By Michael D. Glass, EA

While much of the attention surrounding the celebrity college scandal (Operation Varsity Blues) has focused on the 50 people being charged for their involvement in a bribery and cheating scheme to get unqualified children into top colleges, expect the Internal Revenue Service (IRS) to play in a role in hundreds of cases that have not received media attention.

While the scandal has exposed deep issues in the academic system, expect the IRS to examine the Colleges nonprofit status and hundreds of wealthy parents’ “donations” to nonprofits, which they later claimed as tax deductions. The concealment of millions of dollars in bribes is likely going to trigger audits of countless tax-exempt organizations and taxpayers who claimed deductions to the charity at the heart of the admissions scheme.

According to documents released in the case, Lori Loughlin allegedly agreed to lie to the IRS that the $500,000 she and her husband paid to bribe their two daughters’ way into college was just “donations.”  How big and widespread this scandal by college placement service businesses connected to tax-exempt organizations within the population of over 3,000 Colleges & Universities in America remains unknown.

While the IRS rate of auditing nonprofits is low, colleges and donors should expect additional random audits to encourage greater tax compliance and deter fraud.  For some organizations and donors, the IRS criminal investigation division is likely to get involved.

Having overseen the division responsible for compliance, I expect the IRS will use a data-driven approach to guide tax-exempt audits, using a highly effective system that flags potential problem areas on exempt organizations’ tax returns.  This approach means that audits are narrower in scope and more likely to result in penalties for those audited.

We know the IRS criminal investigation is watching and were involved with the FBI in this case. From my prior experience, I expect that the Forensic Investigation Unit within the Tax Exempt and Government Entities Division was likely included in a criminal investigation briefing.  This should be a concern to universities across the country. While they may be victims, it will likely lead to further investigations into their activities. These issues should not be treated lightly.  The IRS could decide that a college was the beneficiary of an “insider inurement” or “private benefit” which could lead to serious tax implications including IRC 4958 excise taxes or the loss of tax-exempt status.

IRS regulations make it clear that a disqualified person who benefits from an excess benefit transaction is liable for the excise tax.  And an organization manager at a University may also be liable for an excise tax on the excess benefit transaction.

There are many questions not answered from this troubling national scandal:

• How prevalent are other criminal operations or scams within the college preparation and placement business industry in America?
• How many individuals over the years are involved? Generally, from my experience, the IRS can audit tax returns going back three years and can look back six years for a substantial omission of income, and an unlimited number of years if fraud is involved.
• How many non-profit organizations must now file amended tax returns?
• Were all the universities involved and associated with the same tax-exempt organization?

As the former experienced subject matter expert for Colleges and Universities, I would recommend that individual taxpayers and university non-profits should consult with a tax-exempt expert who has a deep understanding of the IRS.  The charitable organizations and individuals who voluntarily correct their return will have better outcomes than those who wait for the IRS to come knocking.