The city had condemned part of the land where Jacobs's home sat.  She claimed the land was worth two-and-a-half times what the city paid her, so she challenged the condemnation appraisal. She lost.

Even though she knew she received more than she paid for the land, she didn't report the gain on her tax return. Instead, she reported a $54,815 theft loss deduction.

She attached a letter explaining this was the additional amount the city should have paid.  She wanted the IRS to somehow use tax laws to prove that a conspiracy between the city and a nearby Mormon Church deprived her of her rightful gain.

Instead of the audit she expected (and wanted), because of the large theft loss the IRS computer sent her a refund.

So she tried again the following year with another letter and another theft loss deduction. But this time, instead of mailing the return to the IRS location near where she lived, she mailed it to the head guy at IRS in Washington.

The letter, to the IRS Commissioner, said: "I want my taxes audited so that somebody who did know all the tax laws could find the tax law that shows this was an illegal condemnation."

Then she went to Salt Lake City to tell an IRS official about the conspiracy. He told her he'd already started the paperwork and assured her she would be audited.

With an IRS audit looming, most taxpayers would have shrieked. Not Jacobs. She told the official she was pleased; she was eager for the conspiracy investigation to begin.

But the IRS isn't a tool for taxpayers to use. It taxed the gain on the land and disallowed the theft deductions -- and added a fraud penalty.

Now Jacobs shrieked.

Then she appealed. The Tax Court, of course, agreed with the agency's tax increases, but said the IRS had no fraud case.

Fraud is the deliberate intent to evade taxes. She wasn't trying to evade taxes. She did everything she could to alert the IRS to her deductions.  That isn't the action of a person trying to commit fraud, the judge said.

But, the court admonished Jacobs, the condemnation wasn't a theft, and by deducting it, "she came perilously close to committing fraud."

The Moral: If you ask for an audit, chances are you'll get one -- whether you like it or not.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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Released 1-22-01