TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/052989/05298900.017

Text File | 1990-09-22 | 10KB | 171 lines

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.