Column: How a lax IRS let the college admissions scandal continue for years

Former Rep. Darrell Issa (R-Vista): Was his overheated IRS "scandal" the reason the tax agency didn't catch the college admissions cheaters?

By Michael HiltzikBusiness Columnist

April 9, 2019 3:50 PM PT

The college admissions scandal was hiding in plain sight for years. It may have continued because the Internal Revenue Service, which had enough information in its hands to open an investigation, didn’t bother looking.

Tax experts say the most important information was accessible via the income tax forms filed by Key Worldwide Foundation, the purported charity through which the admissions scam’s mastermind, William “Rick” Singer, allegedly funneled bribes to university coaches and administrators.

For the record:

3:30 p.m. April 9, 2019An earlier version of this column misspelled Lloyd Mayer’s name.

The university officials were expected in return to give children of Singer’s clients athletic preferences, even though the students didn’t play some of those sports at all or not at competitive levels, according to federal prosecutors.

“The whole conspiracy could be right there on the tax forms, and Singer submitted it all,” says Adam Looney, a regulatory expert at the Brookings Institution.

IRS agents and leaders could see what happened. Heads rolled, and people were vilified publicly. It would be shocking if people at the IRS weren’t affected.

— Notre Dame tax expert Lloyd Meyer

Adds Lloyd Mayer, an expert in tax law at Notre Dame law school, “I’m fairly confident in saying that no human being at the IRS looked at the returns, given their low staffing level.”

Looney and Mayer say that even routine IRS scrutiny of Key’s Form 990s, the organization’s annual tax returns, would have turned up a number of unusual characteristics — “yellow flags,” in Mayer’s words.

Although Key was collecting donations averaging more than $2.2 million a year from 2014 through 2016, it had no paid employees. The foundation operated out of Singer’s home address. The forms listed one independent contractor, Gordon Ernst, who was paid $231,000 in 2014, $287,000 in 2015 and $825,000 in 2016.

“It’s very odd to be paying one individual that amount of money for an organization that appears to be not doing very much,” Mayer told me. It would not have taken the IRS much effort to discover that Ernst was the head tennis coach at Georgetown University.

Prosecutors say Ernst accepted $2.7 million in bribes from 2012 to 2018 to designate 12 students as “recruits” for the university’s tennis team, even though some didn’t play tennis competitively. He has been indicted on a racketeering conspiracy charge and pleaded not guilty in March.

The failure by the IRS to function as the first line of defense against financial conspiracies in this case reflects years of systematic gutting of the agency’s enforcement budget by Congress, especially by Republican administrations. As the investigative news organization ProPublica reported last year, audits have been plummeting, particularly those of wealthy taxpayers. That has opened the door to a surge in tax cheating.

Scrutiny of tax-exempt organizations such as Key Worldwide also has suffered, particularly in the aftermath of the GOP’s largely fabricated “scandal” involving accusations that the agency targeted conservative political groups for enforcement. No such partisan targeting was actually uncovered, but the lengthy probe orchestrated by former Rep. Darrell Issa (R-Vista) chilled the agency’s willingness to examine tax-exempt organizations.

“IRS agents and leaders could see what happened,” Mayer says. “Heads rolled, and people were vilified publicly. It would be shocking if people at the IRS weren’t affected by all that.”

Key Worldwide may not have looked like a politically sensitive group on the surface, Mayer says, “but you never know when you look under rocks that you may not find someone who’s politically connected or powerful, so that makes them a little more gun-shy.”

The IRS’ interest legitimately extended beyond Key Worldwide’s behavior. Many of the parents who allegedly participated in Singer’s scheme took tax deductions for money they paid Singer to help their children cheat on college admissions tests or fabricating athletic records, masking the payments as charitable donations.

According to papers filed Tuesday in Boston federal court, a federal grand jury indicted 16 of the parents on charges including conspiracy to commit money laundering, stemming from their efforts to disguise their bribes or other payments as contributions to a charity set up by Singer. The indicted parents include actress Lori Loughlin and her husband, fashion designer J. Mossimo Giannulli.

In an announcement Monday that 14 other defendants, including 13 parents, would plead guilty in connection with the case, federal prosecutors said that “all of the defendants who improperly took tax deductions for the bribe payments have agreed to cooperate with the IRS to pay back taxes.”

The government said that Bruce Isackson, a Silicon Valley real estate investor who with his wife paid $600,000 to help their two daughters cheat their way into college, will plead guilty to one count of conspiracy to defraud the IRS. As part of his plea agreement, he will pay the IRS nearly $140,000 in restitution.

The Form 990s are public documents, though only those from 2014, 2015 and 2016 appear to have been made publicly available. Key received its designation as a tax-exempt 501(c)3 organization, allowing donations to be tax-deductible for donors, in 2014. The forms show the organization’s officers, major expenses and grants, among other information.

But the IRS has more data in hand from tax-exempt charities, including their Schedule B listings of donors and their contributions. Organizations like Key must report all donors of more than $5,000, a threshold that would have covered many of the 33 parents accused of participating in Singer’s scheme. Schedule Bs typically are not public in unredacted form.

Key’s Form 990s offer a harvest of clues to the breadth of Singer’s scheme, including indications that he may have paid bribes to universities that have not yet been identified as having accepted unqualified applicants.

These include Chapman University in Orange, which is listed as having received donations of $175,000 from Key Worldwide in 2015 and $150,000 in 2016. The donations appear in the same section of Key’s 990s where it listed donations to universities where bribing allegedly occurred, including USC and Yale.

According to a statement issued last week by Chapman President Daniele Struppa, the university has hired an outside law firm to examine “our interactions with Mr. Singer.” Struppa says the university has been cooperating with federal prosecutors “for several months” and has not been accused of any wrongdoing. Struppa said it was still unclear whether any student acceptances were tied to the donations. “We do not have enough information to act on at this point,” he said, “nor do we know if action is warranted.”

In a statement issued March 13, the university said that “any irregularities in the gift from the Key Worldwide Foundation … were and are totally unknown to us.”

At New York University, which is listed as having received $51,200 in donations for athletics in 2015 and $83,181 in 2016, spokesman John H. Beckman said in an emailed statement that the institution is “only at the initial stages of looking into the matter,” but that NYU’s athletic department is “not empowered” to give preferential treatment to applicants, and its coaches don’t have direct contact with admissions officers about candidates for their teams.

Other purported donations that might have raised eyebrows at the IRS were $150,000 from 2014 through 2016 to DePaul University in Chicago, where Singer’s son was a student. DePaul said in a statement that it had no “reason to believe these donations are connected to recent indictments.”

Key also said it donated $19,200 to “Friends of Cambodia” in 2015 and $18,550 in 2016. “Friends of Cambodia” is a fund created by Elia Van Tuyl, 72, a retired real estate appraiser in Palo Alto, to raise school fees for destitute children in Cambodia. But it’s not a registered charity, Van Tuyl told me — just a conduit for small donations from friends and family, that are made out to Give2Asia, a San Francisco philanthropy that maintains an account for Van Tuyl’s charity. Van Tuyl says he can make recommendations to Give2Asia about how it should spend the money he brings in, “but they don’t have to follow them.”

Van Tuyl says he had never heard of Singer or Key before he started receiving media inquiries after the admissions scheme became public, and he has no record that any donations from them were ever made to his account at Give2Asia. “It’s a total mystery to me how we got involved,” he says. “We never got any money from him at all.” He would have noticed, he says. Since Friends of Cambodia typically raised about $20,000 a year, Singer’s purported donations “would have accounted for our entire budget.”

The IRS would have been empowered to pull on all these threads if it were so inclined, simply by asking for explanations of the donations and other elements of Key’s tax filings and following where the answers led.

“It wouldn’t need to be the intrusive auditing that we think of,” Looney says. “You could imagine the purpose of the investigation being whether this organization had a bona-fide charitable purpose. It seems like a reasonable question to ask, ‘Why did you pay this tennis coach $800,000?’ ”

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