With the news of the college admissions scandal breaking just last month, the once far-fetched notion of parents doing anything to get their kids into an elite university has become a reality. But what does this multimillion-dollar scheme, involving actresses Lori Loughlin and Felicity Huffman, have to do with taxes? Well, the scheme set up by William Rick Singer involved the creation of a §501(c)(3) organization—charitable organization—to disguise years of accumulated bribe payments and launder money.

The scheme allowed wealthy parents to secure their children’s admission to prominent schools, including Stanford, Yale, Georgetown, USC, and Duke, in a couple of ways. The first way consisted of bribing the ACT/SAT proctors to essentially “look the other way”—which is what Desperate Housewife Felicity Huffman did; paying mental health professionals to classify the wealthy children as learning disabled to have extended time to complete the exam(s) and take the exam(s) in a private room; paying a third party to take the exam in place of the applicants or  correct the applicants’ exam responses after-the-fact. This method cost parents anywhere from $15,000 to $75,000 per test.  The second way was to classify the child as a recruited athlete—since college admission requirements for athletes are less stringent. Coaches from universities across the country were given a bribe to list the wealthy children as recruited athletes. Full House’s Lori Loughlin was able to get her two daughters into USC as rowing recruits in this manner.

But how did these actions amount to a tax fraud conspiracy? Well, the charges listed in Singer’s grand jury indictment describe the way the tax fraud conspiracy was carried out. Singer, a college counselor:  (1) registered the Key Worldwide Foundation (KWF) under Section 501(c)(3) of the Internal Revenue Code (IRC); (2) directed purported charitable donations to KWF, even though part of those funds were intended to be used to bribe test administrators, athletic coaches and university administrators; (3) sent acknowledgment letters to the wealthy parents falsely attesting that no goods or services were exchanged for the purported donations to KWF; and, then, (4) enabled the false acknowledgment letters to be used as a basis to support fraudulent deductions  from federal income taxes.

As mentioned, Singer used the KWF to run the scam for seven years (2011 to 2018) and amassed more than $25 million. The KWP had to qualify as a §501(c)(3) non-profit organization to be exempt from federal income tax. To be classified as such, an organization must be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes; for testing for public safety; to foster national or international amateur sports competition; and/or for the prevention of cruelty to children and animals. Singer had claimed KWF was established to help poorer students and, as President of KWF, even filed the necessary Form 990, which is the required information return for tax-exempt organizations. From 2013 to 2016, the organization allegedly distributed more than $7 million in grants, a.k.a. disguised bribes.

Then, KWF sent acknowledgment letters to the wealthy parents stating that no goods or services were exchanged for the “donations.” Subsequently, the parents involved in the scam used these letters to claim a charitable donation deduction. To encourage public support of charitable organizations, federal law allows individuals to write off or deduct contributions to 501(c)(3) entities from their taxable income. Such deductions are typically reported to the IRS on a donor’s income tax returns, thus reducing the donor’s income tax obligation. In general, Section 170 of the IRC provides that no deduction for a charitable contribution of $250 or more shall be allowed unless it is substantiated by a written acknowledgment from the recipient organization. Such acknowledgment must indicate whether any goods or services were provided in consideration for the contribution, and, if so, provide a description and good faith estimate of the value of the goods or services provided. Any deduction must be reduced by the value of goods or services provided in exchange. As we now know, the acknowledgment letters to the wealthy parents falsely stated no goods or services were exchanged for the “donations.”

In summary, the tax conspiracy involved the creation and use of a charitable organization, not only to launder money, but to allow for the improper payment of bribes, and to thereby defraud the United States by underpaying federal income taxes. Essentially, Singer created a once-perfect cover to defraud the government; now, he and the parents face severe criminal charges. For the students involved, however, we must wait and see.