Organized Crime Is an Enemy in Our Midst
Al “Scarface” Capone was a genuinely evil man. He was born near the Brooklyn Navy Yard in 1899, and his first real job was as a bouncer and bartender at the Harvard Inn in New York City. Although he would later falsely claim he was wounded while in the army during World War I, a dance hall knife fight during that period left him with a scar along his left cheek and a memorable nickname. In 1918, he married Mae Coughlin, who one year later bore their only child, Albert Francis Capone. It was also about this time that the family moved to Chicago and Capone became a bodyguard and the bouncer at a bar and gambling establishment called the Four Deuces.1
Prohibition came to the United States on January 17, 1920. In Chicago, a large number of vicious gangs began a murderous ten-year war to control the illegal booze gurgling down the hypocritical throats of the American people who had supported the Volstead Act. There were hundreds of millions of dollars to be made and young Capone turned out to be a totally ruthless and extraordinarily skillful gangster. For example, it is known that on one occasion he personally beat to death three men whom he had invited to dinner. The chosen instrument was a baseball bat. His corruption of the police and most of Chicago’s leading political figures, including Mayor Big Bill Thompson, was masterful. It is estimated that by 1928 Capone’s control of the supply of illegal liquor and a string of whorehouses and gambling joints was bringing in more than $100 million a year.
It was indeed outrageous. And the upright president of the United States was outraged. Herbert Hoover liked to begin the day with a touch of exercise. Before breakfast he would meet on the White House lawn with his cabinet to toss the medicine ball.
“Have you got that fellow Capone yet?” Hoover asked Secretary of the Treasury Andrew Mellon, tossing the medicine ball in his direction. “Remember, I want that man in jail.”
Although Elmer Irey understood that presidents rarely are denied their whims, he raised the right question about Hoover’s order when looking back on his career some years later. “I couldn’t help wondering,” he wrote, “why a Treasury Department Unit charged with fighting tax, customs and narcotics frauds should be assigned to nab a murderer, a gambler, a whore monger and a bootlegger.”2
But Irey and his specially assigned team went to work. Although a Justice Department team headed by Elliot Ness would later gain a great deal of attention for its attack on Chicago’s gangsters with a self-promoting book and a television series called “The Untouchables,” it was in fact the IRS that collected the evidence that eventually sent Capone, Case Jacket SI–7085–F, to federal prison.
The story of the investigation and prosecution is dramatic. Working on the inside was a secret IRS agent who in some accounts is called Michael F. Malone and in other accounts Pat O’Rourke. Whatever his real name, a colleague some years later would say that Malone “was the greatest natural undercover worker the Service has ever had. Five feet eight inches tall, a barrel chested, powerful two hundred pounds, with jet black hair, sharp brown eyes underscored with heavy dark circles and a brilliant friendly smile, Mike could easily pass for Italian, Jew, Greek, or whomever the occasion demanded. He was actually ‘black Irish’ from Jersey City.” Malone went to Philadelphia and developed the undercover persona of one Michael Lepito. Some weeks later Malone turned up at the Lexington Hotel in Chicago. He was wearing a white snap-brim hat, a checked overcoat, and a purple shirt, all with labels from a well-known Philadelphia department store, and he spoke with an Italian accent.
Capone and his gang of bodyguards and henchmen occupied several lavishly decorated floors of the Lexington. Capone’s sentinels were wary. They ran a check on the stranger. They intercepted his mail, which bore Philadelphia postmarks and consisted of letters carefully sprinkled with the slang phrases then favored by gangsters in the City of Brotherly Love.
Finally, one of the Capone gang approached him and asked his business. “Keeping quiet,” Malone replied. A few days later Malone and the goon had a drink and the IRS undercover agent confided he was wanted for a burglary in Philadelphia. The mole had burrowed his way into the Capone organization and in the next two years would be an invaluable source of information.
On the outside was a special five-man IRS investigative team headed by Frank Wilson of Baltimore. Just before the team had been established to nail Al Capone, several of its members had been involved in a successful effort to convict his brother Ralph. The key break in the investigation of Scarface himself came after months of investigation. It was the summer of 1930. For many weeks, Wilson had been combing through the mountains of paper that had been seized during earlier fruitless raids on Capone establishments. The team already had examined more than a million items. But no evidence had been found to document the gangster’s income.
As Capone’s biographer recounted it, one hot August night well after midnight Wilson was exhausted and discouraged as he continued his seemingly fruitless search. While returning one batch of documents to the file, the IRS supervisor accidentally bumped into the cabinet; the drawer snapped shut and automatically locked. Wilson searched his pockets but couldn’t find the key. In the hallway behind him there was another row of dusty old file cabinets. Wilson thought this would be a good place to stash the documents he had been working on until he could get a key the next morning. As he opened a drawer to temporarily stow the unwanted file, he spotted a package containing material that he had not previously examined.
“He broke the string. Out tumbled three black ledgers with red corners. They were dated 1924–26. Leafing through them, he stopped, electrified, at a page in the second ledger. The columns were headed BIRD CAGE, 21, CRAPS, FARO, ROULETTE, HORSE BETS.”3
Wilson was no longer exhausted. He returned to his office with the miraculously discovered books, which four years before had been seized during a raid by local police. The books showed that the single operation they covered had made net profits of over $500,000 in one eighteen-month period. “Every few pages a balance had been taken and divided among ‘A’ (for Al Capone, Wilson surmised), ‘R’ (Ralph Capone), ‘J’ (Jake Guzik), etc.” A balance of $36,687 on December 2, 1924, showed that A and J received $5,720.22 and R got $1,634.35.
Wilson was ecstatic. The handwriting in the ledgers was checked against those of hundreds of known gangsters collected from automobile registration records, the courts, banks, bail bondsmen, and others. Eventually a bank deposit slip was found with writing matching that in the ledgers. The name of the bookkeeper was Leslie Adelburt Shumway. Here was the key, the man who could bring down Capone. But first he had to be found and persuaded to cooperate.
Four months later, in February 1931, Wilson got a tip that Shumway was working as a cashier at a racetrack in Miami. With this lead, the bookkeeper was soon discovered in one of the cages of the Biscayne Kennel Club. Wilson approached Shumway and told him he had two choices. He could go on pretending ignorance about the Capone operations. If this was Shumway’s choice, Wilson was prepared to hand him a subpoena in a very public way, thereby pretty well assuring that one of Capone’s assassins would kill him. Or he could cooperate with the IRS investigators without a subpoena.
Given the options, Shumway agreed to testify before a grand jury. Buttressed by some other evidence collected by Wilson’s team, the government indicted Capone for failing to pay $32,488.81 in taxes during 1924. His net income that year was estimated to have been $123,102.89. The indictment was kept secret while Wilson and his team continued to collect evidence. In June 1931, the grand jury voted to indict Capone for his tax liabilities from 1925 to 1929. Although the IRS knew it had documented only a fraction of his actual income during this four-year period, Capone was charged with earning more than $1 million and with owing $383,705.21 in back taxes and penalties.
Five days before the trial was to begin, the undercover agent, Malone, managed to call Wilson’s boss, Irey, with critical information. “They got the jury list, chief,” he said. “The boys are out talking with jurors with a wad of dough in one hand and a gun in the other. So long.”4
Irey, worried that Capone would once again corrupt the law, contacted the judge hearing the case, James H. Wilkerson. The judge told Irey not to worry. On the first day of the trial the reason became clear. Early that morning, Wilkerson had ordered that the regular panel of jurists available to the other judges replace those on the list that Capone’s thugs had been working on for the previous two weeks.
The trial began on October 6, 1931. After an IRS clerk testified that Capone had filed no tax returns for the years from 1924 to 1929, the first substantive witness was Shumway.
Eleven days later, the jury found Capone guilty. On October 24, 1931, Judge James H. Wilkerson sentenced America’s most powerful hoodlum to eleven years in jail, fines of $50,000, and court costs of $30,000. At the time, it was the stiffest penalty ever given to a tax evader.
Because of his extraordinary reputation, Capone was ordered held in jail pending his appeal. After both the court of appeals and the Supreme Court rejected the arguments of his lawyer, the gangster was taken to the federal penitentiary in Atlanta. He arrived on May 4, 1932, and was assigned number 40822. Two years later, Capone was transferred to a new federal prison just established for the “more dangerous, intractable prisoners.”
Alcatraz, located on a small island in San Francisco Bay, was to be Capone’s home until January 6, 1939, when, partially paralyzed with syphilis, he was returned to the mainland. After his release, Capone, his mother, wife, son, and brothers retired to a small estate in Miami. Capone died on January 25, 1947.
Given the corruption of local police agencies and prosecutors of the time, Herbert Hoover’s decision to order the tax police to put Capone in jail may have been justified. To this day most Americans applaud the IRS prosecution of this most powerful criminal czar.
But President Hoover’s decision also established a precedent that the IRS could be mobilized for a cause, in this case a worthy one, not directly related to the enforcement of the tax laws.
GETTING THE GAMBLERS?
In the Capone case, it was the president who established the IRS’s enforcement policy. Frequently, however, forces outside the White House or the Treasury Department have weighed into the battle. An important outsider in the early 1950s was Senator Estes Kefauver, Democrat of Tennessee. In 1950 and 1951 Kefauver held a widely publicized series of hearings on the growing power of organized crime. Eventually, his committee issued a report sharply criticizing the IRS for failing to enforce the tax laws against gamblers and loan sharks.
Another key outside player during the early 1950s was Colin F. Stam, staff director of the House Ways and Means Committee. In late 1952, he managed to persuade Congress to pass a law requiring professional gamblers to register with the IRS, pay an annual $50 “occupational” tax, and provide monthly payments of 10 percent of their gross take to the government.
The new law presented gamblers with a catch-22. The penalty for not complying was up to five years in prison and a $5,000 fine. The penalty for complying with it, on the other hand, was that local law enforcement officials were provided with the names, addresses, employees, and gross takes of any gambler silly enough to register.
The IRS at first resisted the gambling proposal on the grounds that it would be difficult if not impossible to enforce. Surprisingly enough, Senator Kefauver also opposed the legislation, arguing that it would give local police officials the impression that the federal government condoned gambling.
Once Congress approved the law, however, John B. Dunlop, then the IRS commissioner, became an enthusiastic supporter, and the agency grandly announced that a force of five thousand investigators had been put to work enforcing it. (In those days, the agency had a total of 56,000 employees.)
Given all the other demands of the tax collection business, of course, the IRS did not actually have anywhere near five thousand agents who could be diverted from their normal duties. But even if it had been able to mobilize that number, the project was inherently ridiculous in relation to the vast size of the nation’s illegal gambling industry. In 1951, for example, Dunlop traveled to New York City and announced that the IRS had initiated an intensive drive against 2,850 “known racketeers” and corrupt public officials in the New York region. He estimated that the tapping of racket and graft incomes should yield $258 million in back taxes and penalties.
It didn’t take long for the squishy quality of Dunlop’s prediction to reveal itself. One year after the commissioner’s ambitious promise, James J. Guthrie, the assistant director of the agency in charge of the drive, announced that his agents had assessed a grand total of $15 million throughout the United States. It should always be remembered that announcing an inflated tax assessment is a lot easier than forcing the assessed to cough up the money.
The special IRS project aimed at racketeers and corrupt local officials was launched at about the same time that the agency itself was awash in a massive wave of corruption. These serious problems led to extensive congressional hearings, indictments of a number of senior tax officials including the assistant attorney general in charge of tax matters, the sudden resignations of many more officials, and eventually a major reorganization of the agency. One casualty of the restructuring of the IRS was apparently its highly touted but extraordinarily shallow drive to round up all of the nation’s gangsters.
Organized crime dropped from the headlines of the American press and the consciousness of the American people. But then came the 1957 Apalachin meeting of senior Mafia leaders in upstate New York and the subsequent Senate hearings about the mob’s infiltration of several major labor unions. Significantly, the labor racketeering hearings were organized by the younger brother of an ambitious Massachusetts senator named John Fitzgerald Kennedy.
CRIME FIGHTING DURING THE KENNEDY YEARS
In November 1960, with Robert Kennedy acting as his campaign manager, John Kennedy was elected the thirty-fifth president of the United States. The young president-elect swiftly decided he wanted his younger brother as attorney general. At the time, Robert Kennedy retained a fascination with organized crime that had been kindled by his intense involvement as chief counsel in the earlier labor racketeering hearings of the Senate.
Victor S. Navasky described the genesis of the new IRS drive against crime in his book Kennedy Justice. The Kennedy brothers had pretty well decided that they wanted their commissioner of internal revenue to be Mortimer Caplin, who had taught Robert when he was a student at the University of Virginia Law School. Robert Kennedy and Caplin had a final meeting a few weeks before the inauguration. “I saw Bob in December,” Caplin told Navasky.5
“He asked me my views on tax and organized crime and whether I wanted to join the administration. He asked me to write a letter telling how I felt about IRS working closely with Justice in organized crime. I hadn’t thought much about it, but I said sure. Then I went back and saw Dean Ribble and concluded, after much thought, that as long as we were making real tax investigations—not sham ones—there was nothing objectionable. I wrote him a long letter, five or six pages, spelling out my philosophy.”
Caplin was appointed on January 24, 1961, and a special IRS organized crime squad was immediately detached to work with the Justice Department. Robert Kennedy proclaimed himself a true believer of the theory that the IRS should play a lead role in battling a variety of social ills. In an interview shortly after he became attorney general, he seemed to be echoing IRS Commissioner Dunlop’s words a decade before. “We are going to take a new look at the income tax returns of these people to spot the flow of crooked money. I have been criticized on the ground that tax laws are here to raise money for the government and should not be used to punish the underworld. I think the argument is specious. I do recognize that tax returns must remain confidential. But I also recognize we must deal with corruption, crime and dishonesty.”
The Kennedy brothers were certainly not the first to order the IRS into the war on corruption and dishonesty. And they would not be the last. The questions about the policy, however, have not changed. First, even assuming that the Kennedy-led war on organized crime actually resulted in less corruption and fewer heroin addicts—and that case certainly has never been proved—the more investigators who are assigned to a fairly small number of Cosa Nostra hoodlums, the fewer will be available to investigate the far larger and richer universe of white-collar criminals who infest what is considered legitimate business.
The second problem, of selective enforcement, was articulated by Howard Glickstein, a lawyer who worked in the Justice Department’s Civil Rights Division at the time Kennedy was mounting his war on organized crime. “This time it’s the Mafiosi, but the next time it could be the Black Panthers or Goldwater supporters.”
A colleague of Glickstein’s in the Justice Department’s Tax Division put the problem of the Kennedy crusade in slightly different terms. “The purpose of the tax laws is to collect revenue. Once you bend them to catch criminals, you undermine the tax laws and ultimately destroy confidence in them. Justice has to be evenhanded. It can’t be personal.”6
Many years later, an experienced Washington tax lawyer named Donald Alexander offered a more partisan interpretation of Robert Kennedy and Caplin’s decision to create Justice Department–IRS task forces to investigate leading organized-crime figures. At the time he spoke, Alexander himself had served as an IRS commissioner and had become a leading advocate of the theory that the IRS should concentrate on tax criminals rather than on organized crime figures.
Alexander said he thought Robert Kennedy had a hidden motive in creating the joint strike forces, one effect of which was to increase his personal control over the Criminal Investigation agents assigned to them.
“Bobby Kennedy didn’t get along with J. Edgar Hoover and the FBI wasn’t under Bobby’s thumb,” Alexander observed during a 1988 interview. “Bobby wanted his own investigative unit. So the attorney general called on the IRS and one of my predecessors as commissioner gratefully gave him what he wanted. It was terrible. I don’t think the IRS should be taking orders about who it will investigate and who it will not investigate and how the investigation will be conducted from the political people in the Justice Department. These decisions only should be made by the professionals of the IRS.”
Despite the doubts expressed by Howard Glickstein and other Justice Department officials, however, the department and the IRS greatly increased the number of investigations and prosecutions of organized crime figures. In 1960, the Justice Department counted nineteen organized crime indictments; four years later, it reported 687. The important role of the IRS in this campaign is suggested by Navasky’s estimate that 60 percent of all organized crime figures who were prosecuted during the Kennedy years were indicted on tax charges.
The Kennedy crusade against organized crime generated critics outside the handful of quiet nay-sayers within the Justice Department. Chief among them was Senator Edward Long, a wealthy country banker and Democratic politician from Missouri who also had political ties to Teamster President Jimmy Hoffa. On March 26, 1963, Long was named chairman of the Senate Judiciary Subcommittee on Administrative Practice and Procedure.
With the help of an aggressive staff, Long’s subcommittee held a series of critical hearings on the widespread use of mail covers, wiretaps, and bugging devices by a number of federal agencies, most especially the IRS. The hearings won Long the praise of leading civil libertarians. The hearings, however, also earned the senator the deep animosity of many Justice Department and IRS officials who eventually found a way to even the score. Because counterattacks on political critics are an important, unfortunate, and integral part of IRS history, details of the Long affair are described in chapter 12, on the failure of Congress and other institutions to maintain effective supervision of the tax agency.
After the November 1963 assassination of President Kennedy and the departure of his brother from the Justice Department, the joint IRS-Justice campaign against organized crime was greatly reduced. With urban riots and massive antiwar demonstrations sweeping the country, it is not entirely surprising that Nicholas deB. Katzenbach and Ramsey Clark, President Lyndon Johnson’s attorneys general, had other things on their minds. In 1967, a group of House Republicans reported that two years after Robert Kennedy had left Justice the number of man-days in the field of agents from the Organized Crime and Racketeering Section of the Justice Department had decreased by over 48 percent.
The IRS’s first publicized effort to confront the general forces of evil had been focused on the gamblers. Of course it had failed. Robert Kennedy had led the IRS on its second broad crusade. This time the crusade was against organized crime. According to at least some of these crusaders, it too had a negligible impact. The third campaign was precipitated by a demand that the administration in power act on drugs. Campaigns to educate young people about the menace of drugs take a lot of time. Programs to provide clinics to wean young people from their destructive habits are costly. The fastest, cheapest, and possibly least effective route is enforcement. Once again, it was time to call in the IRS.
During the second half of the 1960s, marijuana became the drug of choice of a swiftly growing number of young Americans. Although marijuana was strongly associated with students at Berkeley, Columbia, and other universities who were mounting impassioned protests against their administrators, and with others who opposed the Johnson administration’s Vietnam policy, polls showed its use to be a far broader phenomenon. July and August 1967 became known as the summer of love. The Woodstock festival came in 1969. To the politicians, bankers, bureaucrats, and police chiefs who ran the country, the clouds of smoke rising up from the massed protestors were almost as upsetting as the protests themselves. Sipping their bourbon or scotch, the men in power wondered whether the world was catching fire.
Something had to be done. And in January 1969, after Richard Nixon was sworn in as president, senior officials in the White House and Treasury Department began to push the IRS to mount a major program to suppress narcotics. Within the IRS, however, some worried that the new program might distract the agency from its prime mission: collecting taxes.
The Nixon administration figure most enthusiastic about turning the IRS into a drug enforcement agency was Eugene Rossides, an assistant secretary of the treasury. His nemesis within the agency was Randolph Thrower, the commissioner of internal revenue. Although the IRS is a part of Treasury, Rossides did not have direct authority over Thrower.
Rossides marched with Robert Kennedy in the vision that the IRS should enforce the laws against the corrupt and the wicked as well as against the tax cheats. Thrower, in contrast, held the view that the IRS’s mandate was to collect taxes. With new players, the fascinating battle of wills between Rossides and Thrower over IRS involvement in narcotics enforcement, which of course echoed the earlier fights concerning the war on gambling and organized crime in the Truman and Kennedy years, would continue through the Bush administration.7
The exchanges in the Rossides-Thrower battle frequently reeked of animosity. “Your memorandum of March 5 expresses deep concern about the evils of narcotics trafficking and I can assure you we all share that concern,” Thrower wrote Rossides on March 26, 1971. “We agree, too, that all available forces should be brought to bear against those who profit from this insidious traffic.”
But Thrower went on to argue that the special demands on the IRS’s authority had to be somewhat limited or collection of taxes from the public would suffer. “Our manpower is now spread over so many diversified activities that we cannot make sufficient audits and investigations in the general tax area to maintain and assure an acceptable level of general compliance with our tax laws. A breakdown in compliance is as great a threat to the welfare of our country as is the narcotics problem which we all abhor.”
In a second memo in June, Thrower continued to resist the pressure from Rossides. “The service has not had sufficient experience in investigating narcotics subjects to assure that intensive tax investigation of major narcotics dealers would have a substantial deterrent effect on narcotics traffic.”
In December 1971, an aide to Assistant Secretary Rossides charged that the top management of the IRS was “a reluctant bride” of the Nixon administration project to launch a coordinated attack on major narcotics dealers, even though the agency’s street-level investigators were gung ho about busting druggies. Several years later, this deep split within the IRS broke out into open warfare.
Despite the resistance of IRS senior managers, Rossides would not be dissuaded. On January 4, 1972, for example, apparently without bothering to consult with the IRS commissioner, he sent a letter to the chiefs of police and sheriffs of virtually every police agency in the country trumpeting the start of “a major new action program to disrupt narcotics distribution by using the Internal Revenue laws.” The Treasury official told the local law enforcement officials that the purpose of the drive “is to seriously disrupt the narcotics distribution system not only by prosecuting those guilty of criminal tax violations, but also by reducing drastically the profits of the narcotics traffic by reaching income not previously reported on tax returns.”
Then came the key request to the police chiefs. The stated targets of the project were middle- and upper-echelon dealers and financiers involved in the narcotics business. “It is in this connection that I am seeking your assistance to provide us with a list of potential targets in your jurisdiction meeting the criteria outlined above as well as supporting intelligence information.” The supporting intelligence included Social Security numbers; activities in the narcotics business; and all available information about a suspect’s standard of living, income, and known assets.
Although senior IRS figures remained opposed to the agency’s heavy involvement in narcotics enforcement, they had trouble controlling their special agents in the field, who found the shoot-’em-up world of narcotics investigations far more fun than the less glamorous business of tracking down everyday corporate tax cheats. The troops went their own way.
But when the size of the nation and the extent of the drug use are taken into account, the results of the intervention appear to have been negligible.
On November 6, 1972, John F. Hanem, head of the Criminal Investigation Division, sent Rossides a thirty-two-page progress report. “The accomplishments by the Service continue to be generally above expectations,” he boasted. Although the report’s charts and graphs all projected dramatic gains in the coming months of the drug war, the actual numbers were far from impressive.
Since the program’s initiation fifteen months before, Hanem reported, 1,011 potential targets had been selected for investigation. Given the difficulty of collecting usable evidence in such cases, it is not surprising that this step of selecting possible targets was the high point of his report. During the same fifteen-month period, Hanem continued, IRS investigators actually had completed 238 investigations. Of this total, the special agents had recommended eighty-two prosecutions. Federal grand juries, however, had indicted only forty-three alleged drug traffickers. Hanem saved the worst for last: The special IRS project, which cost a total of $12 million, had resulted in convictions of fifteen dealers or 1.5 percent of the original IRS targets, obviously only a tiny portion of the nation’s serious drug dealers.
In fairness, however, there was another aspect of the IRS’s narcotics project. At the same time the criminal division was conducting the investigations that led to the fifteen convictions, the agency’s Examination Division completed 384 sometimes overlapping audits of suspected dealers. During July, August, and September 1972, these audits resulted in civil assessments of $11.3 million in taxes from 356 individuals. A comparison of the number of drug dealers indicted over a fifteen-month period with those found to owe back taxes during a single quarter suggests that the application of the IRS’s civil authority might have been somewhat more effective than the exercise of its criminal powers. But given the official estimates that the nation was then spending billions of dollars a year on marijuana, heroin, cocaine, and other illegal drugs, the total impact of the IRS effort seems negligible.
The Hanem report said that an unspecified number of civil assessments made against drug dealers were brought under an emergency procedure that allows the IRS to seize preemptively the assets of a suspect in situations where investigators believe the taxpayer may be about to flee the country or otherwise escape.
Hanem described this “jeopardy assessment” process in glowing terms. “There probably is no single procedure available to the Internal Revenue Service that will reduce the working capital and thus disrupt the drug trafficking as suddenly or dramatically as the jeopardy assessment,” he claimed. “Termination of taxable income usually originates with arrests by the Bureau of Narcotics and Dangerous Drugs, or state or local police authorities where the individual is found in possession of large amounts of cash or other assets which the IRS may seize.”
But as described in chapter 3, on collections, the improper use of the jeopardy assessment procedure by IRS agents in Florida eventually proved extremely damaging. It was the 1974 Court of Appeals decision denouncing the IRS’s treatment of Sharon Willits that provided agency critics with the ammunition they needed to argue that the Wild West antics of the Criminal Investigation Division were seriously undermining the basic tax collection mission of the IRS.
The slashing court decision, however, was only one of several factors that in the early 1970s prompted the IRS once again to contemplate the hazards of using its enforcement powers for purposes other than tax collection. In July 1969, under pressure from the Democratic Congress and the Nixon White House, the IRS secretly created a small surveillance organization that later became known as the Special Service Staff (SSS). Its purpose was to focus the agency’s various enforcement powers on civil rights and anti–Vietnam War activists. In early 1973, however, an anonymous citizen provided the Senate Subcommittee on Constitutional Rights with an IRS memorandum describing the SSS. Six months later, the brand-new head of the IRS, Donald C. Alexander, disbanded the SSS, stating that “political or social views, ‘extremist’ or otherwise, are irrelevant to taxation.”
Although directed at a separate problem, Alexander’s August 1973 announcement abolishing the SSS clearly indicated his concern about using the IRS for purposes other than collecting taxes. Shortly thereafter, in January 1974, Alexander seemed to anticipate the concern that would be expressed by the court in the forthcoming Willits decision. The occasion was a private letter to a senior official of the Treasury Department.
Disrupting the flow of narcotics, he said, might be a good by-product of IRS enforcement efforts. “It is not, however, the purpose of the tax system nor of the tax enforcement system. Tax laws, as I have said before, are an imperfect weapon to strike at the evils in our society—other than the evils of tax evasion.”
Even as Alexander was attempting to deal with newspaper headlines generated by Congress’s disclosure of the political surveillance activities encouraged by the SSS and the sharp criticism of agency narcotics efforts by the court of appeals, IRS agents in Florida were secretly conducting two other entirely separate intelligence-gathering projects that soon would create even greater political problems for the IRS and its commissioner.
One of these intelligence projects, Operation Leprechaun, had been initiated in the early 1970s by Special Agent John T. Harrison to gather information about prominent Miami residents, including judges and politicians. One of the nontax matters that had reached Harrison’s ear concerned a judge who allegedly delighted in providing sexual services to the defendants who came before the court.
In early 1975, the Miami Daily News published a series of articles charging that the paid informants working with Harrison had gone completely off the track by collecting unverified gossip about the sex and drinking habits of scores of Miami taxpayers. The news accounts, which later were criticized by a grand jury as being considerably exaggerated, prompted embarrassing investigations of the IRS by two House subcommittees. (The waves created by Project Leprechaun took a long time to subside. As is told in Chapter 7, one dispute connected with the project came before the federal courts in the mid-1980s.)
The second intelligence project that eventually created a national storm of controversy had been initiated in 1965 by Special Agent Dick Jaffe, who had first told me about the IRS aphorism concerning big cases leading to big problems. The aim of Jaffe’s project, which he called Operation Tradewinds, was to learn the identities of American citizens who had turned to illegal shelters in the Caribbean to lessen their tax burdens.
In September 1975, information about the secret Miami-based operation began to leak to newsmen in Washington after Alexander had disclosed its existence to a House subcommittee.
Jaffe was furious with Alexander for the handling of his case because the effect of the disclosure was to abruptly halt his undercover operation and thus curtail what he and many others in the agency viewed as an important investigation of wealthy and powerful tax cheats. Alexander, however, contends that his concern about Operation Tradewinds went only to the procedural question of whether it was proper and lawful.
As a result of the Court of Appeals decision lambasting the IRS for the jeopardy assessment against Sharon Willits and the negative publicity generated by the disclosure of the political investigations of the Special Service Staff during the early Nixon years, Alexander had become extremely sensitive to any situation that might be interpreted as questionable. Thus, when word of the latest chapter in Jaffe’s extended investigation reached Washington, Alexander ran to Congress with a possibly premature mea culpa intended to head off what he feared might be another legal and public relations nightmare for the IRS.
The focus of Alexander’s worry was a deliciously devious undercover operation that had provided Jaffe with a secret list of all the Americans who had deposited money with a small Bahamian bank to avoid paying millions of dollars in taxes. Jaffe had recruited a former police trainee named Sybol Kennedy as bait to lure a senior executive of the Bahamian bank to Miami.
The smitten banker walked blindly into Jaffe’s trap. While Kennedy and the executive were enjoying a three-hour dinner at the Sandbar Restaurant in Key Biscayne, an IRS undercover agent named Norman Casper entered her apartment, forced open the executive’s briefcase, and rushed the contents to a nearby location where Jaffe photographed all the revealing documents. The undercover agent then quickly returned the material to the briefcase before Kennedy and the unsuspecting executive returned from dinner. Kennedy, of course, had given the agent permission to enter her apartment.
Jaffe’s highly successful spy operation, and the commissioner’s immediate reaction to it, eventually created a situation in which a small group of angry and outspoken Criminal Investigation Division agents almost succeeded in driving Alexander from office.
Jaffe, one of the agency’s smartest and most dogged investigators, was not a rogue cop. In fact, the whole operation, which came to be known as the briefcase caper, had been approved in advance by Jaffe’s supervisors.
Despite these approvals, however, the raid was in fact of dubious legality. The Justice Department held that the search did not violate the constitutional prohibition against illegal searches. A federal district court judge ruled that the secret photographic mission was illegal and dismissed the criminal tax charges that had been brought against a midwestern businessman as a result of the evidence obtained by Jaffe. In the end, the Supreme Court decided that the tax charges should stand. But the Supreme Court’s decision was based on a technicality and did not rule one way or the other on the appropriateness of Jaffe’s tactics.
Confronted with highly embarrassing headlines concerning Operation Leprechaun, the Willits case, and the Nixon administration’s misuse of the IRS, and imbued with the natural distaste of most tax lawyers toward handling tax cases in the criminal courts, Alexander was furious. Tradewinds was halted. In addition to trying to disarm Congress by informing it of his problems, the embattled commissioner also attempted to impose a range of tough new controls over the Criminal Investigation Division and how and when it went about collecting information.
At least in the beginning, Democratic liberals in Congress supported Alexander’s drive to curb the powers of the Criminal Investigation Division. But a large group of rebellious IRS field agents, silently backed by many of their senior supervisors, strenuously resisted the new restrictions.
The anger of these rebellious agents was so intense that it spawned a highly unusual bureaucratic revolution, a full-blown attempt to destroy Alexander’s reputation. Their tactics included challenging the commissioner’s leadership in both Congress and the federal court. Jaffe was a lead player, openly testifying against Alexander in House hearings and joining a legal action challenging his leadership that had been filed in federal court by the Federal Criminal Investigation Association. The association’s lawyer, Jack B. Solerwitz, also spoke at the congressional hearings. He said the suit had been brought because the agency’s criminal investigators “feel there was an alleged conspiracy to wreck the intelligence community in the IRS” and “destroy any effectiveness that the Division could have.”
While the attacks were unusual, they at least were stated in a way that allowed the commissioner to identify his enemies and to respond to their criticisms. Far more vicious was a series of anonymous leaks to the press, apparently from current and former IRS agents, suggesting that Alexander was fundamentally dishonest. One such false rumor claimed that Alexander had closed down the Tradewinds investigation because one of his former law clients had been identified as a potential target. These leaks generated so many hostile stories that they ultimately led the attorney general and the secretary of the treasury to announce that they were investigating the commissioner. By late 1975, in fact, so many critical stories had been published in such papers as the Los Angeles Times, the Washington Post, and The New York Times that officials in the Ford administration’s White House considered suspending Alexander from his post until the various investigations were completed.
Ultimately, however, the grand juries cleared Alexander of any wrongdoing, and the anger of the criminal investigators slowly began to dissipate. With the election of President Carter, Alexander retired, bruised but unbowed.
But bureaucracies do not take lightly to challenges from front-line troops, even if, as in this case, the bureaucracy itself mostly agrees with the challengers. Gradually, life in the IRS became very hard for Jaffe. Several years later, the IRS ordered Jaffe’s immediate supervisor to bar him from investigating any major criminal tax cases. At first, Jaffe disputed the order. But finally, in 1982, he decided to retire. To this day, Richard Jaffe remains a bitter man. He is convinced that a number of subtle conspiracies within the higher reaches of the IRS and the Justice Department improperly blocked the prosecution of scores of major tax criminals, including those identified by his own lengthy investigation, Operation Tradewinds.
The best available evidence suggests that the successful prosecution of Al Capone was something of an aberration in the long chaotic history of the Criminal Investigation Division. But because legitimate privacy concerns make it improper for outsiders to look through the agency’s files, it is difficult to judge the overall performance of the IRS’s criminal enforcement efforts.
Over the years, however, two government organizations have conducted a number of independent studies. The General Accounting Office, the research arm of Congress, is one such organization. Its collective judgment is not flattering. In 1977, the GAO issued a report charging that the IRS’s use of paid informants was seriously flawed. Two years later, the same office reported that the Criminal Investigation Division had no long-range plan to guide its agents and had inadequate information to measure their effectiveness. In the same year, it completed a report on the IRS narcotics efforts. “Relatively few criminal investigations of drug traffickers have been initiated and most cases have not led to prosecution recommendations, let alone convictions,” it concluded. In 1982, the GAO examined the quality of an $8 million investigation by the IRS and the Labor Department of the massive pension funds controlled by the Teamsters Union. The joint investigation, it reported, “had significant shortcomings, left numerous problems unresolved and failed to gain lasting reforms in the Fund’s operations.”
Then there was a 1988 GAO study of the Reagan administration’s effort to mobilize the IRS for the investigation and prosecution of “major criminals,” drug traffickers, and organized crime figures who violate the tax laws. Given the heavy emphasis President Reagan and his vice president assigned to the war on drugs, the findings of the congressional investigators were surprising.
According to long-standing IRS policy, intensified once again by President and Mrs. Reagan’s commitment to fight illegal drugs, the objective of the agency’s special enforcement program was to identify, investigate, and prosecute major criminals. But when questioned by the GAO, the officials who headed the Criminal Investigation Division acknowledged that they had never sought to determine whether or not the targets selected by the field agents were in fact significant figures. So the GAO selected a random sample of special enforcement cases and asked the special agents who had conducted the investigations to assess their importance. After restudying the case files, the agents themselves acknowledged that two out of three “did not involve major criminals as defined by the IRS and other agencies.”
The GAO also found that of all the major criminal cases referred by the Criminal Investigation Division to the Examination Division, only 50 percent resulted in the assessment of additional taxes. Furthermore, the IRS actually managed to collect only 30 percent of the taxes it had assessed.
There were other serious failings. The GAO found, for example, that the IRS had sometimes provided Congress with misleading information about the success of the special enforcement program. In one case, for example, a former assistant commissioner (Criminal Investigation) had passed information to the House and Senate that claimed that the average prison sentence imposed as a result of a special enforcement program conviction was fifty-three months. “However, our review of U.S. District Court docket sheets disclosed that the average jail sentence imposed for a SEP conviction was 28 months,” the congressional investigators said.
The GAO is not the only skeptic when it comes to the Criminal Investigation Division. Sometimes, doubts are expressed by the IRS’s own management experts. In 1970, Congress approved a law requiring all banks to report to the IRS every cash deposit or withdrawal exceeding $10,000. The law was intended to help the government prosecute organized crime figures and narcotics violations. For many years, neither the IRS nor Treasury sought to enforce this requirement. In 1981, for example, a little more than ten years after the passage of the law, the banks submitted reports on only 226,000 such transactions. But finally, after a series of Senate hearings criticizing the government for failing to enforce the reporting requirement, the banks began to comply. By 1985, in fact, 1.7 million “currency transaction reports” poured into the IRS. In 1988, the IRS received more than 5 million. Certainly a lot of reports. But what did the IRS’s criminal investigators do with them?
A 1986 analysis by the agency’s own Internal Audit Division found that, at the time of its investigation, the currency transaction reports sitting in IRS computers were mostly ignored.
Criminal Division’s Office of Intelligence had developed procedures to give the district criminal offices access to the transaction reports. But an internal audit completed in May 1985 revealed that, in a survey of sample districts, six “used this capability infrequently or did not use it at all.” (This was not the first time criminal investigators had been told they were ignoring valuable data. Seven years before, a report by the General Accounting Office had made the same point: The division wasn’t using the currency information.)
Bruce Milburn is an assistant IRS commissioner, the man in charge of the Criminal Investigation Division. By all accounts, Milburn is a hardworking and intelligent man who has dedicated his entire working life to the difficult job of enforcing the tax laws. “Our goal,” he told me, “is to develop and conduct investigations that result in successful convictions yielding a maximum deterrent value for achieving voluntary compliance. That’s it. That’s our overall mission in life.” But the record suggests that Milburn may be pursuing a mission impossible.
What about the GAO finding that the IRS was grossly exaggerating the prison sentences of convicted tax cheats? “That was a problem in how we track those cases and we’re trying to correct that now.” Wasn’t this a situation where the district offices were trying to puff the results of their investigations? “No, not at all. I have no concern about that. It’s just a statistical flaw.” Why did federal court records indicate that a significant portion of the criminal cases brought by the IRS in New York City appear to involve small amounts of tax cheating by relatively obscure individuals? “A few years ago, we might have had some questionable cases. But a lot has changed over the last five years. We are no longer looking for easy cases. We are pursuing complex and compliance-yielding cases. That is our job in life and that’s what we’re doing.”
Why were the IRS criminal investigators in the field not using the currency transaction reports available in Washington? “A lot of improvements have been made since that report. Back then, we had fallen behind in placing the information in our computers. We now are current.”
What was the significance of the GAO finding that only one third of the persons indicted for tax crimes under the special enforcement program aimed at major criminals were judged to be major criminals by the special agents who had investigated them? “You must realize that this record represents a significant success,” Milburn replied. “In organized crime and narcotics cases, many of the people we prosecute are accountants, attorneys, airline pilots, and bankers who cannot be classified as major criminals but who nevertheless are of major importance.”
The GAO’s investigation supports the belief that a good number of Criminal Investigation Division cases have genuine merit. In a recent report, for example, the agency pointed to one case in Pennsylvania where conviction on drug and tax charges resulted in a sentence of forty-five years in prison and a $100,000 fine. A second case resulted in a twenty-five-year prison sentence for a major drug dealer in Detroit on charges that included tax evasion and ten criminal tax charges against bank officials who had assisted the dealer in laundering his illicit funds. In yet another case, a former bank investment officer in San Diego was sentenced to five years in prison and a $250,000 fine for her part in conspiring to launder $36 million through San Diego banks and a currency exchange.
While fully acknowledging the important criminal cases brought by the Criminal Investigation Division each year, however, the fact remains that every independent examination of the division has found a substantial portion were insignificant.
How, for example, can the IRS justify the four-day surveillance of Michael Kuzma, the Buffalo teenager? “From the way you describe the case, it sounds like a waste of time,” Milburn replied. “But I would have to believe there was a sound reason for the operation. We don’t willfully squander our resources. That’s why it would take the approval of senior management officials to get that kind of surveillance going.”