Mayer: Could a More Robust IRS Have Nipped the Varsity Blues Scandal in the Bud?

In today’s Chronicle of Philanthropy, Lloyd Hitoshi Mayer (Notre Dame) authored an opinion piece questioning whether a better funded IRS could have discovered and ended sooner the college admissions scandal discussed in several prior blog entries this week (here, here and here).  Here are some highlights of the opinion:

• There were certainly enough yellow flags in IRS filings of the nonprofit at the center of the scam to signal something was wrong.  The Internal Revenue Service would have needed the capacity to review those filings carefully and to pursue those flags.
• In addition to more funding for the IRS oversight of nonprofits, Congress could consider possibly moving that oversight out of the IRS.
• One significant red flag:  In its tax-exempt application, the Key Worldwide Foundation articulated that it would be using materials developed by a for-profit company owned by one of the organization’s directors, which also employed the foundation’s chief financial officer and treasurer.
• In its annual Form 990 returns, the Foundation reported it had three directors and none of them met the IRS’s definition of “independence,” indicating they all had financial ties to the foundation or related entities.
• The Foundation also stated in its annual returns that none of the grant recipients were tax-exempt charities. While charities can make grants to businesses and governments in limited cases, the complete lack of charity recipients raises the issue of how KWF ensured that its grants would be used only for charitable purposes.
• The Foundation’s organizers and maybe some of the parents participating in the admissions scam knew that the IRS is mostly asleep at the switch with respect to audits.  
• There is only so much that technology and public disclosure of information can do to uncover such misdeeds without more funding of IRS oversight.
• It is, therefore, not surprising that an apparently unrelated FBI investigation led to the discovery of this scheme instead of an IRS investigation, given this lack of resources and resulting low audit coverage.

Nicholas Mirkay