BOSTON — A wide-ranging college admissions cheating scheme allowed wealthy parents not only to get their kids into sought-after schools but to write off the bribes on their taxes, federal authorities say.
Now some parents who are already facing possible prison time could be hit with additional criminal charges and stiff financial penalties, experts say.
And a slew of others who paid into the foundation that an admissions consultant used to mask the bribes, but haven’t been charged in the scam, are also sure to face IRS scrutiny.
The IRS has “been known as the follow the money crowd since the days of Al Capone so they will be following those lists and that money very carefully,” said Mark Matthews, a former deputy commissioner of the agency who’s now an attorney at Caplin & Drysdale in Washington.
Consultant Rick Singer funneled millions of dollars from parents through his tax-exempt organization and then used it to pay coaches and other insiders to designate applicants as athletic recruits or cheat on entrance exams, prosecutors allege.
Among the 33 prominent parents charged in the case are Hollywood stars Lori Loughlin and Felicity Huffman, who haven’t publicly commented on the case. The actresses and others — including Loughlin’s fashion designer husband Mossimo Giannulli — are scheduled to make their initial appearances this week in Boston federal court.
William “Rick” Singer founder of the Edge College & Career Network, departs federal court in Boston on Tuesday, March 12, 2019, after he pleaded guilty to charges in a nationwide college admissions bribery scandal. (AP Photo/Steven Senne)
IRS Is Looking Into the Parents’ Payments
The parents’ bribes were disguised as “donations” to the Key Worldwide Foundation, which purported “to provide education that would normally be unattainable to underprivileged students, not only attainable but realistic.”
Singer’s foundation sent the parents letters thanking them for the donation that claimed “no goods or services were exchanged,” allowing many of them to deduct the payments from their taxes as charitable contributions, prosecutors say.
After Singer began cooperating with investigators in September in the hopes of getting a lenient sentence, the FBI had him call the parents and pretend that his foundation was being audited by the IRS in an attempt to get them to admit their involvement in the scheme.
“So what I want to make sure is that you and I are both on the same page because what I’m going to tell them is that you made a 50K donation to my foundation for underserved kids and not that (the proctor) took the test for (your daughter)…” Singer told one parent, according to court documents.
“Dude, dude, what do you think, I’m a moron?” Agustin Huneeus, Jr. a Napa Valley, California, vintner, replied. An email was sent to Huneeus’ attorney on Monday.
The IRS, which has been investigating the criminal case jointly with the FBI, has said it is looking into the parents’ payments.
Parents Are Sure to Pay Harsh Penalties
Though prosecutors outlined the tax deduction scheme when the parents were arrested last month, none of them have been charged with tax evasion. Some experts suspect officials are holding the additional charge, among others, over the parents in an attempt to convince them to quickly plead guilty.
To convict them of tax crimes, prosecutors would have to prove that they not only purposely underpaid, but knew they were breaking the law when they did. If may be a difficult sell, but parents could try to argue that their statements on the phone calls don’t prove that they knew the deductions were illegal.
“Ignorance is no excuse for breaking the law, but in the tax area is it,” said Philip Hackney, who worked in the IRS’ office of the chief counsel and now teaches at the University of Pittsburgh School of Law.
But parents are sure to pay harsh penalties to the IRS, experts say.
In addition to paying back the taxes they owe, parents could get hit at a minimum with a 20% penalty for claiming a deduction when they shouldn’t have, said Lloyd Hitoshi Mayer, a professor at the University of Notre Dame Law School. Some could be on the hook for a civil tax fraud penalty that’s equal to 75% of the amount they underpaid, Mayer said.
Some Parents Are Accused of Paying Singer’s Charity
“Certainly the exchanges that (Singer) had with those parents are enough to support a fraud penalty,” he said.
Some parents are accused of paying Singer’s charity through their own family foundations, which could face their own set of civil penalties and lose their tax-exempt status, experts say.
Related Story: California Lawmakers Debate How to Prevent Another College Admissions Scandal
Key Worldwide Foundation should have reported to the IRS all contributions over a certain threshold, said Meghan Biss, who spent a decade with the IRS before joining Caplin & Drysdale.
That means that in addition to clawing back taxes from the parents who’ve been charged, the IRS will likely be going through those names to determine whether the other donations were legitimate, she said.
“Are there more people who have potential criminal charges or just civil fines out there?” she asked.
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