Real Death and the IRS

Devvy Kidd
November 3, 2003

                      "The man who produces while others dispose of his product is a slave." -Ayn Rand, author of Atlas Shrugged


While the article below is over a decade old, little has changed regarding this criminal syndicate called the IRS. Kissed and blessed by the two parties who control Congress, these Mafioso type hoodlums continue to break the law routinely and steal from your children's future.

If you think the story below can't or won't happen to you, I submit that you are one of those Americans who are either resigned to slavery or who are so afraid of their own servant government, they would rather live in a self induced coma than stand up with the rest of us fighting real tyranny.

We are no longer the land of the brave and the home of the free. We are a nation of gutless criminals (IRS employees) and a citizenry who value WWF Smackdown or Survivor more than they do the welfare of their children.


The so-called "Taxpayers Bill of Rights" is just more phony magic tricks to keep the people fooled about the nature of the income tax and its misapplication. Pacify the cowardly. Put a Republican in the Dirty House who invokes the name of God and all will be well.

The American people are being played big time and sadly, most of them don't give a damn 'cause tonight's Monday night football and the "football widows" are at the mall.


Taxes and Death

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

By Randy Fitzgerald

A resigned smile crossed Kay Council's face as she steered her car into the garage of the new brick A split-level house just outside Winston-Salem, North Carolina. Her husband, Alex, had every light blazing inside and out. If I could just teach him to turn some lights off, she thought as she climbed the stairway to the upper level.

Alex didn't seem to be inside. It was only 9 p.m., a warm June evening. Maybe he was at one of the unfinished homes in the housing development they were building nearby. She wandered into the kitchen. Sure, there's a note. On her desk lay a sheet of yellow legal paper with words in Alex's familiar hand.

"My dearest Kay,

"I have taken my life in order to provide capital for you. The IRS and its liens which have been taken against our property illegally by a runaway agency of our government have dried up all sources of credit for us. So I have made the only decision I can. It's purely a business decision. I hope you can understand that. I love you completely,

"Alex."

Her eyesight was blurring by the time she read the matter-of-fact postscript: "You will find my body on the north side of the house." For a few desperate, hopeful seconds Kay thought it might be one of Alex's practical jokes, and he would jump out from hiding and surprise her.

"Alex?" There was a sliver of that hope when she called his name the first time. "Alex!" She began shouting his name. No one answered.

She could not bring herself to look outside and confirm the note. She slumped in a kitchen chair and in a daze began punching out phone calls to relatives. Alex's brother arrived a short time later with a deputy sheriff. They found 49-year-old Alex sprawled near a backyard woodpile, dead of a bullet to the head. A pistol lay by his hand.

Mistakes, delays, and bureaucratic stonewalling that led Alex Council to take his own life are part of a pattern. A General Accounting Office investigation recently revealed that the IRS wrongly assessed penalties against 1.5 million taxpayers in 1988 alone. The GAO found that almost half of IRS mail to taxpayers contained incorrect information. Another IRS probe found that 2 million documents, including tax returns, could not be found in the agency's files.

Unlike criminal defendants, taxpayers faced with IRS penalties must assume the legal burden of proving their innocence. Rather than challenge the nation's most powerful law enforcement agency, even when its assessments are questionable or in error, most taxpayers simply choose to pay up and avoid drawing further attention to themselves. Of $15.3 billion in additional taxes and penalties wrung out of taxpayers in 1989, a Money magazine analysis estimates, $7 billion was wrongly collected based on erroneous calculations.

For those who do challenge IRS inefficiency and arrogance, there looms a stark and bitter truth: Even if they win in court, they can often expect to spend more in legal fees than the amount of tax at issue. Beating the IRS usually amounts to a Pyrrhic victory at best.

With Congress exerting intense pressure on the IRS to shake down taxpayers for every available dollar to help reduce the budget deficit, the story of Alex Council's fight for financial survival, and his eventual death, becomes a cautionary tale of what can happen to men and women of principle.

Alex met Kay in 1971 in Greensboro, North Carolina, at the mortgage insurance company where they both worked, he as vice president, she as the data processing manager. Both had two children and were in the throes of divorce. Friendship grew into love. After Alex moved to San Francisco to become vice president of a new mortgage insurance company in 1973, Kay soon followed, and a few months later they married.

Alex had an infectious spirit of adventure. On their honeymoon he took Kay to Alaska to explore the wilderness. He convinced her to ride gliders and hot-air balloons, and drove her 1,800 miles through the Yucatan peninsula to climb every ancient ruin they encountered.

A voracious reader, Alex had studied every book written by Ayn Rand and admired her strong, principled characters. He took classes in American constitutional law for the sheer enjoyment of reading, and he lived his life according to the dictates of his well-defined, individualistic conscience.

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.

Alex and DuBois found themselves begging faceless IRS employees for some record that the post office had ever received and attempted to deliver the original notice of deficiency. It should have been a simple matter. Had delivery of the certified IRS mail been accepted and signed for, or attempted and refused by the Councils, the Postal Service would have kept a record indicating the circumstances. No response.

As Christmas 1984 approached, another problem-resolution officer, this one in California, wrote the Councils, requesting additional information. They sent it. Again, the seasons passed with no answer. On October 29, 1985, another IRS employee, this time in Memphis, wrote: "We apologize for not replying sooner....Because of the volume of our correspondence, we have been unable to gather the information we need....We will write you again within l60 days." Four months later the employee wrote again to say the IRS was still gathering the requested information/"We are sorry for the inconvenience we have caused you."

The Councils' agonizing limbo was broken only by monthly tax-due notices showing an ever-escalating bill. Requests for meetings with IRS officials went unanswered. The Councils were haunted by the fear of losing their new home, which they had built and moved into during February 1986, and the homebuilding business in which they had invested all their savings.

When they hung the two framed lithographs--the source of their troubles--in their new home, Kay watched impatiently as Alex stood on a stepladder with a tape measure, methodically checking that each picture was centered perfectly. This exactness in him gave Kay faith that their lives would eventually return to normal.

In 1986, three years after Alex had first requested it, the IRS bureaucracy produced a Postal Service certified mail list indicating that the deficiency notice had been sent on April 15, 1983, a month before the statute-of-limitations period expired. Crestfallen at first, Alex soon became angry as he perused a copy of it. The Councils' 1983 address, in suburban San Francisco, was incorrect. DuBois's copy had been misaddressed as well.

Furthermore, the document gave no indication whether delivery of the deficiency notice had been attempted. As it turned out, the IRS had stalled so long in seeking the delivery records that the Postal Service had destroyed them in the course of routine housekeeping after two years.

In its manual the IRS warns employees to exercise "extreme care" to ensure that there are no typographical errors in the taxpayer's name and address when deficiency notices are sent. Nonetheless, Alex and Kay had been victimized by bureaucratic sloppiness.

The Councils' anger turned to hope. Its own evidence proved the IRS wrong. Surely the agency would now admit its mistakes and back down. Yet when Alex's attorneys contacted IRS officials, they impassively replied that Alex had only two options: Pay the amount due, or file suit in federal court against the IRS.

On May 15, 1987, the IRS filed a $284,718 tax lien against all of Alex and Kay's property and assets. Council Development Co., solely owned by them, held a $896,000 short-term construction loan from an insurance company for their small residential housing project. The Councils held a $ 112,000 loan from the same company on their own house, the model for the development. Because of the lien they were unable to refinance their home-construction loan as a conventional mortgage and mortgage insurance on the houses under construction was canceled. They now faced the loss of their home when the loan came due in a balloon payment. The lien also sabotaged any possibility of credit for a second real estate development for which they had already spent money on feasibility studies.

Alex filed suit against the IRS in January 1988 to have the crushing tax lien removed. Alex's attorneys pleaded before the federal district court that the Councils couldn't survive any delays in the trial. Granting the IRS additional time to conduct discovery "would spell financial disaster" for the Councils because the tax lien had effectively killed their ability to earn a livelihood. All their savings were tied up in the housing development. They couldn't even pay the $30,000 in annual interest accumulating on the IRS tax assessment.

Kay no longer planned for the future. She couldn't see beyond the next week or the next threatening letter from the IRS. Alex, however, stitched and restitched the shreds of his old optimism together. He helped organize his 30th-year high school reunion. He began working toward his private pilot's license. He en. oiled in classes on the U.S. Constitution at Wake Forest University. He had known hard times before, since the age of 12, when his father died and he had been forced to find employment. His desire to remain strong for Kay helped Alex resist despair.

Only in phone conversations with his old friend Chuck David did Alex occasionally reveal his frustration. "We just can't get away from this. It's so unjust. The IRS broke my back." Chuck sensed that the fighting spirit was being beaten out of Alex. He stopped asking about the problem. It had become a wound that would not heal.

Alex and Kay celebrated their 14th wedding anniversary in May 1988 with a three-day driving trip through North Carolina. As in the early years of their marriage, a sense of adventure buoyed them. "l can live with losing everything and starting over," Kay told Alex, "so long as we have each other." He assured her he felt the same way.

Later that month, federal judge Frank Bullock called a hearing on their case. Alex and Kay thought their burden would finally be lifted one way or another. They were shocked and furious when, instead of presenting testimony, the IRS sought and was granted a two-month extension to gather more evidence. Their tax problem had dragged on for eight years.

Now Alex acted defeated, seeming to lose hope. Their business was paralyzed. They were about to lose their home. Their net worth had plummeted to $15,000. They couldn't pay their lawyers, and it seemed they would never have their day in court. Even the original cause of all their troubles--the investment in two lithographs--had long since failed as a business. There were no takers for the prints.

A man with a mind for planning and detail, Alex had prided himself on finding a solution to any problem. Facing the prospect of public humiliation and losing everything he had worked for all his life, he began quietly considering the desperate act that for him had been reduced to a simple business decision.

Kay spent most of the last week in May visiting her ill mother in the hospital. In her absence, Alex began tying together all the loose ends of their life. He sat at a desk in a room of the house set aside as his office and used a tape recorder to compose his thoughts. First, he explained why he felt there was no way out but to end his life. Then he discussed in exacting detail their finances, explaining which accounts needed to be paid when, detailing the disposition of each lot in the residential development, and offering suggestions on how to spend the insurance money. He placed the 45-minute tape in an upstairs closet and, in one of the two notes he wrote Kay, described where she could find it.

On the night of June 8, 1988, while Kay took her recuperating mother to a bingo game, he walked out back and shot himself.

Numb through the funeral, Kay soon found her grief turning to a grim determination. Using a transcript of Alex's tape (she couldn't bear the pain of listening to his voice), she began acting on his advice and instructions. With the $250,000 from his suicide-proof insurance policy, she purchased a small townhouse to live in, paid off all their personal bills, pumped money into the housing development to keep it going, and, most important, paid her attorneys to continue the court fight against the IRS.

She told them bluntly, "l don't want anybody saying Alex let me down. I know how much he loved me. In his mind, he did it for me."

Meanwhile, Kay supervised the eight houses under construction. A petite, energetic woman who had previously only made color and design decisions involving the houses, she forced herself to learn all aspects of the construction business. Somehow, she managed to complete the homes, sell them, and pay off the construction loan.

When the nonjury trial was finally held before Judge Bullock on October 12, 1988, the IRS attorney insinuated that Alex, Kay, and their accountant were all Iying when they claimed never to have received the assessment notices. "The errors that would have had to have occurred in concert for this to have happened the way the Councils claim are mind-boggling," said Justice Department attorney Robert Welsh. Furthermore, the IRS contended that "actual receipt of the notice is not required if the notice was properly mailed."

Kay's attorneys countered that IRS sloppiness prevented delivery of the assessment notices and that agency stalling and disorganization had prevented settlement of the case five years earlier. After the day of testimony, Kay went home exhausted and depressed. Having lost faith in the system, she waited for the worst. It was a long wait.

On December 16, 1988, Kay's attorney Gray Wilson phoned her.

"Kay, I've got good news. You finally won."

After a long pause, Kay regained her voice and composure. "I can't believe it's finally over."

Bullock had ordered the IRS to drop its collection efforts and cancel the tax lien. The Councils and their accountant, Bullock concluded, "had no reasonable motive to fabricate a story" about failing to receive the notices 'for they did not yet know what evidence the IRS might produce to verify mailing." Nor does the law place upon taxpayers "the burden of hounding the IRS for delivery of a possible notice of deficiency."

In February 1989, Kay's attorneys requested that the IRS compensate her for legal fees. The IRS refused. So Kay's attorneys petitioned the court for reimbursement. On August 29,1989, Bullock granted her $27,971 for legal fees and expenses.

Months after the judge's verdict, Kay found that the tax lien continued to haunt her. She was turned down when she tried to purchase a vacuum cleaner on credit. The lien remains on record with credit bureaus for seven years, and it is her responsibility, not that of the IRS, to convince them it has been removed.

In 1988 Congress passed legislation, known as the Taxpayer's Bill of Rights, aimed at safeguarding taxpayers from IRS abuses. But the law does little to mitigate circumstances like those that ruined the lives of Alex and Kay Council.

The law's 17 reforms include automatic IRS disclosure of rights for taxpayers whose returns are questioned; an increase in the waiting period for seizures of property from 10 days to 30 days after notice; and limited awards of legal costs to taxpayers who successfully challenge the IRS. But the Taxpayer's Bill of Rights fails to adequately address the powerlessness most taxpayers experience when they attempt to defend themselves against the IRS.

Under the original version of the law, as sponsored by Sen. David Pryor (D-Ark.), taxpayers could have sued the IRS for damages if any agency employee "carelessly" or "intentionally" disregarded any provision of the tax laws. As the bill evolved through the congressional committee process, the word carelessly was dropped. For taxpayers who have been financially harmed or devastated by IRS carelessness, as the Councils clearly were, proving that IRS employees intentionally wronged them is almost impossible.

As Kay Council learned, even those who beat the IRS suffer substantial financial damage. Kay was fortunate to have a judge who mandated that the IRS pay some of her legal fees. But at a rate of $75 an hour, the current law's cap, the award fell far short of the $135 an hour charged by her attorneys, forcing her to cover the difference.

It seems perverse that a taxpayer wronged by IRS employees has to exact justice by winning monetary compensation from other taxpayers. Six years ago, Rep. Andrew Jacobs (D-Ind.) introduced a tax-bill amendment permitting federal judges to hold IRS employees personally liable for legal fees incurred by taxpayers who prove that the employees have taken arbitrary and capricious actions. The amendment lost in the face of arguments that such accountability might affect IRS employee recruitment.

Yet the fundamental concept is sound. Why not hold government employees responsible for their mistakes? Under the present system, the IRS rarely disciplines even those employees who are found to have committed serious errors.

David Keating, executive vice president of the National Taxpayers Union, argues: "It seems clear that the IRS is more interested in controlling, regulating, and punishing taxpayers for their violations than they are in controlling or punishing their own employees for comparable infractions."

IRS Commissioner Fred Goldberg says his agency needs better-trained, more highly paid personnel and improved data processing to help eliminate errors and improve response times. Just modernizing the IRS computers could cost $6 billion or more. Goldberg concedes that the American public resents the complexity of the tax laws and "hassles with the IRS that take month after month to resolve." He has urged Congress to greatly simplify the tax code to make it easier for taxpayers to understand and comply with, and easier for IRS personnel to enforce.

Complexity does work to the disadvantage of all but the most astute and well-heeled taxpayers. Complex and vague laws encourage enforcement abuses. If an individual within the IRS decides to "get" you, or even to ignore you, the complexity of the tax code enables the agency to plausibly deny wrongdoing and create a financial headache for you.

Above all, taxpayer rights must be vigilantly safeguarded. In the last Congress, Sen. William Armstrong (R-Colo.) introduced a series of bills called "Fair Play for Taxpayers" to provide full compensation for legal expenses to taxpayers who beat the IRS in court and to allow taxpayers to sue the IRS for carelessness. The legislation never got anywhere, and Armstrong has since retired from Congress. It remains for another member, perhaps Pryor, to inherit the role of taxpayer advocate.

When the Senate Finance Committee, which oversees the IRS, held routine hearings on the agency last April, Kay Council came to Washington. She barely kept her emotions in check as she spoke to a hushed hearing room. "I was cheated of growing old with the man I love. I lost my best friend. Somebody should be held accountable for the destruction to me and my family. Beating the IRS should give some meaning to Alex's death, but it hasn't. There has to be more. If enough little people like me keep coming forward, there will be changes."

Randy Fitzgerald is a staff writer at Reader's Digest.

From the March 1991 issue of Reason

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