In January 1986 David Fitzpatrick, an inspector of taxes in Hawkins House in Dublin, was instructed to issue a notice for the raising of a Capital Gains Tax (CGT) bill against Charles Haughey.

The bill was for £89,850. Fitzpatrick sent it by registered post to Abbeville and a copy by ordinary post to Haughey's tax agents, Haughey Boland. The tax was due by March 25th.

The tax bill arose because of a £300,000 payment to Haughey from Patrick Gallagher of the Gallagher Group shortly after Haughey's election as Fianna Fail party leader and Taoiseach in December 1979. The Revenue had not been informed of the payment by Haughey and discovered it only when told by the receiver to the Gallagher Group, Laurence Crowley, in 1984. The Gallagher Group had collapsed in 1982.

In July 1986 the Revenue received £50,000 from Haughey. Some of this, £12,480, was in respect of another CGT bill arising from the sale of a stud farm in Meath in 1977. Haughey still owed £52,330. For the Revenue the next step was to issue a notice to the Collector General. Before doing this, Fitzpatrick consulted a senior official, Christopher Clayton.

The Revenue first learned of the matter when the then chairman, Seamus Pairceir, was contacted. The receiver to the Gallagher Group, Crowley, had come across what purported to be a contract for the sale to the Gallagher group of land at Abbeville by Mr and Mrs Haughey.

Crowley was suspicious that the contract was a sham and that the payment was really a gift to Haughey. If it was, then technically the money could be recovered and given to the Revenue.

In the event, Pairceir decided against incurring the legal costs involved in what he considered would be a long shot - getting the courts to declare the contract was a sham. He decided to have the £300,000 assessed as a capital gain.

Clayton was the man then in charge of the capital gains section and Pairceir informed him of what had been discovered. Clayton sent a letter to Haughey Boland indicating he knew Haughey owed money but not mentioning the Gallagher deal.

He got no satisfactory response. More than a year later, in January 1986, he decided to have an assessment issued. In this and future dealings he kept Pairceir informed as to what was happening. Pairceir said this week this was so as to provide "comfort" to Clayton in his dealings with such a powerful taxpayer. He said Haughey's position did not affect how he dealt with him. He instigated no general review of Haughey's affairs.

When the remaining tax due from Haughey had still not been received by October 1986, Clayton told Fitzpatrick to set in motion the process to have the money secured through the courts. Around February 20th, 1987, Clayton was contacted by the Collector General's office and asked to contact Haughey Boland again about the matter. It was the week after the general election and Haughey was about to be elected Taoiseach. Clayton was dealing with a hugely sensitive matter.

Before telephoning Pat Kenny, of Haughey Boland, Clayton wrote a note of what he should say.

It read in part: "As you know the tax liability in question has been handled sensitively and as quietly as possible on our side. We have no wish to change that position. However, it is the case that despite the ordinary process of collection. . . the balance does not to date appear to have been paid and the next stage in the collection process is enforcement through the courts. . . I am phoning now because the enforcement stage is imminent. . .

"I am conscious of the fact that your client has been very busy for quite some time and is not likely to be less busy after 10/3/87 (when Haughey was due to be elected Taoiseach by the Dail)."

Within days Clayton was told Haughey had said he would pay up. The final payment was not made until January 1988. No interest or penalties were charged.

Despite the suspicions aired about the Gallagher document, and the fact Haughey had not declared a significant gain, no decision was made by Pairceir to refer Haughey to the Revenue's investigation branch.

"It never came to my mind that I should send it to the investigation branch, and even if I had, I don't see what the investigation branch could have done," he said. The Revenue's files contained a history of Haughey's accumulation of assets from the 1950s but, as James Connolly SC, for the Revenue, put it to Clayton, these "were capable of plausible explanation as to their acquisition in a tax compliant way".

That said, Revenue officers had their suspicions. Someone in the Revenue maintained a file containing newspaper articles about Haughey's assets and lifestyle. It included articles by Frank McDonald and Dick Walsh, published in the Irish Times as far back as 1979.

Suspicion was a factor behind Clayton's next action in relation to Haughey. As he explained it: "In late 1991 certain things came to my attention and entered into the public domain which caused me to institute a review of compliance in certain matters. I remember in particular the semi-state sector . . .

"There were problems with Telecom Eireann, Greencore, the beef tribunal, all those were happening in late 1991. So I would have been conscious of the fact that there was non-compliance by persons from whom I would have expected compliance."

As part of this initiative, Clayton thought of Haughey. Haughey, as far as the Revenue was concerned, was a PAYE worker, the bulk of his earnings coming from his political work. Like most PAYE workers, he had not filed a return in years.

"It seemed quite inappropriate and perhaps even scandalous that a Taoiseach should be so much in arrears as regards tax compliance, as regard filing," Clayton said.

Haughey wasn't quick to respond when the Revenue contacted him seeking returns. By the time his first return was filed he'd retired from politics. The returns, which went back to 1985, mentioned his income from politics, deer farming, and some rental income. There was no mention of offshore accounts or large gifts from admiring businessmen. No further action was taken by the Revenue.

In regard to property tax Haughey was again a troublesome taxpayer. At 1.5 per cent, this was a self-assessment tax where people assessed the value of their property and answered a few questions on a standard form.

Haughey had been making returns giving his assessment as to the value of his home and some immediately adjoining acres, but had not answered the questions. Repeated requests from 1986 through Haughey Boland led to no answers.

The questions, to do with the purchase price of his house, when it was bought, and other matters, were never answered.

In 1983 Haughey valued his home at £250,000. He said its market value remained steady for every year to 1989, when there was a small uplift to £262,500. This remained the value up to 1995, when it increased to £272,500. The 1996 valuation was £295,000.

These valuations were accepted by the Revenue. On November 6th, 1986, an official from the Valuation Office had visited Abbeville. The Revenue was advised that the self-assessed value for that and the three previous years were adequate.

However, these valuations and the associated tax were revised upwards by the Revenue in the wake of the 1997 McCracken Report. The increases were huge. The revised figure for 1988, £300,000, was greater than the figure previously accepted for 1996. The revised figure for 1996 was £1.3 million, four times the previously acceptable valuation. Significant increases every year from 1988 to 1996 were imposed.

No reason was given at the tribunal this week as to why revelations about payments from Ben Dunne to Haughey could affect the market value of a Gandon mansion in Kinsealy. On the face of it, it suggests that the Revenue's attitude towards Haughey was influenced by his position in society.