TIME: Almanac 1993/TIME Almanac 1993.iso/time/052989/05298900.017

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                                                                                BUSINESS, Page 66

Delinquent Taxmen


A congressional investigation examines corruption and cover-ups
at the Internal Revenue Service

By Richard Behar


    When 50 Internal Revenue Service agents swooped down on the
New York City headquarters of Jordache Enterprises, spent two
days rummaging through files and carted off more than a million
documents, the company's executives were shaken but not
surprised. They quickly concluded that their rivals at Los
Angeles-based jeansmaker Guess, Inc., were involved, and they
were right. The IRS raid and a subsequent grand-jury
investigation of possible tax violations by Jordache were
triggered by tips supplied by Guess to one of the most powerful
IRS officials on the West Coast: Ronald Saranow, who then headed
the Los Angeles office of the service's criminal-investigation
division. Saranow later asked to take an unpaid leave from the
IRS to accept a job at Guess. More than three years have passed
since the raid, and no tax charge has been brought against
Jordache.

    The Jordache affair, among many other cases, will be aired
next month by the House Commerce, Consumer and Monetary Affairs
subcommittee in what could be the most extensive and
embarrassing examination of the IRS since Watergate. While the
subcommittee has not discovered the widespread bribes, kickbacks
and blackmail that led to an overhaul of the IRS in the 1950s,
its yearlong probe has unearthed evidence of disturbing
misconduct: several instances of alleged wrongdoing by
high-level IRS officials in the past five years and an attempted
cover-up by the agency's image-conscious leaders.

    At the heart of the probe are two perplexing questions.
Have post-Watergate reforms designed to shield the IRS from
political abuse unintentionally allowed corruption to flourish
by exempting the agency from proper oversight? And is the
agency, headless since Commissioner Lawrence Gibbs resigned at
the height of the tax season last March, using those reforms to
prevent the subcommittee from delving into the wrongdoing?

    In 1976 Congress amended the IRS code, making it a felony
for the agency to provide or even discuss confidential
tax-return information with most outsiders, including the FBI
and the Justice Department, without a federal court order. The
revised Section 6103 was designed to prevent Executive Branch
officials from obtaining tax information on political enemies,
Richard Nixon-style. But critics maintain that the reform has
turned the IRS, which is possibly the Government's most feared
civilian bureaucracy, into an agency that answers to no one.

    The subcommittee's chairman, Georgia Democrat Doug Barnard
Jr., says the IRS has become so consumed with preserving its
reputation that it is using Section 6103's confidentiality
provisions to thwart congressional scrutiny of alleged
misconduct. Citing Section 6103, IRS officials have refused to
turn over confidential files about the Jordache affair and other
cases. "We are handicapped from doing the oversight job that
Congress has determined we should do," says Barnard, a
conservative former banker.

    There is certainly much to question in Saranow's handling
of tax cases that the IRS brought against two rivals of Guess.
In 1985 Saranow, acting on a tip from Guess, launched a criminal
probe of Jeff Hamilton, Inc., a Los Angeles-based company that
once made clothes under a license from Guess. A year later
Saranow, again relying on information supplied by Guess, got IRS
officials in New York City to begin a criminal case against
Jordache. At the time, Jordache's founders, the Nakash brothers,
were embroiled in a bitter dispute with the Marciano brothers,
who founded Guess, that is still being contested in the courts.

    In late 1986, after the IRS dropped a tax case against
Guess that had been initiated by Jordache, top agency officials
began to investigate Saranow's possible role. The probe
intensified in 1987, when Saranow's office dropped charges
against Jeff Hamilton only days after that firm withdrew a
lawsuit it had filed against Guess. Meanwhile, the IRS rejected
Saranow's request to take a leave of absence and work for Guess,
as his deputy, Howard Emirhanian, had done a year earlier.
Saranow was cleared of charges of wrongdoing in 1988.

    Congressional investigators believe that the IRS in its
investigation of Saranow not only ignored key witnesses but
also kept him abreast of the case as it developed. John Rankin
Jr., the retired IRS assistant commissioner for inspection who
oversaw the Saranow investigation, denies a whitewash. "I think
Ron made some bad judgments, but I don't think he committed a
crime," he says.

    Despite such assurances, the Justice Department has
convened a second grand jury in New York City to re-examine the
original investigation. Saranow has left the IRS to open a
bicoastal private-investigation business with, among others,
Anthony Langone, until recently the IRS's assistant commissioner
for criminal investigation.

    Another disturbing incident involves Frank Santella,
formerly an assistant regional inspector in the IRS's Chicago
office. In 1984 Santella's three deputies complained to Joseph
Jech, the IRS's Midwest regional inspector, that their boss had
released confidential tax data to a mob-linked company in
exchange for illegal gifts such as theater tickets and expensive
dinners. One year later, their charges ignored, the
whistle-blowers sought help from IRS officials in Washington.
As a result, Santella received a twelve-day suspension without
pay -- whereupon a group of senior IRS officials chipped in to
reimburse him.

    The whistle-blowers did not fare as well. Two were demoted,
and the third was pressured to transfer to another city. But
all, they say, were harassed by some of the same higher-ups who
had rushed to Santella's aid. Top IRS and Treasury Department
officials dismissed the whistle-blowers' cries of harassment.
But in 1987 an independent IRS "grievance examiner" concluded,
in a report obtained by TIME, that their complaints were
justified. Nothing was done, however, until Barnard's
subcommittee began asking questions in early 1988. The
whistle-blowers were reinstated in their former positions, and
Santella was forced to resign.

    One of the IRS officials involved in harassing the
whistle-blowers was John McManus, who is also the subject of
investigation by the subcommittee. McManus, a former deputy
assistant commissioner of the IRS, was permitted to retire
quietly from the agency in 1987 after a tax case against him was
initiated. In April 1988, shortly after Barnard's subcommittee
stumbled across his case, the IRS sent McManus a "notice of
deficiency" seeking nearly $100,000 in back taxes and penalties.

    "The IRS has tried to offer explanations for what has
happened in these cases," says Barnard. "Some of these
explanations have been very, very farcical." His efforts have
been impeded by the fact that his subcommittee is not empowered
to obtain confidential IRS documents without the consent of the
concerned taxpayer. But although several taxpayers have given
their consent in the current investigation, the Justice
Department has blocked the subcommittee from getting the
information it seeks.

    One way around the impasse would be for the powerful House
Ways and Means Committee to obtain the records, as it is
empowered to do under Section 6103. But the committee's
influential chairman, Illinois Democrat Dan Rostenkowski, has
not cooperated, apparently out of concern that embarrassing
disclosures about the IRS could damage its ability to collect
taxes.

    Moreover, Barnard charges, Rostenkowski has threatened to
scuttle any attempt to pass a House resolution granting his
subcommittee the authority to get the records on its own. The
IRS insists that it has complied as fully as the law allows by
turning over 12,000 pages of documents and making available 75
agency employees as witnesses. Says IRS spokeswoman Ellen
Murphy: "It's unfortunate that the cooperation we have given is
ignored because the law prohibits us from talking about a couple
of obviously interesting cases."

    Nevertheless, the IRS has warned agents who have been
contacted by congressional investigators not to talk unless IRS
attorneys are present. The agency's lawyers travel across the
nation in tandem with congressional investigators and relay the
witnesses' testimony to senior IRS officials in Washington. One
key informant, a former IRS agent, claims that he has been
audited repeatedly by the tax agency in retaliation for
reporting corruption within its ranks. At next month's hearings,
he plans to disclose how two Treasury Department attorneys
visited him in December with what he interpreted as a warning
that Gibbs, who was still IRS commissioner at the time, did not
want to be contradicted when testifying before Congress.

    Gibbs, who declined to be interviewed for this report,
proclaimed in a nationally televised news show before he left
the IRS that he welcomed "a full, fair and complete airing."
Since his departure, however, Acting Commissioner Michael
Murphy, a career IRS bureaucrat, has been actively lobbying
Congressmen to prevent any hearings. He believes that the IRS,
which rarely hesitates to expose the peccadilloes of private
taxpayers, would be hurt by the publicity. Last month Murphy
turned up in Barnard's office to discuss whether the dispute
could be ironed out in private, behind closed doors.