In 1993, New York author Lee Israel found herself staring down the barrel of a prison sentence. Following an investigation by the FBI, she had been busted as a literary forger. For the past two years, the 53-year-old biographer and journalist had made a killing – not a fortune, but enough to pay the arrears on her rent and get her beloved sick cat treated by the vet – by inventing letters from well-known wits of the mid-20th century. In a series of clever fakes bashed out on vintage Remingtons and Adlers sourced from local junk shops, Israel had ventriloquised funny one-pagers from the likes of Noël Coward, the actor Fanny Brice and, her particular favourite, the satirist Dorothy Parker. With Israel in charge, Brice, of Funny Girl fame, quipped about the size of her nose, Parker apologised for being drunk yet again – “I’m sure that I must have said something terrible” – and Coward was bitchy about Marlene Dietrich, that “canny old Kraut”, whom he nonetheless professed to cherish. These amuse-bouches were then fenced for cash by Israel in those venerable independent bookshops of Manhattan that did a bit of literary memorabilia-dealing on the side. As long as the signature looked OK – and Israel practised those to perfection – no one bothered to ask searching questions about provenance.

In the end, Israel didn’t see the inside of a cell, getting off instead with six months’ house arrest and five years’ probation. Nor did she go down as one of the great forgers of literary history: no one mentioned her in the same breath as Thomas Chatterton or even the “Hitler diaries”. In fact, no one mentioned her at all, which for any writer is galling, but for one with Israel’s ego was simply unbearable. She was justly proud of her work, of the way she had immersed herself in her subjects’ lives and writing in order to absorb their voices by osmosis before sending them out again into the world, duly refreshed. Nor did she regard this is as a mere sideline, but instead turned out fakes on an industrial scale, generating 400 letters in a year and a half.

“My success as a forger was somehow in sync with my erstwhile success as a biographer,” Israel wrote later. “I had for decades practised a kind of merged identity with my subjects; to say I ‘channelled’ is only a slight exaggeration.” She was careful to add just enough juice to make her documents piquant without making them so improbable that flags would be raised. In Israel’s letters, Coward snipes mildly about Julie Andrews’ overbite, while Ernest Hemingway grumbles about Spencer Tracy being cast in The Old Man and the Sea. Israel remained unrepentant about these literary larcenies: “The forged letters were larky and fun and totally cool.”

Dorothy Parker was one of Lee Israel’s targets. Photograph: Hulton Archive/Getty Images

In 2008, a safe 15 years since she had been up in court and nearly 25 years since her last legitimate publication, Israel published Can You Ever Forgive Me? Memoirs of a Literary Forger. Do not be fooled by the apparent cringe of the title. “Can you ever forgive me?” is a line that Israel invented for Dorothy Parker in one of the letters, where she shows the legendary wit faux-abasing herself for drunken shenanigans the night before. The real Parker would never have apologised and nor, indeed, would Israel. Instead, Can You Ever Forgive Me? is a bold, braggy account of how Israel was able to outscam the scammers.

In the pre-internet early 1990s, the trade in literary memorabilia was a sketchy cottage industry powered by a fair amount of greed and bad faith. A proportion of the dealers came to suspect that Israel was passing off fakes, but they were happy to slip her $50 in cash before selling them on for three times that amount to any passing punter who professed a soft spot for Coward, Parker, playwright Lillian Hellman or film star Louise Brooks.

No one was getting hurt and, what’s more, Israel felt that she was being paid for her professional skills in a way that had become closed to her elsewhere. “Lee Israel’s story is intimately bound up with the fact that the publishing industry no longer wanted her kind of writing. She was disappearing from her own landscape,” explains Marielle Heller, director of the Oscar-buzzed film version of Can You Ever Forgive Me?, starring Melissa McCarthy, which goes on UK release next month. What Heller means is that Israel’s way of working – she had been the author of three biographies, two of which were critically acclaimed, with one making the New York Times bestseller list – was going out of style. Years of patient sleuthing in the archives, followed by the crafting of a meticulous narrative in which the subject of the biography – Israel’s 1972 life of the actor Tallulah Bankhead was probably her best work – is given precedence over the whimsy and ego of the author, was becoming unfashionable. Kitty Kelley had recently published muckraking exposés on Jackie Kennedy and Frank Sinatra, and it was increasingly clear that, without a fair dollop of vicious smut and a breathlessly scandalised narrative voice, a well-turned biography didn’t stand much of a chance.

Nor, in this newly commodified market, did Israel have either the knack or desire to turn herself into a “brand-name author”. She wasn’t merely bad at publicity, she was bad at life, managing to offend just about everyone, including her own agent. There’s a wonderful scene at the beginning of the film where she turns up semi-drunk to her agent’s smart party and stumbles across smooth-as-silk thriller writer Tom Clancy holding forth about the secret of his success. Snorting in derision, she stomps out of the building, but not before stealing a particularly nice coat from the cloakroom.

McCarthy with Richard E Grant in Can You Ever Forgive Me? Photograph: Allstar/Fox Searchlight

The apartment to which Israel returns is, somewhat incongruously, on upmarket Riverside Drive. The early 1990s was still a time when artists and writers were able to live in nice bits of Manhattan thanks to the long reach of rent control and reasonably accessible welfare benefits. It is this aesthetic of a New York that is both grand and shabby that Heller has worked so hard to show in her film. “Some of those old bookshops, which have been in the same family for generations, are still there and you can feel 20th-century literary history dripping off the walls,” explains Heller, who shot on location in the places where Israel plied her nefarious trade.

The fact that Israel’s Upper West Side apartment was in a state of chaos, with cat shit piling up under her bed, suggests that her mid-life plunge into criminality was less a dramatic moral decline than a symptom of decaying mental health. Israel’s inability to sell a new book to her sneering agent, who suggested she “find another way to make a living”, her armoured loneliness – her ex-girlfriend did not return her calls – and her alcoholism were tipping her from eccentric cat lady into social nuisance. She had recently taken to phoning up leading publishing people pretending to be the essayist and screenwriter Nora Ephron and yelling “star fucker” when they came breathlessly to the phone. Ephron’s lawyers had to send a letter instructing her to cease and desist.

Another time, humiliated by a bookseller who refused to buy the second-hand books she had schlepped across town, Israel concocted a delicious revenge. Having ascertained that he had an expensive dog that he adored, she called the shop from a phonebox pretending to be one of his neighbours, and screaming that their block was on fire and that his beloved pet was about to become toast. The clerk was last seen hysterically hailing a cab to take him to the non-existent Armageddon.

Ventriloquised by Israel, Noël Coward was uncharacteristically bitchy about Marlene Dietrich. Photograph: Everett/REX/Shutterstock

Israel is hardly an obviously sympathetic character and both Heller and co-scriptwriter Nicole Holofcener put her spikiness front and centre. “Sure, she comes across in her memoir as unlikable, but she’s also brave enough to reveal her vulnerabilities too. You have to admire a woman who is prepared to tell you that the pest exterminator refused to enter her apartment until she had cleaned up,” says Holofcener. For Heller, making a film about an unlovely woman is important since, in real life, most of us are unlovely in one way or another. “Hollywood traditionally hasn’t been interested in telling the stories of women like Lee Israel unless it is to punish them,” she says. And punishment is the last thing Heller has in mind.

One of the most significant parts of the film for her is the love story between Israel and her partner in crime, a ruined jailbird dandy called Jack Hock, played by Richard E Grant. With the booksellers becoming increasingly suspicious of Israel and her forgeries, she takes to selling real letters. Visiting the libraries of Yale, Princeton and Harvard, the workings of which she knew well from her career as a professional researcher, she hand-copied letters from William Faulkner, Margaret Mitchell, composer Kurt Weill and playwright Eugene O’Neill, typed up a fake version at home, and then returned to do a substitution when no one was looking. It becomes Hock’s job to sell the letters to increasingly excited booksellers and auction houses, who know the real thing when they see it and, as ever, are happy not to ask too many questions about how such an unlikely bibliophile happened to have so many literary treasures in his possession.

Heller’s film, then, asks gentle questions about literary authenticity and probes our continuing fascination with the material relics of disappearing cultures and lost lives. Researchers and academics in today’s digital environment still speak tremblingly of needing to see original documents rather than scans or photographs or other facsimiles, but it is unclear exactly what magic they believe is invested in this act of touch.

Lee’s argument was that, given that her fakes were good enough to fool so many people, where exactly was the harm? Struggling booksellers made a tidy profit and buyers felt a thrill at being allowed an exclusive and intimate encounter with their favourite writer. On many occasions, she believed, she was offering something better than the original: “It was better Coward than Coward. Coward didn’t have to be Coward. I had to be Coward and a half.”

The film of Can You Ever Forgive Me? has had a long and troubled genesis, as any film as interestingly genre-busting as this is likely to have. It is not a heist movie, though the scenes where Israel is in danger of getting caught smuggling letters out of research libraries will get your heart racing. The central love story is a platonic one between a gay man and a gay woman, both aged over 50, who spend a large part of the film quarrelling with a viciousness that goes far beyond the cliched animosities of odd-couple pairings. Nor is it a film that wears any particular subject on its sleeve. That Hock is dying of Aids is shown as a bleak fact of life of NYC at the time, rather than an issue around which to organise the plot. “Sometimes people ask me what is the moral of the film, which I find surprising,” says Heller. “I’m not constructing a fable. I’m presenting real lives in all their messy complexity.” If the film has a message it is perhaps this: any of us at any time could find ourselves as achingly lonely, hopeless and desperate as Lee Israel and Jack Hock.

Israel died in 2014. “I exchanged a lot of emails with her when I was writing my script,” recalls Holofcener. “She was polite, she gave me some useful notes.” Nevertheless, Holofcener was nervous when the time finally came to meet. “I thought she would be a bitch, and a drunk bitch at that,” she says. In fact, the frail old lady was a more reserved, contained presence than Holofcener had anticipated. “We had just a single cocktail, and dinner lasted an hour.” Israel, who was by now dying of cancer, took a taxi home. All the same, says Holofcener, her overwhelming impression of Israel was that she was “immensely entitled, even all these years later. Naturally she was flattered that a film was being made of her life but she wasn’t remotely surprised. She felt it was entirely her due.”

• Can You Ever Forgive Me? goes on general release on 1 February.