Dozens of parents may now face steep tax penalties after they allegedly paid bribes disguised as donations in order to get their children into elite colleges like Stanford and Yale.
Prosecutors say that some wealthy parents in the scheme—which prosecutors unveiled March 12—were able to claim tax deductions for purported donations that were funneled through the Key Worldwide Foundation, a Newport Beach, Calif.-based nonprofit. The organization, which the Internal Revenue Service declared tax-exempt under code Section 501(c)(3) in or about 2013, fronted as a vehicle for the bribes to be paid out to university administrators, athletic coaches, and test administrators, according to court documents.
The IRS didn’t return requests for comment.
William Singer, a college admissions consultant at the center of the scheme, pleaded guilty to racketeering and other charges on March 12.
IRS Could Audit
None of the parents have been charged with tax crimes so far. But as long as the statute of limitations hasn’t expired, the IRS could decide to audit the parents and send them deficiency notices, Sam Brunson, a professor of law at Loyola University Chicago, said in an email March 13.
If the IRS finds the parents claimed deductions on fake charitable contributions to an illegitimate charity, the agency could impose large penalties under tax code Section 6601 and Section 6662, which cover interest payments and penalties for underpayment of taxes. References to an IRS audit of the charity was a key component of the sweeping federal investigation, which has sparked massive fallout over questions of privilege and access in higher education.
There was no actual audit conducted by the IRS, Kristina Mastropasqua, a Department of Justice spokesperson, said in an email. A cooperating witness was instructed at the direction of law enforcement agents to indicate that one had taken place, she added.
Under Section 6662, the IRS can add to the tax an amount equal to 20 percent of the portion of the underpayment. Some parents paid as much as $75,000 in order for someone to either take the ACT or SAT on behalf of their children or to correct their children’s answers, according to court documents.
Those payments were typically structured as tax-deductible donations to the foundation, according to court documents. That means that if the IRS determines an individual underpaid taxes, it could force parents to pay back that sum, with an additional amount on top, as well as possible interest.
The IRS could also impose penalties for civil tax fraud, if it finds proof, said Lloyd Hitoshi Mayer, a professor at the University of Notre Dame law school.
The court documents may also lay the ground work for the IRS to pursue criminal tax charges, he said, since some of the record conversations seem to show parents know their contributions didn’t qualify for a charitable deduction.
Tax fraud was a pillar of the government’s case. One family cited in court documents filed tax returns that falsely reported charitable gifts in 2016 of more than $1 million. That sum included a contribution to Key Worldwide Foundation, according to court documents.
“Yes I agree that you can make the 100k payment over the next 6 months starting April 1st,” Singer told a separate client, according to the affidavit. “You can send to my foundation as a donation/write off or if you have your own company we can invoice you as a business consulting fee from our profit business and you write off as an expense.”
Parents could also conceivably face additional criminal liabilities from the IRS, but there would be a higher burden of proof for prosecutors, said Phil Hackney, a professor at the University of Pittsburgh School of Law. Hackney spent five years at the IRS Office of the Chief Counsel.
The concerning signal that the scheme shows is that people, especially those who are wealthy, “think they can do whatever they want,” Hackney said.
“That willingness by people who are well known and respected in their communities—a chair of major law firm, prominent actresses—to move into this space and willingly do something that seems so clearly transgressive to who we are worries me,” Hackney said.
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(Adds DOJ spokesperson's comments in seventh paragraph.)