IRS IN THE SPOTLIGHT : Ex-Director of IRS Unit in L.A. Hindered Probes, Witnesses Tell Congress

The Internal Revenue Service office in Los Angeles in charge of criminal tax cases was hobbled in recent years by an overbearing director who would tolerate no dissent and by an in-house watchdog unit that failed to do its job, Congress was told Wednesday.

Testimony by four past and present IRS investigators came as a House subcommittee continued hearings into charges of misconduct centering on Ronald Saranow, former chief of the agency’s criminal investigation division in Los Angeles.

Saranow previously has been accused by congressional investigators of developing a too-cozy relationship with the Marciano brothers, who founded Guess Inc., a Los Angeles jeans manufacturer. Saranow also has been accused of allowing a group of tax evaders represented by a former IRS lawyer to escape prosecution by paying taxes anonymously.

The four witnesses, who provided a rare glimpse of activity within one of the government’s most confidential agencies, said Saranow’s imposing presence had tended to thwart IRS internal inspectors who investigated his activities. All four witnesses were assigned to the agency’s inspection division, which routinely investigated other branches of the IRS.

Russell M. Davis, a former IRS inspector who led the probe, testified that Saranow had cultivated a close relationship with an inspection division manager in Los Angeles, Debbie Jones.

That relationship caused “a reluctance on the part of CID (criminal investigation division) witnesses to come forward with information” about Saranow, Davis said, for fear that Saranow might learn of the disclosures from Jones.

Frank B. Rippetoe, a former group manager in the inspection division, agreed that there was “hostility on the part of CID management” toward the inspection division.

Rippetoe said Saranow “did not encourage cooperation by his agents (with IRS inspectors) unless it was to resolve a problem for him.”

Rep. Doug Barnard Jr. (D-Ga.), chairman of the commerce, consumer and monetary affairs subcommittee of the House Government Operations Committee, said his panel wants to determine whether the IRS has experienced an institutional breakdown in its efforts to police corruption and ethical violations or whether the situation at the Los Angeles office was abnormal.

Top IRS officials in Washington have strongly opposed the congressional investigation. They have claimed that privacy provisions in the federal tax code prohibit them from providing certain information sought by the committee.

Fred T. Goldberg Jr., President Bush’s newly appointed IRS commissioner, said in testimony to be presented to the subcommittee today that “mistakes have been made” but that he can see “little to be gained from dwelling on the details of each matter” under consideration by the panel.

“Inspection is functioning well. Indeed, as we understand it, each matter considered by this subcommittee had already been referred to inspection by one or more IRS employees,” Goldberg said in his statement.

“The IRS is an organization of 120,000 human beings working throughout the United States and abroad,” Goldberg continued. “In any organization of our size, there will always be instances of bad judgment or misconduct and occasional instances of criminal wrongdoing.”

Charles McCalmont, a former group manager in the Los Angeles CID unit, told the subcommittee that Saranow once was a highly competent manager. But McCalmont charged that Saranow had “deteriorated” in his last few years, or about the same period in which he developed a close relationship with executives of Guess Inc., the jeans manufacturer.

Guess executives approached Saranow in 1985 to give him what they said was evidence of tax fraud by Jordache, a competing firm. Saranow passed along the information to IRS officials in New York, who raided Jordache’s office and seized 3 million documents.

Saranow later made a request to take early retirement from the IRS to work for Guess Inc., but he was turned down by his superiors. He resigned from the agency last year but did not take a position with the jeans maker. An IRS investigation of his activities failed to find any potential criminal violation.

“Saranow was a very powerful individual who dominated the inspection division, as he did his own division,” McCalmont testified. He said Saranow had his superiors in Washington “in his hip pocket. He could do anything he wanted to.”

The former CID director “wanted all his managers to agree with him. He would only select managers who would tell him what he wanted to hear,” McCalmont said. “If you didn’t, you were not loyal.”

A fourth Los Angeles witness, special IRS agent Stan Shirai, said he was warned by a Saranow loyalist that his career could be damaged if he cooperated with the subcommittee’s inquiry. He said the criminal division carefully monitored internal investigations by the inspection division.

Rep. J. Dennis Hastert (R-Ill.), a subcommittee member, said he is examining allegations that IRS agents in Los Angeles sometimes invested in business properties or tax shelter plans after they came under IRS scrutiny.

McCalmont and Shirai said they knew about outside investments by some agents but did not know if the properties had been subjects of IRS interest.

Saranow has declined to comment through his attorney, Richard Trattner.

* RELATED STORY: Part I, Page 1