Bribes, Boodle, and Buyoffs
By the spring of 1984, Stanley D. Welli, George Ecola, and Ron Koperniak, three middle-level IRS officials in the agency’s Inspection Division office in Chicago, had become so concerned about the behavior of their immediate boss that they decided they had to act.
Welli, Ecola, and Koperniak were part of a special IRS investigating unit with the mission of combating corruption and mismanagement within the agency. What so disturbed them was evidence that their supervisor, Frank V. Santella, the assistant chief of inspection in the IRS’s Midwest Region, was doing improper tax favors for Chicago businessmen who were doing favors for Santella.1
Fellow IRS workers had told the three men, for example, that Santella had provided agency tax information to a businessman friend who at the time owed the government about $400,000 in unpaid employment taxes. They also had evidence indicating that Santella was associating with disreputable persons, including one man who had been on an FBI list of Chicago area organized-crime figures. In return for the agency’s improper assistance, Santella had indiscreetly informed some of his IRS colleagues, the businessmen had given him a number of gratuities. These included free lunches and dinners at a restaurant favored by organized crime, free theater tickets, invitations to important Democratic political affairs, and, on one occasion, “a huge package of steaks, chops and roasts” for his freezer.
Welli, Ecola, and Koperniak were shocked that any IRS employee would place himself in such a compromising position. But for a top official specifically responsible for maintaining the integrity and efficiency of all IRS employees in a nine-state area of the Midwest stretching from Illinois and Wisconsin in the east to Montana in the west, Santella’s actions were unthinkable.
In May 1984, the three officials decided that Santella’s special assistance to favored businessmen was so serious a breach of agency rules and practices, and perhaps even the law, that they felt compelled to act. At a confidential meeting with Joe Jech, the regional inspector for the IRS’s Midwest Region, who also was Santella’s immediate boss, the whistle-blowers formally informed the IRS of their allegations.
Jech did not forward the charges to Washington, even though this was required by IRS regulations. Instead, he privately advised Santella that his actions had created an “appearance” of impropriety. Almost a year went by. In April 1985, despairing that Jech would ever act and convinced that Santella’s behavior had grown even more improper, Welli, Ecola, and Koperniak decided their only choice was to contact Washington directly. They dispatched a written report summarizing their charges to Robert L. Rebein, then the top IRS inspection official for the entire United States.
The news that the three Chicago-area men had blown the whistle on their boss immediately became widely known within the ranks of the Inspection Division. It was not well received. In fact, the whistle-blowers were viewed as traitors. All three became the targets of a continuing campaign of verbal abuse by Inspection Division officials from different parts of the country. On one occasion, for example, a regional inspector based in Atlanta warned the three inspectors during an IRS meeting that “the organization will get you, you whores.”
Some time later, Jech and Santella began working on an unusual reorganization plan for the Midwest Region. The plan they began to push through the IRS’s massive bureaucracy would have had a curiously narrow impact: One of the three whistle-blowers would lose his management position, the second would be demoted, and the third would face the possibility of a downgrade.
In Washington, meanwhile, eleven months after Welli, Ecola, and Koperniak had first filed their complaint with Jech, the IRS initiated a tardy investigation of Santella. A few weeks later, in a report dated June 21, 1985, the national office investigators confirmed that Santella had been associating with disreputable persons, accepting gratuities, and ordering IRS employees to conduct improper tax research for at least six different taxpayers. The Treasury Department inspector general concluded in his own analysis that the IRS investigation showed that Santella had clearly violated the rules of the IRS and criminal provisions of the Federal Code. Despite these seemingly serious findings, however, Santella’s immediate boss, Joe Jech, decided that only a comparatively mild punishment was called for: Santella was given a twelve-day suspension without pay.
The decision to discipline Santella at all irritated the senior officials of the Inspection Division. They were sufficiently annoyed, in fact, that two regional inspectors and seven assistant regional inspectors thumbed their noses at the IRS by chipping in at least $820 to a solidarity fund intended to make up some of the salary lost by Santella during his brief suspension.
Surprisingly, the report that Santella had violated a number of important IRS regulations and that his supervisor, Jech, had failed to deal with the problem promptly, did not result in either of the officials losing their management jobs. From these quite senior positions, Santella and Jech continued to urge approval of the reorganization plan that, if adopted, initially would have affected the careers of the three men who had criticized them.
Washington approved the reorganization in November of 1988. Welli was told his management position would be abolished. Koperniak was informed that he could either transfer to Kansas City or be demoted. Ecola, who was known to have medical problems that made it difficult for him to move from Chicago, also was told he must make the Kansas City move or face a downgrade. The first step in an exquisite little bit of bureaucratic torture had been taken.
Further negotiations went nowhere, and Welli filed a formal grievance. On May 21, 1987, the IRS ruled there was no evidence of retaliation. Welli appealed the ruling and, as required by agency regulation, an independent grievance examiner with no knowledge of the individuals or events involved began yet another review of the case.
On November 10, 1987, the examiner ruled that it was “quite evident that retaliation took place and continues to exist. My recommendation is that all retaliation be stopped. Those individuals responsible [for the harassment] must be made accountable so that future retaliation does not take place.”
The IRS still refused to admit error. When it appeared that the agency was going to sit on the grievance examiner’s embarrassing report, the persistent whistle-blowers decided that they had to go outside the agency for protection. They prepared an eighteen-page single-spaced report describing Santella’s improper activities, the agency’s reluctance to deal with these problems, and the personal harassment they had undergone since bringing the charges to the attention of the IRS. On February 24, 1988, they sent the letter to several key members of Congress, with a copy to the commissioner.
Shortly thereafter, apparently fearful of possible congressional interest, the IRS offered Welli an extraordinary deal, a proposal that certainly bore some of the appearances of a bribe. The agency still refused to rescind the punitive reorganization plan. But it said it would settle Welli’s grievance by providing him with a comfortable private office and reimbursing him for his legal fees. All Welli had to do in return was to promise he would never talk about the deal. Welli refused the offer, demanding instead that he be restored to his original position, that both Jech and Santella be removed from the Inspection Division, and that the IRS reimburse him for his legal expenses.
The IRS rejected Welli’s counterproposal, and on March 18, 1988, it issued a decision formally rejecting the grievance examiner’s conclusions and recommendations. One month later, however, Teddy Kern was chosen to be the new head of the Inspection Division. On April 25, he flew to Chicago and restored the three men to their original jobs.
Joe Jech, the executive who refused to send the original allegations against Santella to Washington, insisted during a telephone interview in the summer of 1988 that he had handled the matter in a proper manner. Shortly after our conversation, however, Jech was removed from his executive position in Chicago and assigned to a less prestigious staff position in Washington. Although no criminal charges were brought against Santella, the official quietly resigned from the IRS and took an inspections job with another federal agency. Once again, the IRS had avoided taking any serious disciplinary actions against two of its senior executives who had broken the agency’s rules.
Even if the failure to promptly investigate Santella and the subsequent harassment of the three whistle-blowers had been isolated events, they would have been disturbing. First, a senior executive of the Inspection Division had been corrupted. Second, the Inspection Division had turned on the men who had reported the problem and had sought to prevent an investigation of it. Third, the Inspection official who tried to suppress the investigation was never disciplined.
There is considerable evidence, however, that the underlying agency problems suggested by the IRS’s flawed handling of the Santella affair and the subsequent harassment of the whistle-blowers are not all that unusual; that attempts to corrupt the IRS are far more common than is believed; and that the agency’s anticorruption efforts have long been marred by serious underfunding, favoritism, incompetence, and secret efforts by the IRS to block public knowledge of such flaws.
LOS ANGELES
Ronald Saranow was the head of the Criminal Investigation Division in Los Angeles for more than a decade, from 1977 until his retirement in 1988. For most of that time, he was considered the smartest and toughest chief of the best-run criminal investigating unit in the IRS.
Saranow had first joined the IRS in 1962. Five years later, he quit the agency to become an officer with the Elmhurst Liquor Company in Chicago. When Saranow returned to the IRS in December 1971, he told me in a 1988 interview, he was investigated by the agency for alleged connections with organized crime. The investigation, he said, had been triggered by his attempts to help an old childhood friend who was a hoodlum. Saranow said that in the end no evidence had been found that substantiated the suspicions about him held by some IRS officials in Washington.
Overcoming this somewhat shaky start to his second hitch in the IRS, Saranow almost immediately was determined to be a star. Five years after his return to the IRS he was appointed the assistant chief of the Criminal Investigation Division in Los Angeles. Shortly thereafter, he became the head of what was then the largest such unit in the nation.2
For a long time, Saranow retained his reputation as one of the most effective managers in the IRS. But by almost all accounts he was arrogant and strong-willed, and all along, especially after 1985, some special agents in Los Angeles found his use of IRS power questionable.
On November 16, 1987, an investigative reporter named Richard Behar wrote an article in Forbes magazine charging that a flamboyant Los Angeles clothing company named Guess? Inc. had improperly influenced Saranow in an effort to damage the reputation and financial standing of its major commercial competitor in New York. Behar’s charges against Guess? and Saranow were investigated by the House Commerce, Consumer, and Monetary Affairs Subcommittee. On July 25, 1989, the congressional investigators presented the findings of their year-and-a-half-long probe to the subcommittee’s members.
Their conclusion: Saranow had “used his reputation as one of the most powerful Criminal Investigation Division chiefs in the country to encourage two criminal investigations against the ‘enemies’” of a company that had offered him a high-paying job.
Almost as disturbing as the criticism of Saranow, however, were the findings of the subcommittee’s investigators about how the IRS responded to the alarms raised by Behar, which concerned both agents within the IRS and a man named Octavio Pena. Pena, a security consultant, worked for Jordache, the New York competitor of Guess? that had become the target of the questionable IRS raid.
“When individuals both inside and outside of the IRS finally raised serious questions about the legality and propriety of Mr. Saranow’s conduct, the Service initiated what can only be described as untimely and inept internal investigations,” the House investigators said.
The ineffectiveness of the IRS’s investigations of Saranow, the report continued, “can be traced to the overly close relationship between the Los Angeles Inspection and Criminal Investigation Divisions; the refusal of the National Office to follow the advice of its own chief inspector that only high officials in Washington, D.C., could properly manage the probe; and the IRS’s institutional mindset that disclosure of serious wrongdoing by its senior managers would be an unacceptable black mark on its public image.”
Guess? officials have repeatedly denied any wrongdoing. In a statement issued on the first day of the House hearings, they said the findings of the subcommittee’s investigators were “untrue and irresponsible.” The officials also flatly denied ever offering Saranow a job. In the same statement, the company attacked Peter Barash, the subcommittee’s staff director, suggesting he had a personal dispute with the IRS. About one week before the often postponed hearings were finally held, the subcommittee invited Guess? executives to present publicly their side of the dispute. Guess? lawyers informed the subcommittee that previously arranged vacation plans made such an appearance impossible.
In response to an inquiry from me after the hearing, Marshall B. Grossman, a leading Guess? lawyer, again denied that Saranow ever had been offered a job. He added that the preliminary discussions between the company and the IRS official about his possible employment had occurred after the IRS had raided the New York office of Jordache. “It is, therefore, absurd for anyone to suggest that any discussion of employment with or indeed offer of employment to Mr. Saranow in 1986 could have had any influence or impact whatsoever on the investigation in New York.”
Grossman also said that the investigation by the subcommittee “was frankly sloppy and one-sided” and had ignored judicial findings in several related cases that supported his contention that Guess? had been victimized by Jordache and its chief investigator, Octavio Pena, rather than the other way around. He concluded that members of the press, including myself, had been “badly misled.”
Saranow, in his 1988 interview with me, admitted that the situation with Guess? looked “suspicious.” He contended, however, that “there was absolutely nothing improper in my activities.” The former IRS official was not called to testify by the subcommittee after his lawyer informed the staff that Saranow would invoke his Fifth Amendment privilege against possible self-incrimination and would not answer any questions.
The report noted that on May 23, 1989, the Washington attorney for Guess? had informed Representative Doug Barnard, Jr., the chairman, that the company had maintained “an arm’s-length relationship with Saranow.” The report challenged this assertion, noting that during an internal interview by the IRS Saranow himself had said he was a “front man” for the company. In addition, the report said that evidence from depositions, sworn testimony, IRS files, and subcommittee interviews clearly showed that Saranow met with the brothers who owned Guess? “over 20 times between April 1985 and December 1986. At least 14 of these meetings can be described as social contacts—lunches, dinners, parties, weddings—where various subjects, such as Saranow’s future employment with Guess?, were discussed.”
The report said that there was strong evidence that Saranow began negotiating with Guess? for a job in late 1985. One senior IRS official testified to the subcommittee staff that Saranow had told him that he (Saranow) was talking about receiving a “six figure salary” from Guess? This statement was buttressed by a former assistant director of the Los Angeles office of the IRS who also testified that Saranow had told him that he was going to work for Guess?. Saranow himself, in later sworn testimony to the IRS, said that he had had lunch with one of the company’s executives on March 26, 1986, at which time a job was offered, complete with salary, company car, and bonus.
During the time when, several subcommittee witnesses said, Saranow was negotiating for a job with Guess? the Los Angeles official was urging the New York office of the Criminal Investigation Division to go after Jordache. The two companies were then engaged in a massive contractual dispute involving hundreds of million of dollars.
At 8:30 A.M. on January 28, 1986, fifty IRS and U.S. customs agents burst into the New York headquarters of Jordache. After two days of rummaging through the company’s files, they carted off more than 1 million documents. Three and a half years later, the grand jury has yet to indict anyone.
At the time of this writing, the Justice Department has convened a second grand jury in New York to reexamine how and why the original investigation was ever started. This new investigation was launched even though the IRS on March 24, 1988, wrote to Rudolph Giuliani, then the U.S. Attorney in New York, assuring him that the handling of the case by Saranow involved “no evidence of wrongdoing.” (The subcommittee called the IRS’s letter to Giuliani another cover-up by the agency.)
The Saranow case raises one key question: Who is actually running the Criminal Investigation Division? Are the vast investigative powers of the IRS directed by independent and professional officials seeking to enforce the tax laws in a firm and evenhanded way? Or is an important part of the agency actually directed by the professional investigators hired by combative companies that seek to use the government’s power to destroy their competitors?
WASHINGTON, D.C.
From 1986 to 1988 Anthony V. Langone was the man nominally in charge of all criminal investigations conducted by the IRS. Langone, among the most senior IRS officials in the nation, very much appreciated the perks of his office. But there were many in the IRS who did not appreciate him and his imperious ways, especially with women. One of those was his secretary. On September 9, 1986, according to the subcommittee investigators, she informed the head of the Inspection Division that Langone was improperly charging the IRS for air travel to Atlanta to visit a female friend. Without examining Langone’s travel vouchers to determine the truth or falsity of the secretary’s charges, the head of the Inspection Division decided that no action was warranted.3
In November 1986, a second warning about Langone came to the assistant commissioner for inspection, this time from a senior technical adviser in the Criminal Investigation Division named Chuck Wey. He too was worried about the circuitous routes traveled by Langone to see his friend, noting in particular a trip from Seattle to Washington, D.C., via Atlanta. Once again the Inspection Division did not initiate an investigation.
The third notice about Langone’s abusive travel habits was made to the Inspection Division on April 23, 1987. The assistant commissioner for inspection later told investigators for the House Government Operations Subcommittee on Commerce, Consumer, and Monetary Affairs that he consulted with the second-most-senior official in the IRS about how the matter should be handled. The subcommittee found this consultation disturbing because it provided evidence suggesting that the Inspection Division was dominated by the senior executives of the IRS.
The joint decision of the deputy commissioner and the head of the Inspection Division was to handle Langone’s indiscretions in an administrative way without a formal investigation. On July 1, 1987, the acting associate commissioner for IRS Operations met with Langone to warn him that his travel arrangements were under scrutiny. Langone denied making any improper trips. For the third time, the matter was dropped.
By that time, the IRS later determined, Langone had made eighteen trips through Atlanta as head of the Criminal Investigation Division. Nine of these trips were made for personal reasons but were paid for by the IRS.
Despite the July warning, the subcommittee investigators said, Langone continued his old ways. On Saturday, February 13, 1988, for example, Langone traveled to San Juan, Puerto Rico, on an unlikely travel extension added to an official round trip between Washington, D.C., and Los Angeles. Because Monday was a holiday and Langone took a day of leave on Tuesday, the official enjoyed a pleasant three-day escape from the nastiness of Washington’s February weather. Langone, the House subcommittee later reported, “did not reimburse the government for the additional $294 for air fare expenses incurred as a result of his extended travel itinerary. Interestingly, his female friend was on official travel in Puerto Rico at the same time.”
In March 1988, Langone retired to set up a private detective company with Criminal Investigation chiefs in Newark, Dallas, and Los Angeles without reimbursing the government for about $2,000 worth of personal travel that he had charged to the IRS. (One of his partners in the new venture was Ron Sarenow, whose hopes of becoming a Guess? executive had gone awry.)
The Langone matter would have ended there except for the fact that on May 26, 1988, during my preparation of this book, I interviewed the new assistant commissioner for inspection, Teddy R. Kern. During the course of our talk I asked Kern about angry allegations I had heard from IRS agents that Langone had used government resources for personal benefit. Pleading the restrictions of the Privacy Act, Kern declined to make any comment on Langone. But on June 2, a little more than a week after the interview, Inspection opened an investigation of the just-retired official. Without my knowledge, my name was placed on the complaint. About four months later, on October 14, a report charging Langone with improperly billing the IRS for $2,000 worth of travel and several other offenses was forwarded to the Justice Department. The question: Were criminal charges warranted? As of July 1989, the matter was still pending.
In an interview with me after the House hearings that described these events, Langone denied any wrongdoing and insisted his claims for official travel expenses were proper. Langone also said that the presentation of the subcommittee’s report had violated his civil liberties. Leonard Bernard, one of the subcommittee’s investigators, said that Langone had refused to be interviewed about the handling of his travel expenses. Langone insisted, however, that he had wanted to talk with the subcommittee staff. He said arrangements for the interview had fallen apart because of a dispute over whether his attorney could sit in on the session.
Representative Barnard said at the July 1989 hearing of his subcommittee that the handling of the Langone and Santella cases, along with several others, showed how the IRS actively sought to avoid if at all possible the investigation of senior agency officials.
“Our investigation indicates that there are serious integrity problems among senior managers at the IRS; inadequate internal investigation and punishment of senior-level misconduct; a pervasive fear at all levels of the IRS over retaliation for the reporting of such conduct; and a driving concern that publicly exposing wrongdoing by senior managers will tarnish the agency’s image and make its tax enforcement responsibilities more difficult,” Barnard said.
CINCINNATI
It must surely be embarrassing to the IRS to have the public learn about cases where it failed to investigate senior agency officials who take gratuities from influential people or cheat the government on their travel expenses. But it must be even more embarrassing when the public gets wind of a high-level IRS manager who appears to have cheated on his taxes for a number of years without being spotted by the agency. After all, catching tax cheats is supposed to be the IRS’s job.
John E. McManus became an upper-level manager in the IRS’s Central Region Inspection Division in 1971. The Central Region is a five-state area embracing Michigan, Ohio, Indiana, Kentucky, and West Virginia. McManus and his wife had three sons and a daughter, and neighbors describe them as a wonderful all-American family. When the boys were young, for example, the IRS manager was an active coach in the Little League.
McManus also seemed to be a model employee, rapidly moving up the chain of command within the Inspection Division during his twenty-five years with the agency. By dint of a lot of hard work, he was named the top inspector of the region on January 4, 1987. McManus was confident enough of his position within the IRS to praise openly the work of the Inspection Division. In the upside-down world of the IRS, even talking about the Inspection Division was regarded as mildly risky because it implicitly acknowledged the possibility of corruption and poor management. “It is important for Americans to have confidence in their government,” he once told a reporter. “It only seems logical that we [in Inspection] should monitor an agency for its honesty and efficiency when it is paid for by the people of America.”4
When McManus spoke these words, it is unlikely that he saw himself as the target for such monitoring. But sometime in late 1985 or early 1986, Cliff Hargrove, a special IRS agent in Memphis, Tennessee, was given a very sensitive assignment: investigate charges that McManus was engaged in criminal tax fraud. Hargrove went to work on the case, collecting a great deal of incriminating evidence.
In the summer of 1987, IRS records show, the forty-seven-year-old McManus quietly arranged to retire from the agency, his pension intact. On the surface, it was a routine departure. But documents from the U.S. Tax Court and interviews with one current and two former IRS officials indicate otherwise. In fact, just a few months before McManus retired, the Justice Department decided not to act on an IRS recommendation that he be indicted on criminal tax charges. As is normal in tax cases where the option of criminal prosecution is declined by the Justice Department, the evidence concerning McManus’s tax-paying habits was referred to another part of the IRS for consideration as a civil case.
On April 15, 1988, the director of the IRS office in Nashville sent John and Alice McManus a letter of deficiency charging them with fraudulently failing to pay all the taxes they owed in 1984. Several weeks later, the couple received a second letter making the same charges for the 1980, 1983, and 1985 tax years. The IRS said that the grand total of their debt to the government was $64,484.14—$37,083.12 in back taxes and $27,-401.02 in fraud penalties and interest. Letters such as those charging McManus and his wife with civil tax fraud are confidential documents that are usually never disclosed to anyone other than the taxpayer and the taxpayer’s tax advisers. They become public documents, however, when that taxpayer challenges the IRS in court. The McManuses took this step on May 9, 1988. Through their lawyer, the couple denied most of the agency’s charges.
As is normal in such situations, the IRS responded to the McManuses’ claim of innocence with a formal answer that also became part of the public file. The IRS commentary about John McManus was pointed. “As a result of his training and education as well as the positions which John E. McManus has held with the Internal Revenue Service, Mr. McManus has a better than average knowledge of Federal tax laws and related matters and, as an employee, he was regularly reminded of his obligation to file timely and accurate tax returns,” said Elsie Hall, an IRS litigation specialist, on October 3, 1988.
Despite this special knowledge and responsibility, Hall continued, “almost every item on petitioners’ returns for the taxable years 1983, 1984 and 1985 has a proposed adjustment. Petitioner John E. McManus omitted taxable income from dividends, interest, capital gains and medical reimbursements and he intentionally overstated deductions for numerous business expenses, overstated his Schedule A itemized deductions, and claimed false business losses and investment tax credits. The cumulative effect of these false entries was the understatement of taxable income and income taxes on the returns filed for the years 1983 through 1985, inclusive, and the understatement of income tax for 1980 as a result of the carryback of the false investment tax credits from 1983.”
To the outsider it would appear that the system had worked, that the IRS had moved against McManus in a straightforward way. But the appearances may be deceptive in at least two important ways.
First, according to the House Government Operations Subcommittee, one of the disturbing aspects of the McManus case is that its review of the financial disclosure statements that the official was routinely required to file with the IRS on an annual basis “indicated that behavior related to the alleged tax fraud began a number of years before he was investigated.” Why, the subcommittee asked, given the questions raised by the information in the financial disclosure forms, had the agency waited so long to investigate McManus, an official holding a highly sensitive IRS post?
The second question relates to whether McManus should have faced criminal tax charges rather than civil ones. According to interviews with Ellen Murphy, head of the IRS public affairs office, and Vernon Acree, head of the Inspection Division from 1952 to 1973, the agency sent the Justice Department a recommendation that McManus be indicted for criminal tax fraud, a far more serious matter. During the debate within the Justice Department about this recommendation, McManus was represented by Sheldon Cohen, the IRS commissioner during the Johnson administration. According to both Acree and Murphy, Cohen’s effort was successful and no criminal charges were brought against the former regional inspector. Cohen was reluctant to talk about the McManus case, limiting himself to one brief comment. “The question was whether this was a foolish young man or a criminal young man,” the former commissioner said from the vantage point of his sixty-two years.
Four IRS agents who were shown the civil charges that were brought against McManus were more judgmental: They unanimously agreed that McManus’s avoidance of criminal prosecution was highly unusual. “In most parts of the country, with the possible exceptions of maybe New York City, Miami, and Los Angeles, any citizen or low-level IRS employee who did what McManus has been accused of doing almost certainly would have been indicted on criminal tax charges,” said one of the members of my expert IRS jury.
Except for the denials of wrongdoing included in McManus’s Tax Court filings, the former IRS official, speaking through his Cincinnati lawyer, Kenneth R. Hughes, declined to comment on his tax problems and how they had been handled by the IRS. As of September 1989, the civil tax charges were still pending against McManus.
Chicago, Los Angeles, Washington, and Cincinnati. Four cases. Four situations where the IRS’s determination to confront the questionable behavior of its senior executives seemed to collapse. But are these matters isolated events or are they part of a larger problem that infected the entire agency?
When IRS commissioners and their deputies speak to the public about this question they always emphasize that corruption within the agency is a rare event that should not be used to detract from its overall integrity.
In private forums, however, they sing a somewhat different song. In January 1989, faced by an impending congressional investigation, the top managers of the IRS acknowledged the breadth of their concern about the corruption problem. The occasion was the decision of the IRS to launch a “strategic initiative” to improve its handling of corruption throughout the agency.5
In a brief summary document, the IRS said that the management failures identified by the congressional investigators were one reason for the new initiative. A second factor, however, was a never-announced study conducted by the IRS itself that seemed to confirm the fears of the harshest congressional critics.
The study’s conclusion: There was “a compelling need to address both systematic shortfalls in the effectiveness of our integrity training and instruction, and individual failures to identify and report integrity breaches” once they had occurred.
There are many explanations for the acknowledged inadequacy of the IRS’s attack on corruption. But one of the most important is the attitude of the senior managers toward what is surely one of the oldest and most persistent problems of any enforcement agency. Corruption, they inevitably argue, is the product of the ubiquitous “rotten apple in the barrel.” The bad apple is a comforting symbol for all officials because it distracts public attention from the far more disturbing thought that the rottenness may lie in the barrel, not in the apple.
Corruption does indeed involve the moral collapse of isolated individuals. Each case of corruption, however, is also prima facie evidence of pervasive poor management. It is a sign of ineffective leadership at the top, inadequate supervision in the middle, and poor recruiting and training at the bottom. Certainly the evidence that has emerged during the recent spate of IRS corruption cases strongly suggests that the real problem was not the lapse of individual agents from the normal standards of good behavior, but rather the failure of leadership in the agency’s national, regional, and district offices.
Effectively managing a large government agency like the IRS is probably one of the most difficult jobs in the world. It is hard to select the right people as supervisors. It is difficult to maintain the morale of an agency whose basic mission is not generally popular with the public. It is an extraordinary challenge to encourage low-paid employees to do their work while at the same time respecting the rights of citizens. But fighting corruption may well be the most challenging task of all.
The job of assuring the integrity of the IRS currently rests on the shoulders of Teddy R. Kern, a serious man, a trained accountant, and a highly regarded IRS official. At the time we met in May 1988, Kern had just been appointed as the new assistant commissioner for inspections. During a long interview, Kern told me that he and the other senior managers of the IRS fully understood that there was almost nothing as important as maintaining the integrity of the IRS. In fact, Kern said, because citizen cooperation was essential to tax collection, citizen belief in the fundamental integrity of the IRS actually was essential to the survival of the nation.
Although Kern appeared to be completely sincere in his views, there is considerable evidence that at least for the last few years the top managers of the IRS have not fully shared his convictions about integrity.
In response to one of my questions, for example, Kern provided me with figures showing that management had in the past ten years allowed the size of its anticorruption forces to decline gradually in relation to the overall size of the agency. In fiscal year 1979, for example, 1,102 of the agency’s 81,505 employees were assigned to the Inspection Division. In fiscal year 1988, the number of Inspection Division employees was virtually unchanged, 1,202, but the agency had grown to 123,000. This means that the responsibility of each individual working in Inspection had expanded from 74 agency employees in 1979 to 102 in 1988.
Along with the decline in the relative size of the Inspection Division has come an apparent drop in the agency’s investigative curiosity about bribery. At least this is one conclusion that can be drawn from a series of IRS reports describing the agency’s use of secret recording devices to investigate all kinds of tax crimes. In this case, the devices, usually worn under the clothing of a person who is cooperating with the IRS, are designed to record the comments of an unwary investigative target. The reports show a sharp 96 percent increase in the use of these devices for all kinds of investigations during a recent six-year period. In fiscal year 1983, for example, the IRS mobilized body mikes in 519 cases. In fiscal year 1985, it reported 944 such cases. In 1987, there were 1,016.
The same reports showed, however, that the IRS was far less enthusiastic when it came to using body mikes for one sensitive group of cases: bribery. In this category, during the same six-year period, the secret surveillance increased by only 11 percent—349 in fiscal year 1983, 389 in fiscal year 1987.
Not surprisingly, the gradual decline in the relative size of the Inspection Division and the cooling of its investigative ardor appear to have resulted in steadily smaller harvests. In 1985, for example, Inspection Division investigations resulted in corruption charges against 291 individuals. That figure dropped to 235 in 1986 and 199 in 1987. As already noted, of course, during the period when the number of corruption cases was declining by about 30 percent, the total number of IRS employees was increasing by about 10 percent.
Kern and I talked about yet another small sign of the IRS’s lukewarm interest in corruption. In an agency as powerful and decentralized as the IRS, the investigations conducted by the anticorruption agents clearly should not be limited to low-level tax collectors. Obviously, any serious program to control corruption must also include serious investigations of possible problems among the thousands of middle- and senior-level managers who direct the daily operation of the agency.
The IRS recognized this vulnerability in 1952, when it created a littleknown unit within national headquarters in Washington called the Inspection Branch (IB). The function of the IB is to investigate possible corruption among the IRS’s managers and top officials.
But the IB is a charade. Even Kern acknowledged as much when he told me that this elite IRS unit now has a grand total of eight investigators. “Clearly, if you just look at the number of investigators in the IB, you would draw the conclusion, considering what they are responsible for, that they cannot do it,” Kern said. The assistant commissioner contended, however, that such a conclusion was not valid because the eight investigators were able to obtain help from other offices of the IRS when such assistance was needed.
In very different ways, Frank Santella in Chicago, Ronald Saranow in Los Angeles, Anthony Langone in Washington, D.C., John McManus in Cincinnati, and Teddy Kern in Washington tell us that the IRS effort to control corruption within its ranks has been withering. Serious cases have been sloughed off or ignored, and the agency’s anticorruption forces have been gradually undermined.
But the insights into the Inspection Division provided by these four case studies and Kern’s interview don’t answer two related questions: How often do American taxpayers try to bribe IRS agents? How frequently do IRS agents succumb to these corrupt offers? The answers, of course, depend somewhat on where you look.
In the fall of 1986, a federal judge in Philadelphia sentenced an accountant named William Kale to ten years in prison. Kale had been convicted of accepting a series of bribes totaling $105,000 in return for his part in helping a thriving Philadelphia investment company largely owned by Robert and Sam Saligman to avoid paying at least $8 million in federal taxes. For most of his working life, the sixty-one-year-old Philadelphian had been a trusted agent of the IRS.
Kale was one of ten IRS employees and former employees and ten wealthy business executives from the Philadelphia area who in 1985 and 1986 were convicted for their involvement in a large number of different bribery schemes. Benjamin J. Redmond, head of all inspection activities in the agency’s Mid-Atlantic region, contends that the successful investigation of Kale and the nineteen other assorted grafters in one brief two-year period proves the effectiveness and dedication of the IRS’s war against corruption.
Redmond admitted, however, that the evidence presented during the Kale trial alone showed that it had taken the IRS more than twenty-five years to discover that representatives of the Saligman family who had regularly been bribing Kale during the first part of the 1980s had also been handing out boodle to a long string of agents during most of the 1960s and the 1970s. The testimony and handwritten notes of the corporate accountant who had actually paid most of the bribes for the corporate entity of this single Philadelphia family indicated that the illegal payments totaled well over $500,000.
The failure of the IRS to detect a corruption case of such massive and systematic proportions for more than a quarter of a century suggests unpleasant answers to the questions about the willingness of American taxpayers and IRS agents to offer and to accept bribes. The case also reinforces the conclusion that the agency’s ability to fight corruption within its ranks is inadequate.
Let’s begin the Saligman story in 1946, the year that Israel Saligman died. Saligman, creator and president of the Queen Knitting Mills, was survived by his wife; three sons, Robert, Martin, and Samuel; and a stepson. His estate was valued at a modest $50,000.
The postwar boom years, however, brought great wealth to the Saligmans. A real-estate company, Cynwyd Investments, was formed and prospered mightily. One sign of the family’s increasing importance in the community came in June 1957 when the board of directors of the respected Albert Einstein Medical Center voted to bring Robert Saligman into the fold. Robert was by then living at a prestigious address on Rittenhouse Square. His brother Samuel had recently bought “Brook-wood,” a seven-acre suburban estate that he loyally renamed “Queen Acres,” apparently in honor of the thriving garment factory developed by his father. The value of some Atlantic City real estate, purchased for $1.5 million by a syndicate headed by Robert Saligman, quadrupled after New Jersey voters approved legalized gambling there. In October 1974, Alice Saligman, wife of Robert, was named the general chairwoman of the Harvest Ball Benefit Dance for the Albert Einstein Medical Center. Alice Saligman’s social raised $60,000, then a record for that event. By the early 1980s the family’s holdings were valued at approximately $40 million.
Although the family obviously had flourished, there were some early signs of possible financial irregularities. In 1962, for example, the Pennsylvania Department of Revenue announced an investigation of whether or not sufficient taxes had been paid by Robert Saligman in connection with his purchase of a shopping center for $4.2 million.
At about the same time, another event occurred that eventually would come to haunt the Saligman family. By 1965 the business of Cynwyd Investments had become sufficiently complex that it was decided that an in-house professional was needed to keep track of its finances. The family-owned company selected an ambitious young accountant named Charles Toll to handle the complex bookkeeping required for its joint ventures. Fifteen years later, in 1980, the family rewarded Toll for his faithful service by making him Cynwyd’s chief operating officer. According to Harry Jaffe, an experienced Philadelphia magazine reporter, during this period Toll gradually became an important social figure in his own right. “He went to all the right parties and fund raising events. He also had become chairman of the Moss Rehabilitation Hospital, an important Jewish charity,” Jaffe recounted.6
But the world was about to unravel for Toll and the family he had served so long. On May 15, 1984, IRS investigators subpoenaed all the books of Cynwyd Investments. The ledgers suggested that Toll had embezzled millions of dollars from the Saligman family. From at least 1968 to 1984, he appeared to have underreported the company’s income, overcharged expenses, and siphoned off a substantial stream of cash to a secret bank account. Altogether, Toll later admitted, he probably had skimmed off at least $3 million for himself.
Toll immediately knew he was in serious trouble, and he hired one of Philadelphia’s best criminal lawyers to help him minimize the time in prison he almost certainly faced. While the evidence against Toll was extremely damaging—a thirty-year prison sentence was possible—the government had other, more pressing interests. For several years, the federal prosecutor in charge of the investigation, an assistant U.S. attorney named Terri Marinari, had been handling a string of cases in which wealthy Philadelphia businessmen had been found to be bribing IRS agents. When Marinari was ready to ask the grand jury to indict Toll, she approached his lawyer to see if Toll would cooperate with the government. A deal was cut. Toll would plead guilty to charges of bribery, tax evasion, and mail fraud. Marinari would ask the judge to give Toll a thirty-month sentence.
In return, Toll would tell a federal jury everything he knew about corruption within the IRS, and that, it turned out, was a great deal. His successful efforts to undermine the fair enforcement of the tax laws, he later would testify, went back almost thirty years and resulted in the payment of secret bribes to at least a dozen different agents.
Toll’s testimony was unusually valuable because over the years an uncanny protective instinct had led him to keep handwritten notes about many of his bribes. These records tended to support Toll’s testimony, making it almost impossible for the defense to argue that he had fabricated the mammoth IRS conspiracy in an effort to save his neck.
The trial of William Kale, with Charles Toll as the principal witness for the prosecution, began in a federal courtroom in Philadelphia on Tuesday, July 8, 1986. With assistant U.S. attorney Terri Marinari asking the questions, the fifty-four-year-old certified public accountant spent much of his first day in court quietly recounting a seemingly endless series of corrupt arrangements he had worked out with a long list of IRS agents.
Toll testified that he had initially become aware of the Saligman family practice of paying bribes shortly after graduating from Temple University in the mid-1950s. One of his first jobs was with an independent accounting firm that the Saligmans had hired to prepare their taxes. “Okay, there was [IRS agent] Vincent Maurelli who was paid a bribe for 1957” of “between one and two thousand dollars,” Toll recalled.
The accountant told the jury, however, that even within the bureaucracy of the IRS the competitive spirit of the free-enterprise system was always a factor. “Then there was Frank O’Neal,” Toll said. “There was a conflict between Frank O’Neal and Maurelli for control of the examination [of the Saligman returns]. Payments were made to both.”
Toll recalled other lessons he had learned in the first years of his career. “It was a very common practice for accountants who handled bribes [for the taxpayer] to keep a portion of the money.”
“When you say this is a common practice, what do you mean?” Marinari asked.
“I am referring to if an internal revenue agent was going to be bribed to overlook certain transactions and not collect the proper amount of tax, an accountant was taking a great deal of exposure in making the payments. So generally he would tell his client that if he were paying a bribe of $6,000 that he actually was paying $10,000 and keep $4,000 cash for himself as compensation for taking the exposure.”
Marinari asked Toll who had taught him this particular lesson. “I learned this practice from year one, as a junior accountant when I first came into accounting by talking with other junior accountants. Evidently, the practice was widespread.” He added he also was advised of the protocol of bribery by his first boss, a successful Philadelphia accountant named Sam Needleman.
Toll was very clear about the product he was buying from the IRS agents: “By paying the bribe, we were able to avoid paying substantial taxes.”
The accountant added that with very little additional effort IRS examiners could easily have uncovered the fraudulent nature of the Saligman family’s books. But Toll worked hard to make sure that this extra effort was not made. “I paid IRS agents not to dig so that I would not have to disclose information about what was going on in our business.”
Over the years, Toll said, IRS agents offered his clients a wide range of specific services in return for the illegal payments. Emanuel Leoff, for example, was “employed by the Treasury Department or the Internal Revenue Service as an estate examiner to handle the estate of Robert Saligman’s brother-in-law. Robert Saligman and I had a meeting with Manny Leoff at which $2,000 was given by Robert Saligman. The purpose was to save taxes, to save estate or inheritance taxes.”
In 1974, Toll said, he paid a $66,000 bribe to an IRS agent named Joseph Berkowitz. “The tax issue involved at Queen Knitting Mills was an inventory understatement in excess of $2,000,000,” he testified. “Robert Saligman’s personal yacht, ‘Queenie,’ on the books of Queen Knitting Mills; some travel and entertainment expenses on the books of Queen Knitting Mills. All of these items, if the agent assessed them, would have cost Queen Knitting Mills substantial dollars.”
One improper expense item charged to the business account was the $100,036 in legal fees that Robert Saligman paid when he purchased his personal Florida residence. Then there was a $1,500 item for cleaning his boat. A third item carried as a necessary business expense was Robert Saligman’s professional yacht skipper. “We paid a salary to the boat captain in Florida,” Toll said. “The boat captain did work around the house and maintained Robert Saligman’s personal yacht. We took tax deductions for it. It served no business purpose.”
The yacht, however, was in fact used to help generate the hard-to-trace greenbacks needed for the long series of IRS bribery payments, an expense hardly likely to be approved in a legitimate audit. “The Saligmans were having difficulty raising the cash [needed for making the bribes] and were complaining about the dollar amounts of the payoffs,” Toll informed the jury.
To resolve this problem, the family made a large deposit in a bank in the Bahamas to generate cash interest payments. These were secretly ferried to Florida on the boat.
Then the cash was moved to Philadelphia. “Robert Saligman has a safe in his—in a closet in his bathroom. I had a key to that safe and the combination. We kept an envelope and other records in the safe pertaining to the payoffs.” In the case of the money being paid to Kale by the Saligman family, Toll continued, a separate record was maintained. “We kept a record on the envelope, on which we indicated the amount of the bribe, the $105,000 bribe. I also indicated the dates that I made the payments and the amount of the installment payments.”
Unfortunately for Kale and the Saligman clan, Toll thought the damaging information he recorded on the envelope in the safe might someday prove useful. “I made a copy to protect myself,” the accountant said. “I had been participating in illegal schemes, and I felt that if I was—if we were ever caught, that I would have evidence that I was acting on behalf of other people, that I was not the only one involved.”
The copy of the envelope placed in the record of the trial indicated that Toll had made cash payments to Kale on April 3, May 5, June 2, and October 10, 1980. Toll’s office calendar indicated that he had appointments with Kale on the same dates that were mentioned on the envelope. The envelope and the calendar provided powerful corroboration of Toll’s testimony against Kale.
In the perverted financial world of Charles Toll, the logic of the honest taxpayer was sometimes turned upside down, as, for example, when Toll actually asked the IRS agent he had bribed to expand his audit into additional tax years. This was an excellent, if somewhat surprising, defensive move because it was unheard of for another agent to start investigating a case that was being worked on by one of his colleagues. “We did not want to have the tax returns examined by an agent we did not know and were not paying off,” he explained.
Another way the family avoided taxes was to inflate grossly its charitable deductions. Toll informed the jury about one occasion when the Saligmans were thinking of giving Temple University in Philadelphia the Traylor Building, a small rundown structure that was actually worth about $500,000. “We were contemplating a charitable deduction on our tax returns of $2,200,000, which was a substantial benefit to us,” the Saligman family official testified.
Toll said that it was in the middle of working out the grossly exaggerated charitable contribution when Kale, the regular recipient of Saligman bribes, decided to retire from the IRS. “At this point, I got very upset, extremely upset. We had already made arrangements and were just about to conclude the transaction with Temple University for the donation of the building.”
But Kale told him to calm down, that he already had arranged for the matter to be controlled by one of his colleagues, a middle-level IRS official named Irving Suval. After several negotiating sessions, an agreement was reached that involved an initial payment to Suval of $65,000, followed by a sweetener of $50,000. In return, Kale’s friend Suval agreed to assist the Saligmans obtain the IRS’s seal of good housekeeping on the spurious value of the building they were giving to Temple.
“Did Mr. Suval explain to you how he was going to get this through the IRS, this deduction?” Marinari asked.
“At that point he did not, but later he did,” Toll replied. “He told me he had to submit it to engineering. He was able to submit the situation—the problem—to the Engineering Department at a time when they were very busy. So that one of the engineers signed a form that said, ‘Too busy to’—I don’t know, I can’t repeat the exact words, but it said something to the effect that the Engineering Department was too busy to examine this particular transaction.”
Toll said that between November 1981 and April 1983 he paid Suval $115,000 in bribes from the Saligman family, pocketing an additional $15,000 for himself.
Suval, fifty-nine, was the second major witness against Kale. Suval’s deep involvement in the long-standing corruption scheme was significant because he was an IRS supervisor, working at various times as a group manager, chief of the district conference staff, and staff analyst in the IRS’s national office in Washington. Suval’s most sensitive assignment, however, was as chief of the Joint Committee Section of the Philadelphia district’s review staff. The Joint Committee Section is a small semiautonomous unit that operates in each of the IRS’s sixty-three districts. Its function is to assure the Joint Tax Committee of Congress about the basic fiscal integrity of the tax collection system by reviewing all major refund claims.
Suval’s testimony was devastating to Kale and damaging to one of the most important review systems of the entire IRS. “While I was on the review staff, Mr. Kale came to me and asked me if I could make sure that certain returns flowed through the review system as quickly as possible,” Suval testified. “And he indicated to me that he was going to be paid money, $65,000 in all, and that he would pay me $6,500.”
Suval kept his word. The particular problem in this case involved a set of “fiduciary returns” that had been prepared to report the income earned by separate trust funds set up for five of the Saligman children. “I went to the reviewer after I had assured myself that the returns were in review and I would say to whomever, would you please review these and get them on their way.”
Bribery and corruption were an essential part of Charles Toll’s working life. According to his testimony, and the handwritten notes he often made, the accountant passed large amounts of cash to a series of IRS agents for at least a quarter of a century. Two particular agents—William Kale and Irving Suval—appear to have been the major beneficiaries of Toll’s twisted generosity, together receiving more than $200,000. For much of this period, the benefits he purchased flowed to his employer, Cynwyd Investments.
The rewards, at least for a while, were considerable. Charles Toll was handsomely paid, lived very well, and was a respected member of his community. The Saligman family lived even more lavishly, with many of the millions of dollars of unpaid taxes diverted for such luxuries as a Florida vacation home and a yacht with a full-time skipper. The agents received significant amounts of untaxed cash. The only loser was the public.
Curiously enough, although the testimony of Toll and Suval was more than sufficient to convict Kale, the recipient of the Saligman bribes, the government never brought criminal charges against any member of the Saligman family for paying them. Terri Marinari declined to explain the legal reasons for this inaction. All criminal indictments, of course, become public. If a taxpayer does not contest a civil IRS effort to obtain back taxes, interest, and penalties, however, the assessment remains confidential. It therefore is possible that the Saligmans have paid all or part of the millions of dollars of taxes that the witnesses in the Kale trial said the family had evaded through bribery. At the time of Kale’s trial, representatives of the Saligmans denied any involvement in the bribery of IRS agents. In response to a letter of inquiry from me on April 14, 1989, Herbert Kurtz, the chief financial officer of Cynwyd Investments, said he had talked with the Saligman family lawyer and that the family would not grant me an interview.
It would be comforting to report that the Saligmans were alone in their greed, that the story told in federal court was an isolated series of events. Unfortunately, however, the evidence from Philadelphia and from many other cities in the United States suggests that this is not the case.
One of the most difficult questions to answer about any single event, especially one that many people want to hide, is whether it was an isolated occurrence or part of a broad pattern of behavior. In Philadelphia, this question was not so hard to answer because the crimes of William Kale, Charles Toll, and Irving Suval were uncovered during a much larger corruption investigation that so far has resulted in the convictions and imprisonment of ten current and former IRS agents and ten wealthy businessmen.
Perhaps the best known of the businessmen is Albert Nipon, the internationally acclaimed fashion designer who runs full-page advertisements in The New Yorker and sometimes sells to celebrities like Nancy Reagan, Rosalyn Carter, and Barbara Walters. In February 1985 Nipon pleaded guilty to paying $200,000 in bribes to two IRS agents to avoid nearly $800,000 in taxes. He was sentenced to three years in federal prison.
Terri Marinari, the assistant U.S. attorney, and Ben Redmond, the IRS regional inspector for the Philadelphia area, have little doubt that a large number of the older IRS agents in Philadelphia had become highly tolerant of corruption.
The actual number of agents who have been convicted, the active role played by some supervisors, the extended periods of time involved in several of the conspiracies, and the manner in which corrupt schemes were continued when a particular agent was reassigned or retired, Marinari said, provided strong if indirect evidence of systemic corruption throughout the Philadelphia area.
A small but revealing example of the self-deceptive thought process that can occur within the mind of an agent when the culture of corruption becomes accepted was inadvertently disclosed by Irving Suval during his testimony against William Kale. Employing the standard tactic of a prosecutor relying on the testimony of a witness who himself has engaged in illegal activities, Marinari asked Suval whether he previously had admitted participating in criminal activities other than those involving the Saligmans.
“Yes, that’s correct,” Suval replied. “I was involved in at least 11 or 12 other instances of bribery, and I have received fees ranging from as low as $400 up to the Cynwyd Group, which is $115,000.”
Professional fees for services rendered, Suval seemed to be saying. Marinari would not indulge him.
“You referred to fees. What did you mean, sir?”
“Bribes, I’m sorry,” he replied.
Partly because of this curiously tolerant attitude about some kinds of bribery by both government agents and the public, corruption remains one of the most difficult of all crimes to detect. This is because corruption usually involves a consensual agreement between two or more participants. Even though the American people are the victims of thousands of burglaries each day that never are solved, burglary is a far riskier business than is graft. The burglar, after all, must penetrate a locked or guarded place, carry off a physical object of value, and sell it to a fence. Each act is inherently dangerous. While breaking into a store or home, the burglar sometimes is spotted by either the victim or a neighbor. While carrying the stolen object back to his base, the burglar sometimes is spotted by a passing police officer. While negotiating with the receiver of stolen goods, the burglar can be betrayed.
Contrast these hazards with those faced by a corrupt IRS agent who receives totally negotiable cash in return for not performing a usually obscure act within a massive bureaucracy that has assigned a very small number of guards to protect itself. Although corruption sometimes involves an element of extortion, the different parties making such arrangements usually expect to benefit by them.
Another factor improves the odds that the corrupt IRS agent will not be caught. The homeowner who loses her television set or diamond ring to a burglar genuinely wants her property back. But because the “goods” stolen by the corrupt agent are intangible—one cannot see or hold or taste the effective enforcement of the tax laws—the rage that drives the homeowner seldom is found in the hearts of the agency’s top managers. In fact, partly because the intangible goods being stolen by the corrupt agent almost always remain invisible to the public, top IRS officials sometimes have been reluctant to expose corruption.
In Philadelphia, the IRS principal investigator in charge of handling the Kale case was Ben Redmond, a canny man who was named the regional inspector of the Mid-Atlantic Region in 1976. Redmond’s turf includes Philadelphia, the rest of Pennsylvania, and all of New Jersey, Maryland, Delaware, Virginia, the District of Columbia, and overseas employees of the IRS. In one recent year, individuals and corporations located in his region filed more than 26 million tax returns.
In addition to worrying about corruption, Redmond’s small team is also responsible for supervising most of the management audits designed to measure and ultimately improve the general quality of service provided by the Mid-Atlantic Region. Finally, he is in charge of investigating all incidents where taxpayers attack or threaten to attack IRS agents.
It is not very likely that a secretary typing letters while sitting in an IRS office or a clerk feeding a computer in a regional processing center will ever be offered a bribe. So in measuring the potential size of the corruption problem in the Mid-Atlantic Region, office workers who have infrequent contact with the public can be generally ignored. But the number of “front line” IRS troops with day-to-day contact with the public is not insignificant.
“I would say that the Mid-Atlantic Region employs at least twenty thousand examiners, auditors, investigators, and collection people who hold potentially vulnerable jobs,” Redmond said.
“Tax collection is a high-risk business at best and investigating corruption in this area is extremely difficult. You need corroboration, you need a living body, you need someone inside.”
But even when the IRS identifies an insider who is willing to work as an undercover operator, corruption investigations are extremely labor intensive. “When an undercover informant has a meeting with a potential target, we often must mobilize six investigators and technicians to capture the evidence on hidden cameras and other kinds of recording devices,” Redmond said.
In the face of the sheer mass of the hazard, the complexity of the tax laws, and the time-consuming process of penetrating just one conspiracy, the size of Redmond’s inspection unit seems puny, even absurd. Is it not ridiculous to think that the 150 inspectors, technicians, statisticians, supervisors, and secretaries assigned to the Inspection Division in the Mid-Atlantic Region of the IRS can come close to achieving their mission? The relative dimensions of the corruption potential and the corruption fighters are essentially the same in the IRS’s six other regions.
To penetrate the secretive underground world of William Kale and Charles Toll and Irving Suval and Robert Saligman and Albert Nipon, Marinari and Redmond needed luck, a great deal of luck. The big break came on November 19, 1980, when a nice young IRS agent named Jude Dougherty was negotiating with an accountant named Victor Gottfried about the tax problems of one of Gottfried’s clients. Dougherty’s initial examination had led him to believe that the client owed the government additional taxes. But Gottfried had different ideas. In the classically vague terms of an initial bribe offer, Gottfried indicated to Dougherty that he would be “satisfied” if the problem could be resolved.
Dougherty followed what is supposed to be the IRS standard procedure in such situations. He told Gottfried he’d think it over. Then he reported the incident to Redmond. Dougherty was asked to wear a small concealed device to record his next conversations with Gottfried and the reluctant taxpayer. It turned out that Gottfried was a gabby fellow who dropped the names of several other IRS agents who were allegedly “friendly.” Redmond and his team reached into the massive computerized files of the IRS and identified Gottfried’s other clients. With further checks, the investigators developed a list of potential suspects. Irving Suval was at the top of the list.
But there was the question of proof. With some reluctance, Dougherty agreed to become the bait that would draw the “friendly” agents, hungry accountants, and greedy taxpayers of Philadelphia within range of Redmond’s secret recording devices and tiny hidden cameras. From 1980 to 1984, Jude Dougherty was a double agent. With careful coaching, Dougherty began acting like an IRS agent who had more of the good things in life than could be purchased on his modest government salary. He traded in the Thunderbird he was driving for a Mercedes. He took lawyers to lunch at one of Philadelphia’s most expensive restaurants.
Incredibly, Terri Marinari and Ben Redmond’s luck held. In the spring of 1982, Dougherty agreed to take a $150,000 bribe in return for apparently helping a manufacturer named Herbert Orlowitz avoid $1.8 million in income taxes. The first two payments were completed in an office where the events could be recorded but not photographed. But then, early one July morning, Orlowitz handed a brown paper bag to Dougherty while they were standing in the middle of a deserted parking lot. Opening the bag, the undercover agent pulled out a thick stack of $100 bills and fanned them in a way that looked like he was just checking to make sure they all were of the same denomination. From a window of an apartment located across the street and twelve stories above the parking lot, the telephoto lens of an IRS video camera also noted the denomination of the bills.
Marinari, Redmond, and his investigators were ecstatic. But following the tested and tedious tactics of serious corruption investigators, they did not run down the twelve flights of stairs and arrest Orlowitz. Although an arrest would have been satisfying, it also would have sent a violent warning signal through the network of agents and businessmen that was corrupting the federal tax laws in Philadelphia.
Three months later two special investigators for the IRS intercepted Orlowitz on his way to his office. They asked him to accompany them to another office in the same building. There, the executive was given a special viewing of a short piece of video tape in which he was the star. Faced with the documentary evidence of his bribe, Orlowitz almost immediately agreed to the government’s offer to go easy on him if he would cooperate. Orlowitz’s office was transformed into a secret television studio equipped with three concealed video cameras and six microphones.
Irving Suval, the IRS supervisor who later would describe his bribes as “fees,” passed his first film test with flying colors while meeting with Orlowitz in December 1983. After some small talk about Orlowitz’s health, the two men got down to business. As Suval shuffled a large stack of financial documents, he described the special services he could offer his client. “What I am about to do, Herb, is as follows,” Suval said. “I am going to conveniently lose a lot of these pages. You’re getting a refund of a million in tax plus the interest.”
The IRS agent appeared to be subtly suggesting that Orlowitz consider increasing the bribe. “You know what? Most of that money is not yours. I just want you to know that million dollars you’re getting back in tax from those back years, you’re not entitled to it. Legally, you’re not entitled to one penny.”
The tactic of “losing” the key documents was dangerous, Suval said. Maybe the service was worth more than the “buck and a half,” that Orlowitz had agreed to pay. A “buck and a half,” in Suval’s fast-moving world, was $150,000.
In March 1984, the investigators ordered Orlowitz to telephone Suval with the good news that the $1 million refund had arrived. A few days later, Suval stopped by Orlowitz’s office to complete the transaction. Instead of Orlowitz, Suval found Jude Dougherty, the IRS agent who had been pretending to be corrupt for more than three years. Dougherty handed Suval $50,000 in cash, far less than the agreed-upon bribe, but plenty for the immediate purposes of the government.
At that moment, according to the game plan worked out by the investigators, four armed special IRS agents were supposed to sweep into the office. But somehow the door they planned to burst through was locked. Improvising quickly, one of the agents knocked.
“Who is it?” Suval asked.
The investigator was really swift. “It’s Mike,” he replied, dropping the name of Orlowitz’s son. With the $50,000 in one hand, Suval turned the lock and opened the door to the four agents. His world crumbled.
Suval, like Orlowitz, was asked to cooperate in return for a promise from Marinari to ask for a lighter sentence. He too became a double agent. The biggest and most complex payoff scheme that Suval disclosed to the investigators involved Charles Toll, Cynwyd Investments, and all the other companies controlled by Robert Saligman.
But Suval turned out to be ineffective as an undercover agent, unable to disguise his underlying nervousness. Toll appeared to smell trouble immediately. “I don’t know what you’re talking about,” Toll said to Suval and the IRS’s secret recording device, when asked about the $65,000 bribe the company had paid Kale and Suval.
It was Toll’s extremely sensitive early warning system that triggered what became the final step in Marinari and Redmond’s investigation: the May 1985 seizure of Cynwyd Investments’ books, the discovery of Toll’s embezzlement, and Toll’s forced decision to testify about his thirty-year involvement in a highly successful effort to thwart the lawful collection of taxes.
The series of bribery trials and convictions that developed out of the undercover work of Jude Dougherty represents the largest wave of corruption to sweep over a major office of the IRS in the last few years. The scandal, however, was far from unique. In fact, about ten years before Benjamin Redmond led the successful investigation in Philadelphia, he uncovered almost as extensive a ring of corruption within the IRS office in Pittsburgh.
In the Pittsburgh case, one of America’s largest and best-known corporations, Gulf Oil, was accused of showering hundreds of expensive gratuities for more than three years on approximately thirty IRS employees, including the man who supervised Gulf’s federal tax audits. As a result of the investigation, the supervisor was convicted and sentenced to six months in prison, five IRS agents were dismissed and twenty-seven others received punishments including demotions in rank and suspensions without pay.
Cyril J. Niederberger, the man in charge of the tax agency’s examinations of the giant corporation, told IRS investigators that he had accepted hundreds of meals, drinks, golf outings, airline tickets, lodgings, and other gifts from Gulf during the eight-year period between 1967 and 1975.
Although the gratuities that Gulf gave Niederberger were considerably smaller than most of the bribes uncovered in Philadelphia a decade later, the potential corporate benefits were massive. According to assistant U.S. attorney Craig R. McKay, one key ruling was Niederberger’s decision that an illegal $12 million political slush fund was not subject to taxation. “On March 28, 1974, he turned over his report,” McKay told the federal jury. “He found no evidence that Gulf should pay taxes on these funds and that no fraud was involved. On that same day he was booked for a week at Pebble Beach.”
The evidence showed that Niederberger and his family received four other no-cost vacations from Gulf in such locations as Miami, Pompano Beach, and Las Vegas. One indication of just how hard the corporation was courting the IRS official was that Gulf’s two top tax executives, Fred W. Stadefer, vice president for tax administration, and Joseph F. Fitzgerald, manager of federal tax compliance, accompanied Niederberger on all the trips.
The case provided several fascinating morsels for the connoisseur of corruption. One tasty trifle brought out in a later trial of one of Gulf’s lawyers was that Niederberger did very little work for all his gratuities. The lawyer, Thomas D. Wright, said he actually wrote the three-page memorandum exonerating Gulf on the slush-fund charges that the IRS supervisor then submitted as his conclusion. “The actual writing of it was done by me, typed in my office,” Wright testified.
Another interesting tidbit concerned the way the payments were discovered. During the trial, an IRS inspector named Alan E. Hobron told the court that the entire investigation began when the IRS belatedly noticed that Gulf was deducting from its taxes sums it was using to entertain Niederberger and the entire IRS team supposedly monitoring the corporation’s taxes. The bribes to the IRS were openly reported and deducted as necessary business expenses. No Sherlock Holmes sleuthing here.
Hobron’s disclosure that Gulf viewed the payments to the IRS as such an acceptable practice that it routinely informed the government about them raises serious questions about the ethical standards of the corporation and the IRS. At the time of the indictment of Gulf and two of its executives, U.S. Attorney Blair A. Griffith disclosed that during his investigation he had uncovered evidence that a large number of other Pittsburgh corporations had also routinely provided cash gratuities to IRS employees.
Although the Pittsburgh investigation at that time generated a good deal of unpleasant publicity for the IRS and Gulf, the ultimate sanctions were minimal. Niederberger was sentenced to six months in prison; Gulf pleaded guilty to providing the trips and was fined a grand total of $36,000.
Before his successful corruption investigations in Philadelphia and Pittsburgh, Redmond had been assigned to New York City, whose residents have long been portrayed as quick to offer a bribe. If you want an apartment, you pay a little bribe. If you need special police attention, you pay a little bribe. If you want to win a government contract, you pay a little bribe. In an environment like that it would be naive to think that any agency could escape contagion. The IRS was not immune.
During his assignment in New York, Redmond investigated many different conspiracies. In one cast of his net, Redmond came up with twenty-two agents, four former agents, and one certified public accountant. The January 1968 indictments, announced in Manhattan by U.S. Attorney Robert M. Morgenthau, were the product of a two-year investigation that bore the code name of Project W.
Only three years before, the same prosecutor had put together yet another IRS corruption case involving an even larger cast: sixty-five agency auditors and eighty-two accountants and lawyers.
Despite the continued investigations and the steady stream of indictments, corruption did not appear to subside in the New York area. In 1970, for example, an IRS inspector named Barnard T. Smyth completed Project S, an investigation that led to the indictment of ten current and former special agents for taking bribes from organized-crime leaders. Project S shocked the top leadership of the IRS because the men who were charged with corruption were from the ranks of the agency’s elite investigating unit, what was then known as the Intelligence Division.
Six years later, in March 1976, Andrew Jackson, the former chief collection officer in the IRS’s Long Island office, was convicted of receiving more than $60,000 in bribes. Charged with playing a role in Jackson’s conspiracy were one recently retired group supervisor, a still active mid-level IRS official, and a revenue officer.
While the numbers of New York indictments seem high, the official charges brought by the U.S. attorneys in Manhattan and Brooklyn come nowhere near reflecting the day-to-day corruption problem within the IRS at that time. In 1970, for example, Andrew J. Maloney, then an assistant U.S. attorney, reported that in addition to the one hundred agents who had been convicted by his office in New York, another forty had been forced to resign. (Maloney is now the U.S. attorney in Brooklyn.)
But investigators in the New York and Brooklyn districts tell tantalizing and suggestive stories of the many sharks who got away. One such yarn involved a senior IRS investigator who was known to operate a ring of approximately six corrupt agents. The gang arranged for the payment of bribes by having an allied outside attorney, usually a former special agent, approach the attorneys of the taxpayers they were investigating. The bribe thus was made from attorney to attorney. The money then was passed to the IRS supervisor who operated the ring. He would extract his cut and pass the balance on to the agent handling the specific case in question.
By the time this particular conspiracy was revealed by one of the original members of the ring, the supervisor had retired from the IRS and had accepted a management position with a major New York corporation. Although many of the participants were subpoenaed to testify, the grand jury never indicted anyone because of a lack of evidence. In this case, however, the failure to indict does not necessarily mean that the original information was incorrect. When the ringleader was brought in to the grand jury to be questioned about the allegations, he chose to invoke his Fifth Amendment right not to incriminate himself. Shortly thereafter, the corporation requested his resignation.
While it thus is clear that an unknown number of bribe-hungry agents escaped the anticorruption campaigns of Benjamin Redmond and Terri Marinari in Philadelphia and their counterparts in New York, the occasional conviction of a William Kale or a Irving Suval or a Cyril Niederberger surely serves as a warning to at least the most timid of the agents. But what happens when the leadership ducks? What happens when the determined foes of the corruption have no real support? What happens when powerful political forces in a city or in the upper reaches of the Justice Department decide that determined assistant U.S. attorneys like Terri Marinari should spend their time on other matters?
Is extensive corruption inevitable within the IRS? Given the high stakes involved, isn’t it ridiculous to think that the competitive owners of Guess? are not going to try to influence powerful men like Ron Saranow? Given the powerful attraction of money, do we expect too much of ambitious businessmen like Robert Saligman if we assume they will not offer substantial bribes to avoid paying far more in federal taxes? Given the go-go ethic of capitalist America, are we naive to believe that middle-level government officials like Irving Suval are not going to begin thinking of these offers as almost legitimate “fees”? Given the ambiguity of “legal tax shelters” and other accepted forms of tax avoidance, is it ridiculous to hope that the driven executive, the high-powered lawyer, and the relatively low-paid IRS examiner will be able to define the line between correct and incorrect behavior?
Vernon Acree, the man who headed the Inspection Division for more than two decades, told me a story a while ago that suggests the naivete of the public at large and, in this case, Mortimer Caplin, the brilliant University of Virginia law professor who had just been named to head the IRS by President Kennedy.
“Mort was desperate that he didn’t want a corruption scandal during his watch,” Acree said. “One day after a lot of people had been indicted in New York we had a meeting up there with fifty or sixty New York supervisors. He gave them a real heavy lecture about all the corruption he had heard about in New York. Then he dropped what he thought would be a real bomb. ‘From my conversations,’ Morty told them, ‘I think as many as 50 percent of the agents doing office and field audits are involved in bribery.’ He stopped for effect. There was a long silence. Not one of the sixty supervisors looked shocked or amazed. Finally, Mort called on a guy in the front row and asked him what he thought about his estimate. ‘Well,’ this supervisor replied, ‘I would think the percentage of corruption might be higher.’”
“Tax collection is a high-risk business,” said Ben Redmond, regional inspector in Philadelphia. And after twenty years of fighting corruption in the IRS, who should know better? “There was a long run of serious problems in New York, the situation in Pittsburgh, and then we found the mess in Philadelphia. People want to believe New York and Philadelphia are unique. I say baloney. I say corruption happens in other parts of the country too.”