Scandalous College Admissions Scheme—Is The Current Tax Code To Thank?

Rode Carpio – From the outside, William Rick Singer, founder of The Edge College & Career Network (“The Key”), a self-identified consulting company for college admissions, appeared to have found his niche—and a lucrative one. The Key presented itself as “the nation’s largest private life coaching and college counseling company.” As part of the gig, parents would hire Singer to help their children secure highly coveted seats in the nation’s most elite schools. Singer’s motto? Obtain these admission tickets by any means necessary.  But on March 12, 2019, his apparent thriving business would come to an end.

Admitting to charges of racketeering, conspiracy, money laundering, tax conspiracy and obstruction of justice, Singer plead guilty to the largest college admission scheme of its kind. Singer is claimed to have received millions of dollars through a fictitious charity fund that he controlled and operated. The fund helped Singer launder the money that he would use to bribe various key players of college admissions at top universities. Among the successfully bribed were exam proctors, athletic staff, and coaches. Names like Yale, Stanford and Georgetown are among the schools tangled in the scandal.

But how did Singer manage to make this all work so seamlessly, for so long? Thank the U.S. Tax Code.

Singer’s money laundering machine was classified as a nonprofit organization claiming 501(c)(3) status. This classification provided a win-win situation for both Singer and his “donors.” Under 26 U.S.C. § 170, this status rewarded the mischievousness by exempting Singer from paying federal income taxes on the payments he received, while the parents claimed tax deductions for their “charitable donation.”

In the wake of the scandal, some point fingers at the Internal Revenue Service and its inability to properly police wrongdoing. They point, specifically, to the lack of resources that would enable real time surveillance. They argue that what took about six years to uncover could have been addressed years earlier by only a cursory review of Singer’s organization. Some of the obvious “yellow” flags included the fact that Singer’s organization did not list any employees in the four years he filed it with the IRS; each time, the nonprofit only identified three officers, two of whom reported zero hours of work; Singer, who disclosed working eight hours a week for the organization, failed to report any compensation; and in 2016, the organization reported $2,024,828 in “total functional expenses,” yet it was not clear how exactly all this money was being used.

Another aspect emphasizing the weak oversight of nonprofit organization is the verification process the IRS uses to authenticate donations. The tax code only requires a simple acknowledgement from the organization that the donor did not receive any goods or services for his donations. In line with the protocol, Singer sent letters to his donors thanking them for their donations and stating that  “no goods or services were exchanged” for the “donation.” And just like that the “donations,” the tax write-offs, the organization, and ultimately the whole scheme flew under the radar for over five years.

What now? Aside from calling for a reinforcement of the current IRS oversight system, members of the senate are currently planning to propose bills that would undercut the incentive to design similar schemes and disallow for their success altogether. For example, Senator Ron Wyden is looking to propose a bill that would not exempt school donations if the donation were made to schools their children attend or apply to attend. On the school side, Senator Chris Coons and Johnny Isakson are working to reintroduce a 2017 legislation that would fine colleges and universities with the smallest proportion of low-income students. In the meantime, it should be interesting to see how the IRS will decide to response.

 

 

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