The Internal Revenue Service has revoked the tax-exempt status of Hawaii Credit Counseling Service, a move that could spell the end of the debt counseling service with a checkered history.

The company yesterday said it was appealing the IRS decision, which it felt was the result of an error. Barring a reconsideration of the decision, Hawaii Credit Counseling said it may seek another type of nonprofit designation that would help it maintain operations here.

"It's kind of a shock to us," said William Haxton, president of the firm at 1803 North King St. He said Hawaii Credit Counseling had exchanged letters with the IRS several times over the past year. "I'm pretty sure you're going to get a retraction within a week."

The IRS said it doesn't comment on the nonprofit revocations.

But the tax agency's Web site shows Hawaii Credit Counseling's status as something known as a 501(c)(3) nonprofit was revoked on Feb. 12.

Under Hawai'i law, so-called "debt-adjustment" firms need to maintain a nonprofit status. Stephen Levins, executive director of the state Office of Consumer Protection, said he could not comment on the Hawaii Credit Counseling case specifically.

But "the fact that a company has lost their 501(c)(3) status by the Internal Revenue Service is certainly a concern for us," Levins said.

The firm's problems may be linked to a crackdown by the IRS on credit-counseling services. Last year the IRS signaled its intent to go after credit-counseling services it felt were failing to meet public-benefit qualifications to qualify for tax exemptions.

In May, IRS Commissioner Mark Everson said some of the counseling agencies provided little or no counseling or education and appeared to be primarily motivated by profit. "They've poisoned an entire sector of the charitable community," Everson said in announcing the program.

Haxton said some of his discussions with the IRS had focused on Hawaii Credit Counseling's educational mission and that he explained the firm counsels about 1,000 people a year. During the counseling, people go over their expenses and income and are asked how they got into financial trouble, he said.

In addition to looking into an appeal of the IRS ruling, Haxton said he is considering switching to another nonprofit designation under a different section of the tax code known as 501(c)(4).

The IRS problem isn't the first time Hawaii Credit Counseling has been in the news.

Haxton's son Michael, who founded the service in 1989, was sentenced to prison in 2003 for helping several men from Mexico launder proceeds from a heroin ring.

Federal prosecutors said Michael Haxton and his wife, Yvonne, would ask clients of Hawaii Credit Counseling Service for large-denomination bills when making payments. In turn, they would exchange the bills for smaller ones held by the drug ring.

The elder Haxton said his son had been rehabilitated after serving time in prison and that Michael was no longer an officer of Hawaii Credit Counseling. William Haxton said his son still works at the firm as a counselor, but that Michael's wife has not rejoined the company.

News of the IRS revocation also prompted the Consumer Credit Counseling Service of Hawaii, a service which is unrelated to Hawaii Credit Counseling, to issue a statement that it was unaffected by recent IRS rulings. It said it remains a nonprofit in good standing with the IRS.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.