The College Admissions Scandal is Also a Tax Scandal
Shame is being poured onto the wealthy parents who paid to get their kids into prestigious colleges. The IRS has something else in mind.
April has always been a big month for the IRS but this year was especially dramatic. With corporate taxes due in mid-March and personal income taxes due April 15, it’s typically when the peak period begins for beleaguered IRS workers charged with keeping our nation’s tax system plugging along. Stress doesn’t come close to describing what they go through this time of year.
But add to that the government shutdown that took place at the end of last year and into earlier this year. It furloughed 30,000 IRS workers exactly during a crucial time: when they were supposed to be training for the new tax codes that went into effect this year. It was off and running once they returned to work (without pay, no less!), and the pace hasn’t stopped all year long.
So when the college admissions scandal broke, we knew some IRS workers were really in for it: those who worked in the Criminal Investigation Division. Complications and stress go hand-in-hand with an IRS job but this year would bring a whole new level of both. What we’re talking about, of course, is the 2019 College Admissions Bribery Scandal, as it’s been officially named on its brand-new Wikipedia page(1).
While most of the nation was focused on the ethical sins committed by the likes of Felicity Huffman and Full House actress Lori Loughlin, tax professionals everywhere have been cringing for different reasons. They know that loss of respect and lawsuits are only the beginning for the wealthy parent admissions cheaters, including Huffman, who is considered Hollywood royalty and Loughlin, known for her wholesome portrayal of Becky Katsopolis, wife of John Stamos’ Jesse. They know the IRS is coming for them.
Tax Nightmares Loom for Parent Admissions Cheaters
This scandal is rife with injustices. Media coverage has focused on the more sensational despicable acts like paying test administrators to cheat, paying third parties to take classes and tests, and paying people who hold college and university sports positions. Let’s add to that list with a few issues the IRS is particularly concerned with.
The IRS has taken the approach of “following the money” and discovered that much of the bribe money was funneled through a certain public charity called the Key Worldwide Foundation (officially known as “The Edge College & Career Network, LLC” but colloquially known as “The Key”). It was this organization which actually paid third parties to take college entrance exams on behalf of defendants’ children. They also paid test administrators to alter scores and paid college coaches and administrators to say the defendants’ kids were athletic recruits. Money to fund these activities was obtained from parents through their “charitable donations” to the “charitable organization”.
The Key is registered as tax-exempt under section 501(c)(3). As you know, donating to a federally-registered charitable organization brings major tax benefits. The tax deduction was merely a side benefit for the parents whose main objective (allegedly) was to secure college entrance for their teenage children at top schools. Nevertheless, the IRS does not take kindly to those who abuse that benefit. Penalties, fines, and back pay will be in order.
Here are the types of offenses the IRS is looking into for this case:
- Fraudulent tax-deductible contributions. It’s very likely that the parents who made donations to The Key knew fully that the money they donated was not going toward any charitable cause but their own.
- Double dipping. In some cases, parents donated to The Key using funds from their own charitable organizations. As such, those funds had already been used as a tax deduction.
- Underpaying their taxes. When you donate to charity, you’re essentially reducing your taxable income. As a result, you end up paying less in taxes. If your donation turns out to be false, as they allegedly were for parents involved with Key Worldwide Foundation, you have effectively underpaid your income taxes.
Defendants Face Serious Financial Pain From the IRS
Conventional US courtroom wisdom has it that ignorance is never an excuse for breaking the law. However, in tax law, there is a window for the possibility that, in at least some cases, this could be the actual truth. The tax code is, after all, famously difficult to understand. Conviction on a tax crime case requires prosecutors to prove the defendants knew they were breaking the law. In this case, they’ll have to prove these parents knew their deductions were not legal.
What do the fines and penalties look like for Huffman, Loughlin, et al.?
At the time of publishing, all the defendants had agreed to pay their back taxes, according to the Department of Justice(2). In addition, they face more financial pain. Paying back the money they saved by making the fraudulent donations is just the beginning of a long list of financial reparations they’ll need to make in order to satisfy the IRS.
They also face:
- Paying interest on the back taxes owed
- Possibly paying penalties on the back taxes owed
Penalties typically run around 20 percent of the amount owed. But if there’s fraud involved, that’s just the baseline amount. These parents could face up to 75 percent penalties! That means, in a case where a parent donated $100,000 to The Key and it’s found that they knew full well what they were doing, they could actually end up facing this:
- $100,000 (the original amount of back taxes they owe)
- $20,000 (minimum penalty amount)
- $55,000 (additional possible penalty)
That’s a total of $175,000 plus interest.
The Enormous Tax Implications of the College Admissions Scandal
Clamoring for social capital, wealthy parents ended up committing major tax fraud (allegedly) and could end up in jail as a result. Unlawful tax deductions can mean these parents are facing not just civil action but also criminal action as well. The criminal aspect stems from “willful tax evasion” or “filing a false tax return”. Parents may end up not just paying in terms of losing face and losing money, but losing their freedom as well. as jail time is not out of the question in cases like these.
Clamoring for social capital, wealthy parents ended up committing major tax fraud
The IRS Criminal Investigation Division is still investigating the cases of the 33 parents involved in the scandal. In the coming weeks, we may see some come forward in order to mitigate the consequences of their conduct. The IRS has a history of refraining from prosecuting folks who do so, and at this point, it may be the best and only hope for this sad lot of parents who have disgraced themselves, their children, and the schools they chose to attend.