The Justice Department last week alleged that dozens of wealthy parents 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 chief executive 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.”
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.
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. 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 brand-name colleges by using a phony nonprofit that claimed to be helping disadvantaged children obtain a college education. That’s rich with irony.
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