TIME: Almanac 1995

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<text id=89TT1394> <title> May 29, 1989: Delinquent Taxmen </title> <history> TIME--The Weekly Newsmagazine--1989 May 29, 1989 China In Turmoil </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 66 Delinquent Taxmen </hdr><body> 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. </body></article> </text>