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Guilty college scam defendants to face IRS wrath: A look at potential penalties

Brittany De Lea

Actress Lori Loughlin and her fashion designer husband Mossimo Gianulli were among a group of parents indicted on money laundering charges on Tuesday, a day after fellow actress Felicity Huffman and a dozen other defendants agreed to plead guilty in the massive college admissions cheating scandal – where some are likely to face stiff financial repercussions from the IRS.

Some of the defendants are accused of underpaying their taxes by deducting their bribes as alleged charitable contributions. At least some of the funds were said to have been funneled through a public charity, the Key Worldwide Foundation, thereby allowing tax write-offs.

All of the defendants who improperly took those deductions have agreed to cooperate with the IRS to pay back taxes, the Department of Justice said on Monday.

According to Samuel Brunson, a professor at Loyola University Chicago School of Law, these parents will not only have to pay back what they allegedly saved after claiming the deductions, but they will also likely have to pay interest on those underpayments – and potential penalties.

“Penalties for tax underpayments are usually 20 percent of the underpayment, but in the case of fraud, penalties go up to 75 percent,” Brunson told FOX Business.

Brunson added that the government could theoretically negotiate for lower payments, though he doubts there is incentive to do so. As a result, all of the defendants who have pleaded guilty will probably be faced with the full penalty.

For some perspective, Brunson noted that if a parent claimed a $500,000 deduction in 2016 (when the top rate was 39.6 percent), tax liabilities were reduced by $198,000. The full penalty would be equal to that amount, plus $148,500 in penalties, plus interest (or $346,500 plus interest).

The IRS did not return FOX Business' request for comment.

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The Key Worldwide Foundation is a non-profit that was founded in Newport Beach, California, in 2012. It was approved by the Internal Revenue Service as a tax exempt organization around 2013. It reported that its earnings doubled each year from $451,600 in its first year to $3.7 million in 2016, as reported by The Associated Press.

Overall, around 33 parents were charged for their alleged roles in a scheme, which involved paying $25 million in bribes to gain children admittance into top-tier universities including Yale, Stanford and Georgetown.

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