past due or current and if past due how long and a section to check the types of debt ie credit cards personal loans medical bills etc __ omeach page was a link which states homeowners with good credit click here clicking on this link takes the consumer to a website which shows the name co-30 consumers were provided an opportunity to apply online or to call a number to get pre-approved in minutes noted at the bottom of the page is the following statement website a marketing agent of o-30 in questions and of the questionnaire the employees were asked if org had educationat materials posted on its website and was it a requirement for employees to direct callers to the website to review educational materials per emp-13 sales manager exhibit org did not have educational materials posted on their website and it was not a requirement to direct callers to the website to view educational materials callers were directed to the website but only to get the forms needed to list the debts see exhibit for a copy of the website fees in response to idr question sec_23 sec_24 and sec_25 see attached exhibit the organization provided the following response in describing its fee structure org does not charge any fees for their services they instead request voluntary contributions from theie clients and three creditors clients contributions are based on the clients total debt load and number of creditor accounts the client was asked to contribute their first program payment and an amount of six dollars per creditor we handled on monthly bases all creditors were asked to make a fairshare contribution based on consumer payments sent by org the fairshare amount asked wa sec_15 however many creditors paid less will other made no contribution at all included in the agreement in which the client was asked to sign was the following statement understand that org does not charge any required advance fees for any of their programs but understand that i have been requested and voluntarily agree to make a one time non-refundable counseling contribution to org equivalent to one payment on the debt management program that will be procured ftom my first payment i understand that the counseling contribution will be used to cover the operational costs involved in setting up my account and negotiating with my creditors i farther understand that in addition to the one time counseling contribution i have also been requested and agree to make a voluntary monthly contribution of dollar_figure per account that org is handling fot me see exhibit for copy of agreement revenue sources according to its form_990 return see attached exhibit org generated total revenue of dollar_figure for the year 20xx revenue was generated from three main sources a review of the adjusted trial balance for period ended december 20xx showed a breakdown of all revenue sources as listed in form 886-a examination_report of org attached to 30-day letier account numbers new client payments contribution revenue and fair share revenue see exhibit for copy of adjusted trial balance the initial enrollment fee or first pay requested from each individual who enrolled in the debt management plan consumers were asked to give of their debt load as an initial contribution which was approximately equal to one monthly payment debt management plan amounts received from creditors which were classified as fairshare revenue the monthly fee of dollar_figure per account requested from each participant who enrolled in a from august 20xx to december 20xx a total of big_number clients were contacted by the organization of this total big_number clients used the services of org org collected dollar_figure in enrollment contributions from thebig_number clients see exhibit for response to idr question revenue type amount ty 20xxx of total revenue ty 20xx first payment monthly fee fair share overall for 20xx overall amounts paid_by consumers to org for services constitute approximately of total revenue president co-2 co-1 and emp-1 as stated previously president founded co-1 and eventually spun-off the customer service_department also referred to as back office services to his for-profit company co-2 on i 19xx as of 19xx co-2 serviced all of co-i’s back office functions as well as all of the co-1 spin- off co-26 including org upon formulation of a spin-off cca a fulfillment agreement is executed by co-3 and the cca see org agreement in exhibit substantial fees are then remunerated to co-3 by the cca for customer service emp-i brother of president was a former employee of co-1 gee emp-1 interview in exhibit org was one of spin-offs that utilized former employees of co-1 or close friends or family of president see the co-1 bankruptcy examiner’s report detailing the co-16t-up individuals of co-1 spin-offs and their relationship sec_1 co-1 and president in exhibit emp-1 was able to co-16 org with co-opted elements from co-1 and assistance financial and marketing from president president gave emp-i a dollar_figure loan to assist in the initial phase of the operation see exhibit for emp-1 interview and exhibit for copy of note emp-1 also received leads from co-1 as its primary marketing source to find potential dmp clients again see emp-4 deposition 20xx page see exhibit dollar_figure the co-16t up funds and leads were critical to the formation and going concen of org the formation of org allowed excess co-1 leads to be timely form 886-a examination_report of org attached to 30-day_letter serviced by org and co-3 would be able to receive exorbitant fees for servicing of these dmps clients as stated co-1 advertised heavily and received many leads for potential dmp clients co-1 would utilize co-7 and emp-4 to reconcile the distribution of these leads to various co-26 including org see emp-4 deposition 20xx page of exhibit org was co-16 as a vehicle to service the excess leads that co- could not service and solicit for dmps org also utilized a former co-1 director and co-2 coo emp-17 and his company co- for purchases of leads see exhibit for copy of lead invoice from emp-17 org has paid numerous amounts to co-3 for back office processing an amount of dollar_figure was paid to co-3 for calendar_year 20xx see exhibit in addition to the back office processing fees co-2 provided advertising and leads to org co-2 in its janvary 20xx invoice to org included advertising costs for december 20xx in the amount of dollar_figure see exhibit for copy of invoice leads provided by co-7 are seen in co-3’s monthly invoices the fulfillment agreements with co-2 and due diligence by org org provided the service with copies of its fulfillment agreements see exhibit for copies of agreement a summary of the provisions in the agreement is as follows org retained co-2 to provide fulfillment back-office and customer relations org must submit to co-3 all the documentation for each new budget plan client org must maintain and give co-2 full access to such bank accounts to allow for the once co-2 has received documentation for a client from org org agreed that it services for org budget plan clients would have no further direct contact with the client other than telephone or face-to-face contact initiated by the client for the purpose or receiving additional counseling within business days following the first remittance deposits of money payment of refunds and the payment of funds on behalf of the co-26 budget plan clients org can remove monies from the accounts the balances can not fall below the amounts necessary to operate the client’s budget plans co-3 shall deposit client budget payments into the creditor accounts no later than the fifth day of receipt co-3 shall deposit fairshare monies solicited from creditors no later than the next business_day of receipt compensation_for the services provided is as a one time fee for the initial set up of a new client payment plan a fee of dollar_figure per client plan per month for each client on which co-3 received payments on behalf of during that month is imposed the invoicing should include total receipts from the clients a listing of the portion of the client receipts that represent client contributions a listing of the fair share portion of the payment received from creditors and total_distribution to creditors the term of the agreement i sec_5 years which automatically renews for an additional period of year unless one of the parties has given notice to the other no less than one year prior to the end of the lease agreement form 886-a examination_report of org attached to 30-day_letter the agreement was signed by emp-1 for org and president for co-2 org and co-3 signed a new fulfillment agreement effective september 20xx see exhibit for copy of agreement through the signature of emp-1 and president the major changes were as follows item b was added to sec_4 which stated that in the event fees payable to co-2 are __ paragraph 2c was revised to include the following statement any interference with co-2's exclusive access to such account s as by writing any check or withdrawing any funds from such account s shall represent a substantial breach of this agreement entitling co-2 to terminate this agreement and or recover of the amount of the check or withdrawal past due co-2 would have the option to apply towards the past due amount funds that are required to be paid to org it also included item c which stated that all fees payable under section a would increase by over the fees in effect in addition co-2 may at any time during the term of the agreement give notice to org of a proposed fee increase item 6c was revised to include information relative to org being in default of its obligation at time of termination it included the following statement in the event that at the time of termination agency is in default of any of its obligations under this agreement co-2 may at its sole option and without limiting any other remedy that might be available to it assign agency’s clients to one or more other credit counseling agencies exempt from federal tax under sec_501 c of the intemal revenue code lack of meaningful due diligence emp indicated that no bidding process was used and neither was any financial analysis completed prior to the selection of co-2 as the company’s back office service provider emp-1 in his interview stated that he spoke with co-28 a back office company whose fees were a little greater than co-2 he indicated that co-2 was selected because his brother was involved with co-2 as its owner and co-2 had the experience in addition he stated that co-2 also allowed org to operate a few months approximately days before it co-16 billing for its services emp-i stated that it ‘was a business decision that he made to contract with co-2 since he did not know how to do the back office work he stated that no due diligence was done before signing the contract but that the matter was discussed with the board org did not provide any documentation to show that it performed any due diligence in selecting determining pricing and vetting co-2 as a vendor see emp-1 president interview exhibit payments to co-2 under the fulfillment agreements and fair_market_value under the fulfillment agreements the following expense amounts were paid_by org for back office services only 20xx of total expenses expenses co-2-back office form_990 - total expenses form 886-a examination_report of org attached to 30-day_letter according to the form_990 org’s total expenditures_for 20xx were dollar_figure the irs engineering report and overpayments to co-2 the irs valued the fulfillment agreements and fair_market_value of the customer service functions performed by co-2 the irs engineering report concludes that for 20xx the reasonable fulfillment fees to be paid_by org should be dollar_figure the amount_paid by org was dollar_figure which resulted in an over charge of dollar_figure see irs engineer’s report in exhibit dollar_figure emp-1 has indicated that org has closed all of its offices and has not been conducting business see exhibit for copy of e-mail dated 20xx law sec_501 of the internal_revenue_code provides that an organization described in sec_501 c g3 is exempt from income_tax sec_501 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 the term charitable includes relief of the poor and distressed sec_1 c -1 income_tax regulations ‘the term educational includes a instruction or training of the individual for the purpose of sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 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 improving or developing his capabilities and b instruction of the puiblic on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 in other words the two components of education are public education and individual training sec_1_501_c_3_-1 c 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 sec_501 an organization will not be so regarded if more than an msubstantial part of its activities is not in furtherance of an exempt_purpose the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test 326_us_279 improving or developing his capabilities and instruction of the public on usefiil and beneficial subjects in 326_us_279 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 educational_purposes include instruction or training of the individual for the purpose of sec_1_501_c_3_-1 form 886-a examination_report of org attached to 30-day_letter of truly exempt purposes 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 302_f2d_934 ct_cl 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 hhad 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 rev_rul 1969_2_cb_115 granted exempt status under sec_501 c to an organization with two functions it educated the public on personal money management using films speakers and publications and provided individual counseling to low-income individuals and families as part of its counseling it established budget plans ie debt management plans for some of its clients the debt management services were provided without charge the organization ‘was supported by contributions primarily from creditors by virtue of aiding low income people without charge as well as providing education to the public the organization qualified for sec_501 status in the case of consumer credit counseling service of alabama inc v u s a f t r 2d d d c the district_court for the district of columbia held that a credit_counseling_organization qualified as charitable and educational under sec_501 it fulfilled charitable purposes by educaling the public on subjects useful to the individual and beneficial to the community sec_1 -1 d 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 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 u s t c d d c in which the facts and legal analysis were virtually identical to those in 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 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 form 886-a examination_report of org attached to 30-day_letter outside the context of credit counseling individual counseling has in a number of instances been held to be a tax-exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows rev_rul 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_179 free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering drugs rey rul 1970_2_cb_117 free marriage counseling revrul_68_71 c b 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 internal_revenue_code sec_501 specifies that an exempt_organization described the words private_shareholder_or_individual in sec_501 therein is one in which no part of the net of earnings inures to the benefit of any private_shareholder_or_individual having a personal and private interest in the activities of the organization sec_1 a - ‘the inurement prohibition provision is designed to prevent the siphoning of charitable eeceipts to insiders of the charity 165_f3d_1173 cir college v commissioner 276_f2d_476 cir reasonable_compensation does not constitute inurement birmingham business refer to persons an organization must establish that it serves a public rather than a private interest and that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly ot indirectly by such private interests sec_1_501_c_3_-1 ii those of unrelated third parties as well as insiders 70_tc_1037 92_tc_1053 private benefits include an advantage profit fruit privilege gain or interest 78_tc_280 prohibited private interests include an organization formed to educate people in hawaii in the theory and practice of est was determined by the tax_court to a part of a franchise system which is operated for private benefit and therefore should not be recognized as exempt under sec_501 of the code 71_tc_1067 although the organization was not formally controlled by the same individuals who controlled the for-profit entity that owned the license to the est body of knowledge publications and methods the for-profit entity exerted considerable control_over the applicant's activities by setting pricing the number and frequency of different kinds of seminars and training and providing the trainers and management personnel who are responsible to it in addition to setting price for the training the court stated that the fact that the organization's rights were dependent upon its tax-exempt status showed the likelihood that the for-profit entities were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether the for-profit entity benefited substantially from the operation of the organization the court determined that there was a substantial private benefit because the organization was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations in intemational postgraduate medical foundation tcmemo_1989_36 one individual controlled both a nonprofit that ran tours aimed at doctors and their families and a for-profit travel form 886-a examination_report of org attached to 30-day_letter agency that handled all the nonprofit's tour arrangements the non-profit spent 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 iourement and private benefit also its activities were directed at providing opportunities for recreation not education the credit repair organizations act croa pub_l_no stat date u s c et sea effective date imposes restrictions on credit repair organizations including forbidding the making of untrue or misleading statements and forbidding advance_payment before services are fully performed u s c 1679b significantly sec_501 organizations are excluded from regulation under the croa service described in clause i the croa defines a credit repair organization as improving any consumer's credit record credit history or credit rating or gi providing advice or assistance to any consumer with regard to any activity or 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 retum for the payment of money or other valuable consideration for the express or implied purpose of - u s c 1679a 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 21_fsupp2d_424 n d nj the national do-not-call registry which is maintained by the federal trade commission chr i ginb cer sec_64 sec_501 organizations are not subject_to this rule against cold-calling because c organizations are exempt from regulation under the croa and the cold-calling restrictions organizations that are involved in credit repair have added incentives to be recognized as sec_501 organizations even if they do not intend to operate primarily for exempt purposes businesses are prohibited from cold-calling consumers who have put their phone numbers on government’s position org’s position unknown -3l- form 886-a examination_report of org attached to 30-day_letter discussion application in june 20xx org presented a form_1023 application outlining several proposed educational activities which purportedly would constitute approximately of its operations based on representations made in org’s application the irs granted exemption under sec_501 of the code however based on the service’s review of the evidence gathered through its examination ithas been determined that a significant portion of the activities outlined in the application did not correctly represent how the organization did in fact actually operate moreover org did not conduct about of the activities it proposed in its application specifically in the form_1023 application org indicated that it would conduct financial and budgeting workshops offered free of charge to religious organizations civic groups businesses labor unions businesses and educational organizations org’s application also discussed the use of videos pamphlets and other education materials on budgeting and buying practice and sound use of consumer credit to be provided free of charge to the groups listed above org did not conduct financial and budgeting workshops org did not distribute materials or make available materials discussed in its application to the local groups there were no indications that it ever attempted to include any of the local groups in any aspect of its operations discussion - actual activities based on information obtained during the examination it was determined that the primary activity of org was not educational in the manner described in the form_1023 application and was not educational or charitable as defined under the internal_revenue_code its regulations or legal precedence the primary activity was the sale of debt management plans this determination was made based on the types of activities that org conducted and the manner in which they were conducted these factors together demonstrate that org’s operations were not consistent with sec_501 c of the code advertising org engaged in extensive advertising activities in order to generate leads and made significant expenditures to purchase leads from lead generation companies the procurement of leads was essential to org’s objective to market its debt management plan dmp the magnitude ofits advertising and lead generation activity is reflected in the percent that advertising lead expenses represent to the overall expenditures of the organization org’s overall expenditures of dollar_figure include an amount of for leads advertising see exhibit for lead adv costs thus 20xx of org's overall expenditures were spent on advertising and lead generation based on the review of org's advertisement on its website and its advertisement materials org had several general points that it wanted to communicate to consumers in its advertisements reduce minimum payments as much a sec_50 consolidate multiple payments into one simple monthly payment eliminate or reduce interest rates eliminate late charges and over the limit fees and re-age past due accounts to improve credit rating form 886-a examination_report of org attached to 30-day_letter ‘the duration of the commercials was seconds in length the presentation and content of org’s commercials were substantially_similar to those used by commercial enterprises to market their products leads generated by lead companies were procured mainly through banners strategically placed on various websites to advertise debt consolidation services although org’s name may or may not have been associated with advertisements on the banners such vendors were commercial companies whose sole purpose was to generate leads for sale not to educate consumers in addition to its radio commercials and purchasing leads from vendors org also extended its advertising efforts through the use of internet campaign the formats of the internet campaigns banners were org also used print media in the form of publications to advertise its services the time frames for radio commercials and the line spacing used in the publications and in the internet campaigns did not allow org to present extensive amount of information to the general_public however within the constraints of time or space org consistently informed consumers of the availability of its debt management plan giving quick highlights of the alleged benefits of the program thus the advertising language used within the time frame served to market the debt management plan every form of advertising or marketing technique used by org exclusively promoted the availability of its dmp prodact and the alleged benefits of the program org advertisements advocated the sale or availability of the dmp product and did not provide education or any charity within the meaning of sec_501 c of the code the term educational includes the instruction of the public on subjects useful to the individual and beneficial to the community in org’s case however its advertisements lack instructional information the nature of which could assist a financially distressed individual to cultivate credit practices that would eliminate ot minimize future financial disasters the advertisements did not provide information such as budgeting techniques buying practices or sound use of consumer credit which is generally a part of the provision of credit counseling and which org presented as a part of its proposed activities in the form_1023 application the advertisements did not fall within the parameters of individual counseling rather the advertisements served a commercial purpose and were being used asa marketing tool to sell debt management plans the advertising and marketing campaigns generated a significant amount of leads which were used by employees to market the debt management program org’s operations were statistically driven and were reflected in the manner in which employees were compensated employee qualification training and compensation to achieve its monthly goals org designed a compensation package for its employees based on production employees were required to sign a performance agreement at the time they were employed to acknowledge that salary ranges are commensurate with account achievements see exhibit each employee's base salary and bonus commission was based on the number of enrolled consumers and the amount of contribution that the employee acquired see exhibit ifthe figures were in line with management's expectations the form showed an increase in salary for that employee employee personnel files form 886-a examination_report of org attached to 30-day_letter also showed decreases in salaries when production was not in line with management's expectations see exhibit sec_38 due to the personal financial gain the incentive was present for employces to quickly push consumers into a dmp there was no incentive for employees to provide meaningful education or counseling since consumer enrollment in the dmp was their top priority failure to produce at minimum acceptable levels resulted in the employee being counseled and or terminated review of various personnel file folders showed the upward or downward adjustment of the employees’ base salary based on their production personne folders reviewed also showed employees being terminated for inadequate production in the personnel file for emp-18 the termination form stated the reason for his termination as follows emp-18 did not adapt well to in personnel file commissioned sales environment see exhibit for emp-18 personnel file for emp the reason for his termination was due to low sales volume over a to months period see exhibit for emp-9 personnel file emp-19 termination form in the personnel file showed reason for termination as not meeting sales quota see exhibit for emp-19 personnel file org created a telemarketing sales environment which resulted in consumers being pressured into enrolling in org's dmp the environment was not conducive to provide meaningful education or counseling sessions even though credit counselors formed the pool of employees responsible for the provision of counseling services to financially distressed individuals org did not require applicants to have prior credit counseling experience or any counseling experience it did not require candidates to have a certain level of education or knowledge in the field of credit counseling also org did not require candidates to have any special license or certificates in the area of counseling org's employment advertisements in the classified requested applicants with stock broker or collections experience org’s credit counselor position was similar to telemarketing positions and its advertisement in the local papers to fill such positions was similar to the classified ads used for sales telemarketing positions see exhibit org provided days of in-house classroom training and two days of observing and listening to senior employees selling the dmp to consumers the training materials primarily focused on how to sell the debt management plan and aspects associated with the plan through the use of various scripts see the exhibit according to emp-14 see exhibit in response to question on the questionnaire you were told to follow it the script the script was proven so they said according to the response to question sec_23 and sec_24 from emp-8 see exhibit the consequences of not following the script resulted in employees being reprimanded or terminated no significant training was provided on counseling methods counseling techniques or on topics such as proper budgeting techniques sound use of consumer credit ete the overall goal and purpose of the training was to assist employees to become excellent telephone sales representative how to sell no training was provided to equip the employees the dmp was the primary purpose of the training with skills necessary to counsel in the areas of money management skills or sound use of consumer credit asa result of org recruitment practices and the type of training that was provided the employees neither had the experience knowledge or training that would allow them to effectively counsel a financially distressed person neither did the employees’ compensation package provide an form 886-a examination_report of org attached to 30-day_letter incentive for them to educate the consumers in the area of credit counseling the scripts used had little or no educational content thus substantially_all of the training that was provided to the employees served to equip them to sell the debt management plans scripted dmp enrollment sessions to determine the type level and quality of credit counseling that was allegedly provided to consumers the examination team looked to the scripts since those were primarily the only tools that were used to impart information to the consumers the training materials including the scripts also provide detailed information on the techniques that were used by the employees as stated previously dialogue with consumers was controlled via the use of the script deviations from script lead to counseling or termination ‘the overall basic purpose of the script was to determine if an individual meets the requirements for a debt management program and to convince consumers to enroll in the debt management program by outlining all the benefits associated with the program information provided to consumers to persuade them to enroll in the program included the following a detailed description of the benefits of a debt management program which includes low interest rates reduce payments one monthly payment accounts are brought current and balance are paid off faster etc consumers were also told that org works with a network of lenders that may be willing to lend them money if they met certain criteria and make their payments on time each month times in a row consumers were also told that if they were not approved for loan the lenders could negotiate a settlement with the creditors anywhere from dollar_figure to cents on the dollar thus saving them even more money the script repeatedly emphasized that employees should continue to ‘hit the hot buttons which were basically the consumers response to question of what were their goals for applying for consolidation in the training materials see exhibit the opening paragraph of the initial sales presentation trained employees to find out what the client wanted to do before they try to sell the program the primary reason for obtaining this information was to provide the employee with the hot button used as a tool to manipulate the consumer needs in order to sell the program thus determining the customer needs was not geared towards soliciting information that would allow the employee to understand the consumer’s background or habits that are behind the problem of their indebtedness in order to provide meaningful counseling to address the problem instead the employee focus was to find out the consumer main point of disappointment or motivation that led them to contact org and to use that information to pressure the consumer into thinking that a dmp is the solution for their crises and to ultimately enroll them in the program see exhibit for copies of training materials the ultimate goal of each phone call is the enrollment of the consumer in the dmp org did not provide consumer education or counseling to its callers outside the commercial realm of the debt management program per supervisor emp-13 see exhibit in response to questions to of the interview questionnaire the average length of time for his initial phone call with a consumer is minutes he also stated that management’s expectation in terms of length of time was to minutes he further stated that if phone calls were very long employees would receive a verbal waming any limitation on talk time served to keep the entire focus of the conversation on the sale of the dmp product since it was not feasible for employces to sell the dmp product and educate consumers on personal money management during the amount of time allotted form 886-a examination_report of org attached to 30-day_letter employees were given a handout with a series of questions and answers to use to overcome objections that the consumer may have see exhibit most if not all of the answers to the questions used strategic sales language which served to push the consumer into the debt management program none of these materials or strategies was geared towards educating consumers about how to exercise good judgment in the use of credit or how to develop practices that could prevent future ‘occurrence of financial crisis during the years under examination the org scripts did not contain a section that allowed employees to discuss options with the consumer on the script with the rebuttals one of the questions was as follows is bankruptcy an option for me in response the employee would read the following from the script bankruptcy is your last resort if we cannot work out an agreeable repayment plan based on the bills that you owe we do not advise people to go bankrupt because this ruins their credit for at least years the mere fact that the discussion of bankruptcy only appears on the rebuttal script indicates that bankruptcy as an option is mentioned only if the consumer questioned to employee about that option it also indicates that information on bankruptcy ‘was not included in the initial presentation script and that management does not encourage any meeningfal discussion on bankruptcy the response to the bankruptey is geared towards steering away consumers from that option and into the dmp org did not consider it a priority or necessity to educate the consumer about the various options via the script or during the telephone session the it provided no educational overall the script was a tool to effectively and efficiently sell debt management plans information that was provided relates to how the dmp program operated and the benefits of the programs it provided no information that would assist the financially distressed to see why and how they came to be in a financial crisis org as a consistent part of its telephone session did not address the consumer spending habits or budgetary matters in a personalized manner that would assist the consumer to prevent or minimize similar financial crisis information or counseling in areas similar to those represented in its form_1023 application such as counseling on matters such as proper budgeting buying practices and the sound use of consumer credit it provided no information that was of an educational nature that would assist a financially distressed person to ultimately exercise sound judgment in the use of consumer credit or address the factors that originally created the financial distress afier consumers were enrolled in the program org had no further contact with the consumer unless the consumer initiated a call for additional counseling as a practical matter consumers were given the telephone number for co-2 for all future contact consumers were not told in the package that they could or should contact org for counseling based on the information in the training materials titled how to handle clients that are already on the program it is evident that both management and counselors considers calls from individuals who are already on the program as a nuisance the opening paragraph states every counselor that has enrolled a client onto the program knows how frustrating it is to get a call from a client that is already making payments and should be working with client services the training materials merely instruct the employee to give the consumer a courtesy call to explain to them that the employee is no longer handling the account and to provide co-2 phone number to the consumer for assistance this training document did not mention or discuss any actions associated with additional counseling it dealt exclusively with dmp enrollment matters due to sales goals and compensation form 886-a examination_report of org attached to 30-day_letter based on amount of sales employees did not want and neither were they encouraged by management to spend their time talking to a consumer who no longer had the potential to boost their compensation if they did return the consumer's call it was primarily to tell them to call co-2 based on the content of the script testimonies provided by employees and the method by which org compensated its employees and the threat of termination for low sales quota employees were placed in an environment which was not conducive to provide education but instead created a sales environment geared towards the sale of debt management plans fees contributions in the form_1023 application org indicated that clients will be requested to pay periodic fees to org to raceive the budget plan service creditor per month up to a maximum monthly fee of dollar_figure per client these fees will be reduced or waived for any client who is financially unable to pay the full amounts emphasis added org further stated that the fees will be reduced or waived fro indigent clients no client will be denied budget plan service due to an inability to pay any fees the fees will consist of dollar_figure per the application also stated that org also anticipates receiving substantial contributions from clients org will ask clients to help deftay the costs of its counseling and budget plan costs through a payment of of their outstanding indebtedness a copy of the template copy of the consumer agreement subroitied with the application package stated the following understand that org does not charge any advance fees for any of their programs but i understand that i have been requested and voluntarily agree to make a one time non-refundable counseling contribution to org equivalent to of the total debt that they are handling for me this contribution is approximately equal to one of my payments on the debt management program and will be procured from my first payment i have also been requested and agree to make a voluntary monthly contribution of dollar_figure per account that org is handling for me org submitted copies of debt management agreements that were used in the debt management process the following standard language was used in org debt management agreement i understand that org does not charge any required advance fees for any of their programs but understand that i have been requested and voluntarily agree to make a one time non-refundable counseling contribution to org equivalent one payment on the debt management program that will be procured from my first payment i understand that the counseling contribution will be used to cover the operational costs involved in setting up my account and negotiating with my creditors i further understand that in addition to the one time counseling contribution have also been requested and agree to make a voluntary monthly contribution of dollar_figure per account that org is handling for me these funds will be used to cover the costs involved in handling my creditors on a monthly basis it appears that the language submitted in the application was the language that was used during the examination years since it is substantially_similar to another template provided in the training materials see exhibit for template copy of org debt management agreement in practice it appears that org was consistent in charging all consumers a monthly fee of per account up to a maximum of monthly org also consistently charged a one time non-refundable counseling contribution equivalent to approximately of the consumer’s total debt form 886-a examination_report of org attached to 30-day_letter in practice org did not attempt to identify those persons who could be classified as indigent the debt management program was made available to anyone who was interested in the program and met certain criteria such as a living ina state in which org is permitted to conduct business and b have a certain amount of debt ie question of the questionnaire asked what did employees tell a consumer who could not or was unwilling to give a contribution per emp-14 questionnaire response see exhibit he indicated that we explained that there was a cost of doing debt counseling and that it paid to keep the lights on per emp-13 sales manager see exhibit you would have to try and talk them into it if you couldn’t you still could help them enroll in the plan question of the questionnaire asked if it was a requirement to obtain the supervisor's signature for consumers who did not pay the voluntary contribution and or monthly fee or reduce fee was a requirement to obtain the supervisor’s signature to waive of reduced the voluntary contribution emp-13 response indicates that that it the rebuttal script response regarding consumers refusal to contribute demonstrates that org requested fees from everyone and used language to pressure them into contribute when they refused based on the manner in which org solicited the contribution it cannot be called contribution but an administrative fee charged for participation in the debt management program the first payment charged by org to its clients was based on that particular client's total amount of debt therefore an individual with one credit card who had an extremely large amount of debt would pay a higher first payment than an individual with multiple accounts with a smaller amount of debt thus the first payment amount charged by org bears ne correlation to the actual cost to establish the customer on the debt management program question of the questionnaire asked about the procedures used to determine if the consumer was indigent poor and could not afford the payment before the employee asked for a contribution in response emp-14 see exhibit indicated that euch determination as not made emp-13 the supervisor see exhibit also indicated that no verification of indigence was made it had no established org did not limit its debt management program to a charitable_class procedure or policy in place that would allow for a waiver or reduction of the first payment or monthly fee org had no policy or guideline in place to waive the fee for individuals of families to whom the payment would cause financial hardship org’s debt management program was not designed to distinguish between the indigents non-indigents ot low-income individuals or families the organization erected obstacles to prevent or minimize any reduction or waiver of first payment or monthly fees such policy includes the requirement that reduction of contributions be approved by the manager and using a compensation package based on the number of enrollees and total contribution based on the manner in which the program was administered the debt management plan did not serve a charitable purpose website welcome package referrals co-2 the organization’s website during 20xx thru 20xx had information regarding its debt management program with little or no educational items it was not a practice of org employees to refer consumers to its website to read educational materials because such materials did not exist form 886-a examination_report of org attached to 30-day_letter the welcome package had items which were directly or indirectly related to the debt management program a detailed review of the welcome package showed that most if not all of the information was follow-up information for those who enrolled in the debt management program such information includes a two page document of reminders for consumers enrolled in dmp dmp list of creditors for consumers to call to change payment due dates payment envelopes and instructions to call co-2 with future questions see exhibit contains the welcome package documents overall substantially_all information in the welcome package relates to dmp matters payment envelopes important reminders about the dmp plan and eft authorization forms do not serve to educate consumers on sound money management thus the welcome package was not used ptimarily as an educational tool org referral process was not an educational credit counseling service org merely pointed the consumer to another company which could provide some other form of financial assistance for a fee the primary purpose for most of the referrals was to allow consumers to obtain loans to pay off their debt the back office services provided by co-2 served as the customer service unit to respond to clients inquiries regarding matters relating to the debt management plan clients would contact co-2 if they felt their statement was incorrect or if creditors continued to contact them after they have been enrolled in a debt management plan the co-2 contract specifically excludes intake and counseling service co-2 involvement with the clients after enroliment in the program was an extension of the debt management service and did not serve an educational purpose use of resources ‘according to the form_990 org’s total expenditures_for 20xx were dollar_figure at a minimum looking at two expense categories that were clearly identifiable as expenses associated with the dmp process - leads advertising and co-2-back-office - the following was noted expense 3oxx expenses of total expenses leads advertising co-2-backoffice total total f990 expenses excluding any payroll expenses the annual average amount of org’s overall expenditures on the dmp process represent of its total expense for 20xx org's debt management program is the primary activity of the organization since a substantial amount of its resources were devoted to the program and represent a significant percent of its overall operating cost org does not further any charitable or educational purpose when it mass markets a dmp form 886-a examination_report of org attached to 30-day_letter although the representations contained in org’s form_1023 application package portrayed org as an organization substantially_similar to the organization described in revrul_69_441 and the o-29 case co-29 its actual operations activities were not consistent with the activities described in the revenue_ruling or in the co-29 case org did not provide community education or counseling assistance similar to that described in the revenue_ruling or the co-29 case based on the daily duties of the employees substantially_all of the org employees time was spent on the debt management program as contrasted with the co-29 case where the dmp activity was a relatively small part of that organization’s activities moreover in that case the organization charged nominal fees received some public support and had a board dominated by members of the general_public factors indicating a charitable operation in addition to the lack of educational or charitable activities org has a substantial non-exempt purpose of selling a product the dmp and providing business to co-2 and its successor entities discussion - control of org by president and emp-1 exemption from tax under sec_501 c is necessary in order for fair share monies to be paid_by creditors to credit counseling organizations as well as to avoid federal trade commission scrutiny under the credit repair organizations act which was enacted september 19xx and became effective on april 19xx this act specifically excludes any nonprofit organization that is exempt from taxation under sec_501 of the internal_revenue_code see a summary of the croa law in exhibit dollar_figure hence securing tax-exempt status under section dollar_figure c was critical to all organizations’ economic viability as a credit_counseling_organization and assisted in ensuring that it could operate in a more unfettered manner once co-1 could no longer handle all its leads and his wholly-owned back office company co-3 was operating as a separate_entity president ordered individuals within co-1 to assist in co-16t up operations of other credit counseling agencies co-26 all of which agreements with co-3 distributions of leads to co-1 and co-3 clients co-26 clearly indicate that president was controlling the operations of the co-26 see exhibit emp-4 emp-4 deposition see also exhibit page emp-3 deposition dated for discussion on distribution of leads to other o-26 depositions from emp-4 emp-4 former co-1 employee who assisted in entered into fulfillment excess leads according to the deposition of emp-4 emp-4 see exhibit dollar_figure were distributed to the co-3 contracted co-26 such as org those co-26 including org all contracted with co-3 president’s wholly-owned company to process the client payments resulting from individuals entering into a debt management plan the fees paid_by org to co-3 in 20xx under the fulfillment agreement were not reasonable in relation to the industry the analysis of co-2 financial statements and tax retums show that it was super-profitable compared to industry norms this was due exclusively to the lack of arms-length there are no written contracts with co-1 the ftiends of president and the former employees of co-1 or co-3 for lead purchases form 886-a examination_report of org attached to 30-day_letter negotiations between org and co-3 resulting from president controlling both entities either directly or through nominees emp-1 claimed that his brother president was not involved in the idea to form org however as discussed previously emp-1 received a loan from a company owned by president to fund org operations in addition emp-1 in his interview stated that org operations were the same of co-i being that they used the same contracts forms scripts and same lead generation companies attomey was the incorporator of org attorney is a close friend and business_associate of president according to emp-1 attomey helped him setup org’ governance and board prepared the application the articles of incorporation and the by-laws attorney used estimates for the budget and gave him guidelines and the business model to follow interview see exhibit for emp-1 attorney similar to what he had done with other credit counseling agencies president provided org with financial assistance and leads to assist org see emp- testimony in exhibit further evidence of the overcharging is found in emp-3 s testimony see exhibit also the us bankruptey court examiner concluded that he found a vendor who can currently service the co-i's dmps at a cost much cheaper than the current arrangement with co-2 see exhibit emp-20's memo on co-1 processing see exhibit for the emp-20 memo taken from the files even states that the 20xx cost with substantial portions of the cost attributable to corporate overhead is dollar_figure per dmp per month far less than the initial dollar_figure a month that co-1 org and other co-3 contracted co-26 were charged by co-3 due to a 19xx criminal conviction in state on money laundering president used nominees in order not to draw sorutiny on his companies see the court documents in exhibit president installed emp-1 into org to control its operations and immediately enter into a fulfillment agreement with co-3 for substantial fees for back office services president also controlied the leads through the coordination of advertising and lead inventories president put a former co-1 employee emp-4 into her business co-7 in order to consolidate and distribute leads generated from co-1 advertising to co-3 clients and subsequently advertising for other spin-off co-26 resulting leads to co-1 co-3 org and other co-i spin-offs that were co-3 clients also see exhibits emp-3 deposition and exhibit dollar_figure emp-4 deposition notes to the financial statements for co-2 for december 20xx and 20xx note j related_party transactions stated the following a key employes of the company owns co-27 inc co-27 an entity that provides leads to non-profit debt counseling organizations the company purchases leads from co-27 and provides them to clients as form of marketing which is recorded to advertising and lead support see exhibit for copy of financial statemeot monies for leads provided to org and other organizations were invoiced and collected by co-3 see copies of co-3 invoices and spreadsheets in exhibit a further exhibit proving that president and co-2 controlled org and other co-3 client co-26 is found in the data that co-3 collected on the co-26 co-2 had substantial lead cost information as contracted with advertising media for co-1 and sold the form 886-a examination_report of org attached to 30-day_letter well as profitability analysis see the emp-20 co-2 memo in exhibit the co-3 accounts teceivable and revenue analyses in exhibit which contains information on all co-3 controlled co-26 and the bears stearns co-2 sale in exhibit president responded to the ftc see exhibit showing all of the relationships to the co-3 client co-26 see the senate report co-3 comments in the senate report in exhibit which contends that the co-2-co-2 conglomerate is controlled by the co-3 business practices and president president was able to direct the resources and personnel of co-1 to co-16t org president directed co-1 to provide forms agreements management assistance training and personnel to org which he co-16 with trusted former employees of co-1 his brother emp-1 virtually all of these co-1 spin off companies were represented during the exemption application process by attorney who also represented co-1 president also assisted them with loans and leads to co-16t the companies in exchange for them signing fulfillment agreements with his company co-3 the memo discusses this business model that was employed by co-3 see exhibit also the co-3 financial statements for 20xx and 20xx state that the business model is to assist co-26 who are clients with advertising and marketing j e leads see exhibit the fulfillment agreements fees were not negotiated at arms-length and as a result substantial monies inured to the benefit of president according to an irs engineering report on the value of the back-office services co-3 substantially overcharged org for the services provided see irs engineering report in exhibit discussion inurement and private benefit to co-2 and president as stated previously org signed a fulfillment agreement with co-2 a company wholly owned by president upon formulation of org emp-1 in his interview indicated that no due diligence was done prior to signing the contract with co-2 the irs engineering report concludes that co-3 is super profitable by industry standards and over-charged org in processing fees under the fulfillment agreement in 20xx in the amount of dollar_figure gee analysis in exhibit like the situations in the cases of est of hawaii and international postgraduate medical foundation supra president's for-profit entity co-3 benefited substantially from the operation of org and other co-26 the evidence in this case establishes that the substantial purpose of org was to increase the income of co-3 conclusion org did not operate exclusively for educational or for any other exempt purposes within the meaning of sec_501 of the code since its primary activity was the sale of debt management plans org conducted no educational activities within the community provided no educational training or counseling to individuals on credit or debt management issues and did not provide education in the context of sales of its debt management plans the debt management program was fot limited to a charitable_class and org did not have an established policy or procedure to waive or reduce the fees for the indigents or to waive the fees for those to whom such fees would create financial hardship consequently it does not serve a charitable purpose since org’s primary form 886-a examination_report of org attached to 30-day_letter activity was the sale of debt management plans which lacked substantial educational or charitable aspects its exemption under sec_501 of the code should be revoked effective aprit 20xx the date of its formation in addition org had a substantial non exempt_purpose in selling a product the dmp and providing business to co-2 under a contract that was extremely lucrative to co-2 org did not further any charitable or educational purpose when it marketed its dmps sec_501 organization was exempted from the croa it was able to engage in deceptive business practices that congress intended to prohibit when it passed the croa law as such org is operated for a substantial non-exempt purpose that of carrying on a business while avoiding federal regulation moreover because org as a org earings also inured to the benefit of co-2 and its founder and the founder of co-1 president org paid fees to president’s company co-3 in 20xx that were dollar_figure in excess of reasonable fair_market_value since org earnings inured to the benefit of president and his company co-2 its exemption under sec_501 of the code should be revoked effective april 20xx the date of its formation furthermore even without considering inurement org was operated primarily for the benefit of co-2 org conferred private benefit to president’s for-profit business co-2 since org substantially served the private interest of president in contravention of section dollar_figure c of the code its exemption under sec_501 of the code should be revoked effective april 20xx