O.C. Man Says IRS Caused His Problem

Joe Dutton wonders if the transformation of the Internal Revenue Service into a kinder, gentler agency is real.

He will have a chance to find out on Saturday when the IRS will hold its first “Problem-Solving Day” in Southern California at its Laguna Niguel district office.

The opening is a step promised by IRS officials after Senate hearings in September highlighted abuses by the agency.

“Individuals with long-standing problems who have had difficulty getting answers will have an opportunity to meet with IRS employees face-to-face,” said an agency news release.

When told about Dutton’s tax trouble--underreported income by his ex-wife that led to a $355,000 tax bill--IRS spokesman Chris Connelly said “this sounds like the kind of case that ‘Problem-Solving Day’ was designed for.”

“We want to reach out to taxpayers who have been unable to resolve their problems . . . to work with us toward a solution,” IRS District Director Marilyn Soulsburg said in a written statement.

Dutton, 62, and a lifelong Yorba Linda resident, snickered.

“Oh, they reached out to me. They reached out and grabbed everything I owned. I should be retiring in three years, but now I’m a candidate for welfare,” said Dutton, a part-time real estate agent.

The house he owned in Yorba Linda for 20 years is gone. Also gone is the undeveloped 1.7-acre lot with two oil wells that had been in his family since 1926. The IRS seized the property and sold it at a July auction for $112,000.

Dutton’s tax problem began in 1990 when the IRS audited the 1986 and 1987 returns he filed jointly with his then-wife, Sandra Dennis. The couple legally separated in 1988 and was working on a divorce agreement when notified of the audit.

The audit showed that Dennis underreported the income from her air-conditioning business in Hemet for those two years. They were assessed $211,248 in penalties and additional taxes. In a recent interview, Dennis said she was the sole owner of the business during her marriage and still runs the company.

She acknowledged that she underreported her company’s income but blamed the error on an employee “who was keeping two sets of books.” The employee also “embezzled $25,000 from me and was prosecuted,” she said. She said Joe Dutton knew nothing about the underreporting at the time either.

In 1997, the tax bill resulting largely from the underreported income has ballooned to $355,297.51 with accumulating interest and penalties, by Dutton’s count. But IRS spokesman Connelly said the agency is not sure if Dutton’s figure is accurate. He might owe more.

“It’s hard to say how much he owes,” said Connelly. “Because of our accounting procedure, figuring out how much he owes, that’s the tricky one. I can’t tell you.”

However, Connelly said the agency dropped Dennis from the case in 1995 when she offered to settle with the agency for $5,000. Dutton made no such offering, arguing that he did nothing wrong.

The IRS did not agree with him and seized his bank accounts and filed liens against his properties.

Connelly said Dennis’ offer was accepted after agents “looked at her current and future ability to pay.”

Even though Dutton’s case was considered closed by the IRS, his problem is far from over.

“This case is one of the most complex and massive I’ve ever seen,” said Connelly, referring to the 1,350-page file.

But Connelly said Dutton’s problem was that he benefited financially from his wife’s error, even if he did not know she had underreported her business income and that his wife’s employee was allegedly fixing the company’s books.

Connelly explained why Dutton did not have a legal leg to stand on.

“The law doesn’t make an exception [for the fact that Dutton did not know of his wife’s underreported income]. There is no provision in the law that mitigates it. If he signed a return without any knowledge of her business, that’s a decision he made,” said Connelly, who talked about the case after Dutton signed a consent form.

When asked what reasonable action Dutton could have taken to avoid the tax problem, Connelly said: “That’s a good question.” After mulling it over for a while, he said Dutton should have asked more questions about his wife’s income.

Since his wife did not share information about her income, Dutton said, he had no reason to suspect that she was underreporting her company’s earnings. The first of two tax consultants he hired advised him to file an “innocent spouse” claim to dissolve himself from the case.

But Connelly said such claims are rarely approved and that he knows of only one similar case that was approved in the last 15 years.

Joe Dutton’s rejection came in 1995 in a form letter that said simply: “The information you gave us does not establish a basis for changing our earlier adjustment.”

Dutton unsuccessfully sought a written explanation for the denial.

“If the revenue agent chose not to give him a written explanation, that’s [the agent’s] right,” Connelly said.

Finally, Dutton asked Rep. Jay C. Kim (R-Diamond Bar) to intervene. In an October 1996 letter to Kim, an IRS official explained that Dutton’s claim was denied because the case agent found that he “received significant benefit from his wife’s business.”

Dutton said the only benefit he realized was that his ex-wife helped pay some of the daily bills and the mortgage on the house.

After seizing and auctioning his undeveloped lot for $112,000 in July, the IRS gave Dutton until December to find another buyer willing to pay more. When the IRS auctions off property, the owner has six months in which to find another buyer willing to pay more to satisfy the lien.

Last week, Dutton closed escrow on the property, which he sold for $200,000. But now the IRS code requires him to pay the first buyer 20% interest--$24,000--on what the government received for the lot.

In addition, Dutton will have to pay 20% capital gains tax on profit from the sale. But the profit will be applied toward his old tax bill.

“Does any of this make sense?” asked Dutton. “I have no assets left. It wasn’t me who underreported my income. But they’re saying they don’t care and it doesn’t matter. I’ve been between a rock and a hard spot for seven years, and the IRS is still squeezing both together.”

* INS PLAN: New commissioner says reform will take time. A28