Nothing makes taxes interesting like celebrities

The College Admissions Scandal, featuring none other than Aunt Becky (“Lori Loughlin”), splashed over every headline in March. Now, more than 2 months later, it appears the story is finally beginning to die to down.
Indictments for racketing have been lodged, some defendants have plead guilty, others have remained resolute in their refusal to acknowledge the gravity of their actions. The aftermath of the charges has exposed unimpeded bribery, entrance exam cheating, and the recruitment of students as athletes that not only lack athletic ability but have also never competed in the sport for which they’re recruited. This was facilitated through the funneling of bribe money to the charitable accounts of a supposed 501(c)(3), Key Worldwide Foundation (“KFW”).

What remains to be fully explored are the tax implications that loom over the horizon. The IRS has yet to bring charges against any of the named defendants, but members of the United States Senate Committee on Finance have already called the IRS to action. Here are some issues that may be coming ahead…

Improper Charitable Deductions

Parents made payments to KFW accounts that were designated as charitable accounts. If these parents attempted to claim a charitable deduction for these payments, they would likely be improper because the payments were for services rendered (the student’s admission into the university).

Improper Business Deductions

In at least one instance, one parent paid for the fraudulent admissions services from a company account, as a “consulting fee”. Claiming this fee as a business expense would be improper because it would likely be characterized as a personal expense (as to the parent and student) under Internal Revenue Code section 262 rather than an ordinary and necessary business expense under Internal Revenue Code section 162.

What Comes Next

The IRS imposes significant penalties for improper deductions and even more severe penalties for fraud. While withholding tax charges may be part of a strategic effort to illicit guilty pleas from the parties involved; what is for certain is that the College Admissions Scandal is far from over.

Lauren Lopez-Richard and Lance Stodghill Lance Stodghill