Tax Free Millionaires - Excerpt

Washington Monthly, Sept, 2000 by Donald L. Barlett, James B. Steele

How the super rich get away without paying any taxes

TAX FRAUD IS EXPLODING IN THE United States. In ways large and small, Americans are cheating like never before. One of every three people, perhaps as many as one of every two, is doing it. It's one of Washington's dirty little secrets, a ticking time bomb with the potential to destroy the country's tax system and to undermine essential government programs like Social Security. Disguised by a robust economy and record tax collections, fraud is growing at an exponential pace among all groups, with more and more income concealed from the IRS each year.

How bad is it? No one can put a precise number on lost tax revenue. But it's bad, and getting worse. Even the IRS, which doesn't like to acknowledge this problem for fear it will only encourage more taxpayers to cheat, admitted in 1999 that the "tax gap," its euphemism for fraud and error, is now up to $195 billion a year. But that is based on data from the 1980s. A more reasonable count of the revenue lost every year is $300 billion.

If Tax Dodging Inc. were a business, it would be the nation's largest corporation, eclipsing General Motors, which sits atop the Fortune 500 with revenue of $189 billion.

How do people escape paying the taxes they owe? They inflate their itemized deductions for everything from medical bills to charitable contributions. They manufacture deductions to cover expenses never incurred. They understate their income. Or they do both. They ship their money to foreign tax havens. They claim illegal refunds. They speculate in the stock market and don't report their gains. They charge off their personal living costs as business expenses. And many don't even bother to file tax returns at all.

How many nonfilers are there today? The IRS doesn't have a clue. In part, that's because Congress has slashed the agency's budget, halting the kind of audits that would make even crude projections possible. Informally, government tax authorities say there are 10 million nonfilers. In truth, there are many more, and here's why:

The IRS identifies a nonfiler as a person who fails to submit a tax return even though a third party has filed an earnings statement (W-2) or information return reporting interest or dividends (Form 1099) that shows the person received income during the year. This narrow definition ignores all those who leave no paper trail. These are the people for whom there are no W-2s or 1099s, no record of wages, annuities, gambling winnings, pensions, interest, dividends, or money flowing in from foreign trusts and bank accounts.

In addition to these people who deal only in cash, there is another larger group whose numbers have soared. They are wealthy Americans and foreign citizens who live and work in the United States and in other countries--multinational wheeler-dealers, independent businesspeople, entertainers, fashion moguls and models. They have multiple passports or global residences and therefore insist they are exempt from the U.S. income tax.

People like the Wildensteins of New York City. That would be Alec and his former wife Jocelyne, who became a staple of the New York tabloids during an unseemly divorce that raged from the fall of 1997 until the spring of 1999.

Alec, born in 1940, is an heir to his family's century-old, intensely-private, multibillion-dollar international art business. Jocelyne, four years his junior, is best known for having undergone countless plastic surgery procedures that make her look more feline, permanently, than any member of the cast of Cats. Her bizarre appearance inspired the tabloids to dub her "The Bride of Wildenstein."

For the Wildensteins, the once impenetrable curtain that had protected the family from prying eyes for generations was unexpectedly pierced on the night of September 3, 1997, when Jocelyne returned to the couple's opulent Manhattan home after a visit to the family's 66,000-acre ranch in Kenya. Walking into the six-story townhouse on East 64th Street, next door to the Wildenstein gallery, a few minutes after midnight, she found her husband in bed with a nineteen-year-old, long-legged blonde.

Alec hastily wrapped himself in a towel, grabbed a 9mm handgun and pointed it at his wife and her two bodyguards. "I wasn't expecting anyone," he screamed with a touch of understatement. "You're trespassing. You don't belong here." The bodyguards summoned the police, who arrested Alec and charged him with three counts of second-degree menacing.

So it was that the French-born, aristocratic Alec Nathan Wildenstein, having traded his towel for an Armani suit and a monogrammed shirt, spent the night in the Tombs prison with some of New York's low life. If nothing else, the incarceration gave him time to plot his revenge. When he got out the next day, he moved quickly. He canceled his wife's credit cards. He cut off her telephone lines, locked all the rooms in the townhouse except for her bedroom and sitting room, shut off her access to bank accounts, directed the chauffeur to stop driving her around, fired her accountant, and, in one final act of retribution, ordered the household chefs to stop cooking for her, which proved a major inconvenience because she had never learned how to operate the stove.