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.
Cohen said it is too early to say how congressional legislators may act on the issue. Staff for Iowa Republican Senator Chuck Grassley, the chairman of the Senate Finance Committee, who has a history of attention to nonprofit issues, said their office was keeping tabs on the scandal as new details emerge.
“Chairman Grassley is still reviewing the Justice Department’s materials that it released yesterday about this case, and the information appears to be very concerning,” said Michael Zona, spokesman for Grassley’s office, in a statement issued to the Chronicle of Philanthropy. “If the information in that material is true, it would be a gross abuse of the tax-exempt sector, among many other gross abuses. Tax-exempt status is a very special status reserved for those groups that provide real benefits to their communities, and most often engage in religious, charitable, or educational work. It’s never appropriate to use a charity or a private foundation as a front for criminal activity, and payments to such criminal fronts are never proper tax deductions.”
Warning Signs
The Key Worldwide Foundation is the nonprofit at the center of the college-admissions scandal that has rocked elite universities across the country. According to a federal indictment unsealed Tuesday in Boston, officials at the nonprofit allegedly served as middlemen to funnel bribes from wealthy, well-connected parents to standardized test administrators and athletic coaches at universities to boost their children’s chances of being accepted into the school of their choice.
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.”
Fundraising Jitters
Incidents like the Key Worldwide scandal may make it harder for fundraisers to do their job. However, fundraisers and nonprofit officials who encounter reluctant donors in light of this news should highlight the rare nature of the allegations.
“This seems to be fairly unique,” said Streckfus. “This is one of the first times I’ve seen where somebody has sort of creatively used the foundation to sort of benefit others who are in effect paying the person who’s running the foundation.”
“This scandal is an outlier in terms of the scandals that have sometimes involved nonprofits,” said Cohen. “In this case — and it really is insane unto itself — the organization seems to exist solely for facilitating means of these payments for help to get into these colleges. It’s not as if a bunch of $10 donations meant for something else were pocketed or anything.”
