Taxpayers may have paid $10 million to help wealthy families bribe their way into elite schools

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One of the more stunning aspects of the college admissions scandal unveiled this week is that the alleged bribes to secure wealthy children spots at elite schools were tax deductible. That means American taxpayers may have helped foot the bill for the alleged scam.

“That’s why we should care about this, other than the Schadenfreude of rich people getting their due,” said Sam Brunson, a tax law professor at Loyola University Chicago.

In a worst-case case scenario, if all $25 million that the arrested parents allegedly paid out was funneled through a public charity and claimed as tax deductions, as prosecutors outlined in a criminal complaint, then taxpayers chipped in roughly $7 to $10 million, said Phil Hackney, a tax law professor at University of Pittsburgh.

“Assuming these are all high-income individuals, they’re all paying at the highest tax rate which presumably was about 40% roughly,” Hackney told MarketWatch. “Assuming they were able to deduct the entirety of it, that would be 40% of the $25 million. That’s somewhere in the neighborhood of $7 to $10 million approximately that taxpayers are footing the bill for, and that’s troubling.”

Alleged bribes were funneled through a charity

Federal prosecutors say that the parents who were arrested funneled the money to pay off coaches, exam proctors and test takers who stood in for their children through a public charity approved by the Internal Revenue Service as tax-exempt.

The wealthy parents include actresses Felicity Huffman and Lori Loughlin and financial titans Bill McGlashan of TPG Growth, a private equity and venture capital firm, and former PIMCO CEO Doug Hodge. They allegedly paid college counselor William “Rick” Singer to secure their children spots at elite schools. They made the payments in the form of donations to The Key Worldwide Foundation, a nonprofit that Singer started in 2014 in Newport Beach, Calif., according to a criminal complaint.

In phone calls recorded by investigators, parents charged in the scheme could be heard asking for receipts and other paperwork to ensure that they would be able to list the “donations” they made to Key Worldwide Foundation as tax deductions, according to the criminal complaint.

“We’ll send it so that you get your [IRS tax] write-off,” one cooperating witness said on tape. “Oh, even better!” responded the parent, who had made a $50,000 “donation” to the foundation as payment for having Singer arrange for someone else to take the ACT college entrance exam on her son’s behalf, prosecutors say.

If the IRS decides to disallow those allegedly fraudulent deductions, parents would have to pay that money back to the government, along with penalties, Hackney said. The IRS did not immediately respond to a request for comment. Singer’s attorney has said he is cooperating with investigators and is “remorseful,” the Associated Press reported.

Hidden in plain sight

The charity behind the alleged scam operated in public view. The Key Worldwide Foundation is registered with the California Secretary of State (though the registration status is currently delinquent), it filed Form 990s (the paperwork that nonprofits are required to submit to the IRS) and it has a website with a noble-sounding mission statement about helping students “surrounded by the gang violence of the inner city.”

It’s even listed on the charity review website Charity Navigator. Charity Navigator didn’t give the nonprofit a rating, but that’s not because of any suspicious activity, said Charity Navigator spokeswoman Ashley Post. “We want to be clear that a charity not being rated is not a positive or negative judgment on their activities,” Post said, adding that Charity Navigator has tips for donors on how to evaluate charities it doesn’t currently rate.

Red flags in the charity’s paperwork

Charity Navigator only rates nonprofits after they’ve filed seven years of paperwork with the IRS, and The Key Worldwide Foundation had only submitted four years of tax documents, Post said.

Had Charity Navigator’s reviewers examined Key Worldwide Foundation, a few red flags would have stood out immediately, she said. For one, the charity listed $3.7 million in revenue in 2016 (the last year it filed a Form 990) but said it spent nothing on fundraising costs. That’s unusual, Post said. The nonprofit also claimed to give grants to other nonprofits, but despite the nearly $4 million in took in 2016, it made only one $10,000 grant to another group. That would be “concerning” to Charity Navigator, Post said.

Post cautioned against interpreting the Key Worldwide Foundation’s circumstances as a sign that nonprofits in general are prone to fraud. “This is a really tough situation and it’s one that people will be quick to spin into a cautionary tale, but largely charities exist to do great work,” she said.

‘They saw philanthropy as a weak space’

The wealthy parents charged in the scheme seemed to assume they wouldn’t get caught as long as their payments were disguised as contributions to a charity, and that worries Hackney, the tax law professor. It seems to indicate a perception that charities aren’t closely scrutinized, and that the wealthy can use them to do their bidding, he said.

“It tells us there’s a problematic culture developing at high-income levels in charitable giving,” Hackney said. “Something’s out of whack with our system of inequality and our philanthropic systems. Even though it wasn’t an actual charity, they saw philanthropy as a weak space, a place they could arbitrage and take advantage of.”

That’s partly based in reality, said Hackney, who worked in the office of the chief counsel of the IRS before becoming a professor. The IRS is under-funded and short-staffed. The audit rate is in general “really low” and even lower for charities, he noted.

And philanthropy is indeed increasingly the domain of the very wealthy. Charitable giving reached an all-time high in 2017, but that was largely due to big donations from America’s richest families. In 2018, donations of $1,000 or more increased by 2.6%, while donations in the $250 to $999 range dropped by 4%, and donations of under $250 dropped by 4.4%, according to a recent report from the Association of Fundraising Professionals.

“Giving is increasing because of larger gifts from richer donors,” said Elizabeth Boris of the Association of Fundraising Professionals. “Smaller and mid-level donors are slowly but surely disappearing – across the board, among all organizations.”

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