Taxes and Death

A middle-class couple find themselves in an IRS-spun web of debt and despair.

Randy Fitzgerald from the March 1991 issue

(Page 2 of 5)

When Alex received a large bonus in 1979, he decided to make a series of investments to minimize tax liability while building a nest egg for retirement. The Councils' accountant, William DuBois, suggested several real estate ventures, oil and gas leases, and a tax shelter called Jackie Fine Arts in which investors would receive a tax credit and depreciation for buying rights to reproduce paintings.

Alex and Kay, accompanied by their financial adviser and best friend, Chuck David, attended a promotion in which two representatives of Jackie Fine Arts explained how the purchase of original art works offered large potential profits from the sale of prints, and, according to opinions from numerous lawyers, a legitimate tax shelter.

Seeing the investment as a way of creating a small business for Kay, Alex bought two abstract lithographs offered by Jackie Fine Arts. When preparing the Council's 1979 tax return, DuBois claimed a $71,764 write-off from the investment.

Because of the size of his bonus, Alex half-expected Internal Revenue Service scrutiny of the 1979 tax return. In September 1980, IRS agent Joanne Zich informed him she was conducting an audit. Alex gave DuBois power-of-attorney to handle all contacts with the IRS. Alex wasn't worried about the audit itself, but he became annoyed when, as it dragged on over the next five months, Agent Zich repeatedly contacted him directly for information and documents, virtually ignoring DuBois.

By March 1981 it was clear that the focus of Zich's audit was the art investment. That month she again disregarded his accountant and sent Alex a five-page, handwritten letter, barely legible in places, requesting documents and detailed information about the two lithographs. This was followed by more requests, often handwritten, sometimes in pencil, some undated, others missing the attachments and enclosures to which they referred.

Patiently, wearily, DuBois and Alex answered the requests. Months elapsed without a resolution. In late 1982, after almost two years of inconclusive thrashing, a second IRS agent, Lester Johnson, replaced Zich on the case. He requested copies of many documents that had previously been supplied to Zich. Like her, he ignored DuBois's power-of-attorney and contacted Alex directly.

Still another IRS official, Jim Reed, called DuBois to report that the IRS planned to challenge the art investment write-off. DuBois responded that if the IRS disallowed the shelter, Alex would appeal the case to the U.S. Tax Court. The IRS had to file a legal notice of tax deficiency by May 5, 1983, before the three-year statute-of-limitations period for the 1979 return expired.

As standard procedure, the IRS would send a deficiency notice to Alex by certified mail and a copy to DuBois by regular post. Alex would then have 90 days within which to appeal the assessment to the Tax Court without penalties being added by the IRS.

May 5 came and went with no IRS notice; Alex and Kay were relieved. The write-off apparently wasn't worth an IRS challenge after all. "I guess we got a lucky break," Alex told Kay.

That August, they moved from San Francisco back to North Carolina. They formed Council Development Co. to build single-family homes. They were partners and co-owners. Their four children were grown and living away from home, and the venture was the beginning of a new life for them. Alex had shed coats and ties and office life for blue jeans, flannel shirts, and outdoor work. He couldn't have been happier.

One October afternoon in 1983 Kay opened their mail and was shocked to find a tax-due statement from the IRS, demanding $183,021 in taxes, penalties, and interest stemming from their 1979 return. Alex was dumbfounded. Not only had the statute-of-limitations period passed, so had the 90-day period for appeal to the Tax Court, so he was denied that legal option.

Concerned about the effect on his new business, Alex told DuBois: "We've got to fight this. Once tax liens are filed, the public notice does its work and can't ever be removed from the minds of my creditors and business associates. The IRS has no incentive to retract, even when it's wrong."

DuBois wrote the IRS on October 18, complaining that neither he nor Alex had ever received an audit report, a statutory notice of tax deficiency, or any other IRS document relating to taxes due on the 1979 return. He demanded copies of the documents and an explanation of why they hadn't been sent before the statute-of-limitations deadline. He received no response. Other queries in November and December also went unanswered.

Nationwide, IRS offices employ about 300 "problem resolution" officers to advise taxpayers how to settle disputes with the agency. In January 1984, DuBois phoned one of these officers in the North Carolina IRS headquarters to explain the apparent notification error in the Councils' case. The officer curtly refused to investigate the complaint.

In February, another problem-resolution officer wrote Alex, responding to a letter from DuBois. "We are working on it and will be in touch with you," he wrote. Spring passed, then summer, then autumn, with no action. But the IRS tax-penalty interest meter never stopped clicking. By November 1984, the tax-due bill had reached $238,148 and counting.