How college-admissions scheme exploited tax code to hide bribes
The parents swept up in the nationwide college-admissions scam are accused of not only helping their children cheat their way into elite universities, but also of getting a tax deduction for their illicit payments.
The Justice Department last week alleged that dozens of wealthy parents — including two well-known television actresses, a parenting-book author, a top attorney, and several chief executives — participated in a $25 million scheme to help their children get accepted to such top colleges as Yale, Georgetown, Stanford, and the University of Southern California.
Officials charged ringleader William “Rick” Singer of Newport Beach, Calif., with racketeering, money laundering, and obstruction of justice in what the FBI dubbed “Operation Varsity Blues.” Singer has pleaded guilty and is cooperating with investigators. He owned the Edge College & Career Network, a for-profit college counseling and preparation business.
Singer was also the CEO of the Key Worldwide Foundation (KWF), which claimed to the IRS that it was a nonprofit charitable organization.
In 2013, the IRS approved KWF as a tax-exempt organization under Section 501(c)(3), according to an affidavit filed by the FBI. This meant it didn’t have to pay federal income tax, and individuals who contributed to the charity could receive a tax deduction for their donations.
In its most recent filing with the IRS, the KWF said the foundation “endeavors to provide education that would normally be unattainable to underprivileged students.”
But wiretapped phone transcripts released by the FBI purport to show the true purpose of the charity — to be the conduit for five- and six-figure bribes paid by parents. These parents allegedly include actresses Felicity Huffman, who starred on the TV show “Desperate Housewives,” and Lori Loughlin, who appeared as Aunt Becky on “Full House.”
Loughlin and her husband allegedly hid their payments in two $200,000 wire transfers to the charity to get their daughters into USC. Another couple allegedly made a contribution of $400,000 to KWF to secure admission for their daughter to Georgetown. One family is accused of “donating” $900,000. Huffman paid $15,000 to the fake foundation on behalf of her eldest daughter, according to the FBI.
Parents got written letters from KWF that said, “Thank you for your generous donation.” To make the bribes appear legitimate they received receipts from KWF falsely indicating that “no goods or services were exchanged” for their supposed donations, according to authorities.
“Singer allegedly agreed with certain clients to disguise bribe payments as charitable contributions to the KWF, thereby enabling clients to deduct the bribes from their federal income taxes,” the Justice Department said.
The payments to the charity were used for such purposes as to pay people to take either the SAT or ACT for students or to pay university athletic coaches to falsely designate the children as student athletes in sports they didn’t actually play, according to the affidavit.
The breadth of the deception is mind-boggling. Yet it does provide an opportunity to clarify the rules for those of you who want to make legitimate charitable donations. Here are some do’s and don’ts to keep you in the clear with the IRS and the FBI.
■ Charitable donations have to be made to qualified and legitimate organizations in order to claim a deduction. The parents in this alleged scheme seem to have doubled down on dumb by falsely reporting bribe payments as charitable donations.
■ You need proof of your donation. Regardless of the amount of money you give, you have to have a record — such as a canceled check or a letter from the charity — that proves you made the donation.
■ No, you can’t deduct money you give to your grandchild. You cannot deduct contributions made to specific individuals.
■ For any contribution of $250 or more, you have to get a written description from the qualified organization that describes the property or quantifies the amount donated. The organization also has to indicate whether any goods or services were given in exchange for the gift. If so, you have to provide a description and estimate of the value of those goods or services, the IRS says.
■ Stiff IRS penalties await cheaters. The rich folks in the admissions scheme probably can afford the penalties for tax fraud. But can you? You get hit with a 75 percent penalty for the portion of any underpayment attributable to fraud.
It’s particularly heinous that KWF exploited the tax code by claiming the charity wanted to “open new avenues of educational access to students that would normally have no access to these programs,” according to the organization’s IRS filing.
If found guilty, prosperous parents bought their kids’ way into top colleges by using a phony nonprofit that claimed to be helping disadvantaged children obtain a college education. That’s rich with irony.