After a series of audits, the agency has revoked or is in the process of revoking the tax-exempt status of 41 national credit counseling firms.

The audits found that many of the agencies offered little or no counseling or education and were doing little beyond selling consumers debt payment plans. In many cases, the counselors served the private interest of related for-profit companies. Some companies were charging up-front fees and payments for debt management programs that were not used to pay debts.

"Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors," said IRS Commissioner Mark W. Everson, during a conference call with reporters. "Our examinations substantiated that these organizations have not been operating for the public good."

As consumers' personal debt has soared, credit counseling has become a billion dollar business. A provision in the federal bankruptcy legislation that went into effect last year also boosted the industry. It requires that people get credit counseling before they can file for bankruptcy.

Typically consumers turn to the credit counselors for financial advice and debt management. Counselors can also make payments to creditors, after negotiating a reduced interest rate. In return, some charge a small percentage of the total debt. Some also charge service fees.

Everson declined to identify the companies during Monday's conference call, but the IRS Web site listed several credit counseling companies whose tax-exempt status has been terminated in the past year. The list included: the National Consumer Council in Los Angeles; National Credit Education and Review in Canton, Mich.; and Consumer Guidance Corp. of Sun Valley, Calif. Each has offices around the country.

The IRS plans to send compliance inquiries to each of the remaining 740 known tax-exempt credit counseling agencies to determine whether they comply with requirements for tax-exempt organizations.

"I think this is a positive for the consumer counseling," said Amida Mehta, director of marketing for ClearPoint Financial Solutions of Richmond, Va., which has an office in Raleigh. "People can breathe a sigh of relief that the less charitable agencies' tax-exempt status will be revoked," she said. "They are going to shake out those agencies and bring more integrity to our industry."

Mehta said that ClearPoint offers debt management programs to about 25 percent of its clients. "We are very careful about who we put into those programs. If someone is unemployed and can't make those payments, it's important not to put them deeper in debt."

While some agencies welcome the IRS scrutiny, the head of one local firm said the government is going too far.

"There is definitely a correction needed," said Ken Long, president of Fiscal Progress in Raleigh. "But I think ... [the IRS] is going a bit overboard. The IRS is taking a very narrow view of the law. Any organization that does substantial debt management plans will have their tax-exempt status revoked." Long said Fiscal Progress doesn't sell debt management plans, but refers clients to companies that do.

Consumers should be aware that revoking a company's tax status doesn't stop a company from selling debt management plans, said Nick Jacobs, spokesman for the National Foundation for Credit Counseling. "It only changes their tax status. One can only hope that since they cannot get away with their previous uncharitable practices that they decide it's better to fold up their tents and go away."

Jacobs says that consumers should exercise caution when selecting a consumer counseling agency. But they should also keep in mind that not all credit counseling agencies are unscrupulous.

"The challenge for our industry is to not let a few bad apples spoil the whole barrel. We need to do our best to demonstrate that there are organizations that are committed to providing the best service and quality to the consumer."