Hearings to Begin on Misconduct at IRS Office in L.A.

The Los Angeles office of the Internal Revenue Service will be the focus of attention today when a congressional subcommittee, after a yearlong investigation, begins a series of major hearings on corruption and misconduct at the IRS.

The IRS has strongly opposed the investigation, which members of Congress believe could uncover one of the biggest scandals in recent years for the image-conscious tax collection agency.

Three of the eight complex cases to be discussed today involve the activities of Ronald Saranow, the former chief of the IRS’ criminal investigation division in Los Angeles, a post that made him one of the most powerful law enforcement officials in California.

The probe will explore whether Saranow improperly used IRS power on behalf of the Marciano family in their struggle for control of Guess, a Beverly Hills jeans and sportswear producer. In 1986, Saranow was denied permission by the IRS to take leave without pay to go to work for Guess before the date on which he was eligible to retire from federal service.

Charges of Misconduct

Also under question will be Saranow’s apparent intervention on behalf of an IRS agent accused of preparing a phony tax return for Daniel Mondavano, a reputed loan shark whose associates included several members of the Los Angeles Mafia family. Mondavano pleaded guilty to tax charges last year in connection with a $4-million investment scheme.

In three days of hearings, the subcommittee will look at charges of misconduct among IRS officials in Los Angeles, Chicago and other cities, including agency headquarters in Washington. The hearings will conclude Thursday with testimony from high-ranking officials, including new IRS Commissioner Fred T. Goldberg and former Commissioner Lawrence Gibbs.

Rep. Douglas Barnard (D-Ga.), who will direct the hearings, is frustrated by the reaction of the IRS to the investigation.

The IRS “has often failed to cooperate with, and on occasion has actually obstructed, our probe,” Barnard, chairman of the commerce and consumer subcommittee of the House Government Operations Committee, said in a letter last month to acting IRS Commissioner Michael Murphy.

Federal law forbids the disclosure of any information about the tax returns or related issues for an individual or company. But the IRS has interpreted this so broadly that employees have been forbidden to answer virtually any questions posed by congressional investigators without a specific authorization from the IRS commissioner.

For example, when investigators tried to ask a regional official about an automobile accident involving a government vehicle, IRS attorneys at the meeting told the official not to answer without personal authorization from the IRS commissioner.

Ellen Murphy, spokeswoman for the IRS, said Monday: “We feel that we have provided access to the information that, under the law, we can. We understand that the disclosure provisions of the tax law as well as the Privacy Act have frustrated the committee’s efforts to some degree. We believe the committee has been able to have access to information to perform the oversight role. We have the responsibility to carry out the duty to disclose information properly.”

Extensive Investigations

The subcommittee hearings will look at the way IRS officials wield their power and will review charges that officials have acted improperly for personal financial gain and have granted special favors to social acquaintances. The probe will raise questions about the internal controls within the agency to punish wrongdoing. This is a particularly sensitive issue for the IRS, because the effectiveness of the voluntary tax system is threatened if the public loses confidence in the integrity of the agency.

In the case of Saranow, the IRS has conducted extensive investigations, interviewing more than 40 witnesses, but found that “there did not appear to be sufficient evidence of any federal violation which would warrant criminal prosecution,” the IRS said in a 1988 letter to the U.S. Attorney’s Office in New York.

The investigation disclosed that Saranow had “social contacts” with the Marcianos and asked for leave without pay to go to work for Guess, the IRS letter said. But his request was denied “because approval may appear to outsiders to be a conflict of interest and could cause cynicism among employees,” said the letter from Kenneth Thompson, the acting IRS commissioner of inspection.

But the subcommittee is reviewing the same subjects on which the IRS internal inspection effort has already declared Saranow exonerated.

A key issue is the relationship between Saranow and the Marciano brothers, who founded the Guess firm. The Marcianos are fighting for control of Guess with the Nakash family, who bought a half interest in Guess for $5 million. The Marcianos won a legal victory in March when a California jury ruled that the Nakashes used fraud in persuading the Marcianos to sell them half of Guess. The verdict is being challenged by the Nakashes.

The subcommittee is investigating whether the Marcianos improperly persuaded Saranow to have the IRS open a tax fraud probe of the Nakash family’s firm, Jordache, a major jeans manufacturer.

Richard Trattner, Saranow’s attorney, said he believed that the former IRS official had been cleared of all allegations of wrongdoing in connection with the Guess-Jordache dispute.

But he said the federal laws against disclosure of tax information prevent his client from saying anything more. “This is a very serious bar to anyone talking about anything. . . . This is one of those crazy situations where we might very well like to set the record straight, very clearly, but the truth is nobody knows how to do this without violating the law.”

Lopsided Presentation

According to subcommittee sources, Saranow refused to appear at the hearing without being subpoenaed. The subcommittee was informed that, if forced to appear by a subpoena, he would invoke his Fifth Amendment right to refuse to answer questions.

Trattner said today’s hearing would “end up with a very lopsided presentation, but that’s not our making.”

According to sources in Washington, Marvin Rudnick, a Justice Department lawyer who had been assigned to the Los Angeles strike force on organized crime, is expected to tell the subcommittee today that Saranow attempted to intervene on behalf of an IRS revenue agent who prepared the phony tax return for Mondavano.

Rudnick, sources said, reported to his superiors that Saranow approached him in March, 1986, seeking to have the contemplated felony charges against the agent reduced to a misdemeanor.

The agent ultimately pleaded guilty to a felony count of assisting in the preparation of a false tax return and was sentenced to probation and community service.

Robert A. Rosenblatt reported from Washington and Kim Murphy from Los Angeles. Times staff writers Ronald L. Soble and William K. Knoedelseder Jr. in Los Angeles also contributed to this story.