Tax Free Millionaires.

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 St., 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.

Jocelyne responded by turning up the temperature a few hundred degrees on what had been one of the quietest divorce proceedings ever among the rich and discreet. As a result, life among the Wildensteins–a family that for more than a century had guarded its privacy with a pathological obsession–went on public display.

Jocelyne demanded a $200,000 monthly living allowance, payment of her personal staff’s salary and expenses, and a $50 million security deposit pending distribution of the marital property. Alec pleaded poverty. He insisted he had no money of his own and that the millions they spent came from his father.

The Wildenstein Family Circus that followed established conclusively, one more time, that the rich are very different from the rest of us, beyond the fact that they often pay comparatively little or no taxes. But first, some background on this intriguing family.

Alec is the son of Daniel Wildenstein, the patriarch of the enormously rich French clan. Daniel, born in 1918, controls the Wildenstein billions through a web of secret trusts and intertwined corporations. The Manhattan townhouses, for example, are owned in the name of the Nineteen East Sixty-Fourth Street Corporation, which in turn is controlled by “intermediate entities held in trust.” He continues to operate the private, secretive art business started by his grandfather in the nineteenth century, with galleries in New York, Beverly Hills, Tokyo, and Buenos Aires, catering to private collectors, museums, and galleries. And while he spends a lot of his time in Paris, a good chunk of his money resides in secret Swiss bank accounts.

Tucked away in family storerooms, notably in New York, is reportedly the world’s largest private collection of the works of the masters–valued at $6 billion to $10 billion. The inventory includes thousands of paintings and drawings by Renoir, Van Gogh, Cezanne, Gauguin, Rembrandt, Rubens, El Greco, Caravaggio, da Vinci, Picasso, Manet, Bonnard, Fragonard, Monet, and others. Many have never been displayed publicly.

In 1990, Daniel’s sons Alec and Guy took over management of the New York gallery. Their families maintained separate living quarters in the East 64th Street townhouse. They shared the swimming pool in the basement, the informal and formal dining rooms, the foyer, elevator, and the entrance to the townhouse. Alec and Jocelyne lived on the third floor, their two children had bedrooms on the fifth floor, and Jocelyne used the sixth floor as an office. In addition to the Manhattan townhouse, they maintained a castle, the Chateau Marienthal, outside Paris, an apartment in Switzerland, and the Kenya ranch.

Wherever they happened to be, the Wildensteins pursued a lifestyle that was lavish even by the standards of the rich and famous. The details, as they poured from Jocelyne’s lips in the divorce proceeding, told the story of a family of seemingly unlimited wealth and no hesitation about spending it. According to her, she and Alec “routinely wrote checks and made withdrawals” from their Chase Manhattan Bank checking account “for $200,000 to $250,000 a month.” Jocelyne said that over the last 20 years they did “millions of dollars worth of renovations on the Paris castle and Kenya ranch,” and she directed the management, hiring, and staffs of those properties. The routine operating costs of the ranch alone ran $150,000 a month.

In New York, Jocelyne’s staff payroll at the 64th street townhouse included $48,000 a year for a chambermaid; $48,000 for a maid who tended the dogs; $60,000 each for a butler and chauffeur; $84,000 for a chef; $102,000 for an assistant with an MBA; and $102,000 for a secretary.

In Kenya, their vast Ol Jogi ranch, with its two hundred buildings spread over an area five times the size of Manhattan, required nearly four hundred employees to look after the grounds and the animals.

In France, the resident staff at the chateau, “the largest private home of its type within a fifteen-minute drive of Paris,” included five gardeners, three concierges, and three maids.

Talk did not come cheap for the Wildensteins. The annual telephone bill in Manhattan alone sometimes ran as high as $60,000. And then there were all the other necessities, like $547,000 for food and wine; $36,000 for laundry and dry cleaning; $60,000 for flowers; $42,000 for massages, pedicures, manicures, and electrolysis; $82,000 to insure her jewelry and furs, and $60,000 to cover the veterinarian bills, medication, pet food, beds, leashes, and coats for their dogs. As for miscellaneous professional services, $24,000 went for a dermatologist, $12,000 for the dentist, and $36,000 for pharmaceuticals. Her American Express and Visa Card bills for one year totaled $494,000.

Some of these bills were paid out of the couple’s Chase Manhattan account. Some were paid out of “other bank accounts in New York, Paris, and Switzerland.” And some bills, Alec confirmed, were paid from “the Wildenstein & Co.” account, “the Wildenstein & Co. Special Account, and family businesses.” Sort of like having your employer pick up the cost of your clothing, pets, and vacations.

And then there were Jocelyne’s personal expenditures. Over the years, she accumulated jewelry valued at $10 million, including a thirty-carat diamond ring and custom pieces from Cartier. She attended fashion shows in Paris. Her annual spending on clothing and accessories ran to more than $800,000. She once spent $350,000 for a Chanel outfit that she helped to design. All told, according to papers filed in the divorce case, the couple’s personal and household expenditures added up to well over $25 million in 1995 and 1996 alone.

With all those tens of millions of dollars flowing out over the years to maintain a lifestyle beyond comprehension to most people–$60,000 in dog bills exceeds the annual income of three-fourths of all working Americans who pay taxes–you might think that Alec and Jocelyne also forked over millions of dollars to the Internal Revenue Service. But you would be wrong. They didn’t pay a penny in U.S. income tax.

These admissions by a family accountant are spelled out in records of the acrimonious divorce and also entered into court opinions. They lived the tax-free life even though, by Jocelyne’s account, they resided in the Manhattan townhouse for nineteen years, from shortly after their Las Vegas marriage in 1978 until the rancorous divorce proceedings began in 1997. Their children were born in New York and went to school in New York. Alec conducted the family art business through Wildenstein & Co., Inc., a New York corporation, from the gallery next door. He had a U.S. pilot’s license. He sued and was sued in the courts of New York and other states. He signed documents moving millions of dollars between Wildenstein companies, some located in the tax havens of the world. He transacted business in New York and other states. He was vice-president of Nineteen East Sixty-Fourth Street Corporation, which owns the townhouse, gallery, and other properties. His New York pistol license identified him as an officer of Wildenstein & Co. And following his arrest for pointing the weapon at Jocelyne and her bodyguards, he insisted that he should be released on his own recognizance because of his substantial ties to the community.

Nonetheless, he filed no federal tax returns. And no one in Washington or New York noticed. Or cared. Under ordinary circumstances, even the complex tax returns of the very wealthy that are filed go unchecked. That’s due to a deliberate decision by Congress to starve the IRS, both in operating funds and in manpower and expertise to conduct such audits. So forget about ferreting out serious nonfilers among the rich and prominent. That task doesn’t even register on the tax fraud radar screen. Not surprisingly, representatives of Alec Wildenstein declined to discuss his tax affairs. Jocelyne’s lawyer said she doesn’t know anything about taxes, since Alec controlled the money. And the IRS can’t comment on the tax matters of private citizens. Or in this case, the non-tax matters.

In the divorce case, Alec argued that he was not a resident of the United States, that he had a Swiss passport and visited this country on a tourist visa, and that he did not have a green card permitting him to work. Furthermore, he contended that he had “less that $75,000 in bank accounts” and that “my only earnings are approximately $175,000 per year.” On a net-worth statement, Alec listed his occupation as “unpaid personal assistant to father Daniel Wildenstein.” That stirred the ire of State Supreme Court Judge Marilyn G. Diamond, who presided over the hostilities. “He fails to explain why he is ‘unpaid,'” said Diamond, adding that “this contention insults the intelligence of the court and is an affront to common sense.”

Judge Diamond was also angered that Alec never bothered to attend the divorce hearings. Shortly after Jocelyne began unveiling intimate details of the couple’s private life, he fled the country. He ignored repeated court dates, failing to appear to answer either the gun charges or his wife’s allegations. At one hearing, an irritated Diamond excoriated Wildenstein in absentia for his refusal to obey court orders and to attend depositions. His attorney, Raoul L. Felder, the New York celebrity divorce lawyer, offered an explanation for his client’s behavior:

“It may not be his disinclination to appear before the court. You are aware there are substantial tax problems we believe created by the plaintiff.” Judge Diamond agreed. “There are going to be more substantial tax problems,” she said. “There are more substantial potential tax problems by people continuing to take certain positions. Make no mistake about it.” If this conjures up visions of battalions of vigilant IRS agents engaged in a relentless search to identify tax scofflaws and, when they do so, dun them for the taxes they owe, assess interest and penalties, seize their bank accounts and cars, freeze their assets, and auction off their possessions, well, that’s what they are, visions–at least when it comes to the very rich. For the double standard is to tax-law enforcement what rock is to roll.

Suppose you earn $40,000 a year and don’t file a return. When the IRS catches up with you it prepares a substitute return, estimates your income, calculates the tax you owe, tacks on interest and penalties, and sends you the bill. If you don’t like their numbers, you must prove that the IRS is incorrect. What’s more, the agency may seize your bank accounts, your car, and whatever else you have of value.

Not so with the truly prosperous. First, the agency mails out a computer-generated letter asking the nonfiler to submit a return. When the reluctant recipient fails to respond, a second letter goes out. And then another. And another. If the silence persists, IRS resorts to another tactic: The telephone. It tries to find the number of the missing nonfiler and place a series of calls. When all that proves futile–it generally does nothing.

That was a finding of a 1991 study by the General Accounting Office (GAO), the investigative arm of Congress, that examined IRS’ handling of affluent nonfilers:

“The IRS does not fully investigate high-income nonfilers, which creates an ironic imbalance. Unlike lower income nonfilers in the Substitute for Returns program, high-income nonfilers who do not respond to IRS’ notices are not investigated or assessed taxes. Even if high-income nonfilers eventually file tax returns, their returns receive less scrutiny than those who file returns on time.”

What’s the IRS’s explanation for the double standard? Incredibly, it told GAO that it does not prepare a substitute return for rich nonfilers, as it does for middle-income people, because it fears that it might “understate taxes owed.” In other words, no loaf is better than half-a-loaf. So do nothing. Second, GAO said, “to pursue more high-income cases, IRS would need additional staff.” Which, of course, is precisely what Congress refuses to provide.

But things have changed since the critical 1991 audit that tried to prod the IRS to act, right? Indeed they have. With each passing year, the number of affluent nonfilers has gone up while Congress has slashed the service’s auditing capabilities. There is no better evidence of the agency’s breakdown than the fact the Wildensteins went two decades without filing a tax return, and the IRS knew nothing about it. The Great American Tax Dodge by Donald L. Barlett and James B. Steele. Copyright 2000. Reprinted by permission of Little, Brown and Company (Inc.). All rights reserved.

From the book The Great American Tax Dodge by Donald L. Barlett and James B. Steele. Copyright 2000. Reprinted by permission of Little, Brown and Company (Inc.). All rights reserved.