Was the IRS Asleep at the Wheel in College Admission Scandal? Chronicle of Philanthropy Asks Nonprofit Law Prof Blog Contributor, Roger Colinvaux

In response to Nicholas Mirkay’s post this morning Jessica remarked, “[t]he Form 990 for 2016 states that $825,000 was paid to an independent contractor, [Gordon] Ernst, for consulting services.  This should have been a huge red flag to the IRS, and I wonder why it wasn’t investigated.”  Gordon Ernst is the first named defendant in the indictment and is described as the head coach of men’s and women’s tennis at Georgetown University.  The Chronicle of Philanthropy, noting that Senator Chuck Grassley is monitoring the investigation and reading the charging documents, asks the same question in today’s edition. One of our contributing editors, Roger Colinvaux, provided insight to the Chronicle:

The Key Worldwide Foundation college-admissions bribery scandal threatens public faith in nonprofits and underscores how ill equipped the IRS is to uncover fraud and other illegal activities at the more than 1 million tax-exempt organizations in the United States, nonprofit advocates and watchdogs said.

Paul Streckfus, a former IRS attorney and editor of the EO Tax Journal, which covers tax policy for the nonprofit world, said Congress bears a lot of responsibility for letting the IRS’s nonprofit oversight capacity erode. He noted that the Key Worldwide scandal was foreshadowed by the Obama-era fights over the tax-exempt status of Tea Party-related organizations. Scrutiny from House Republicans and years of budget cuts have had the intended effect of forcing the IRS to curtail its regulation of nonprofits.  “Congress doesn’t seem to care that there’s a great deal of abuse in the tax-exempt area,” said Streckfus in an interview. “The House Republicans succeeded in basically beating down the IRS.”  Rick Cohen, chief communications officer and chief operating officer at the National Council of Nonprofits, agreed, saying it’s gotten to the point where only “screaming red flags” are sufficient to draw the attention of the IRS. “The reality is that for many years, we’ve seen the IRS be underfunded, particularly the section that regulates the nonprofit sector,” he said.

According to tax documents on file with the California Attorney General’s office, Key Worldwide Foundation was set up in 2013. That year, it reported total assets of $54,797 and revenue of $451,600. On paper, at least, it did well for itself. By 2016, the most recent available tax documents filed by the nonprofit show it reported total assets of $2.1 million and revenue of $3.7 million.

Roger Colinvaux, a nonprofit tax law professor at Catholic University of America, said in an email that Key Worldwide appeared to be operating as though it had no fear of getting audited or getting caught. “The case also reinforces the continued need for disclosure of donors to the IRS, which some in Congress have been arguing to get rid of,” Colinvaux said. “If the IRS had been looking at the donors, it might have noticed large donations and perhaps connected the dots to a pay-to-play scheme.”

Darryll K. Jones and Easter Floyd-Clarke