Does a taxpayer commit a felony offense if they pay a babysitter without withholding taxes, fail to keep receipts for charitable donations, or neglect to provide every record to an accountant? A strict reading of the law would suggest that these actions are felony offense. The U.S. Supreme Court recently addressed this in Marinello v. United States, No. 16-1144 (2018).
The Facts and Procedural History
This case involves an investigation of Mr. Marinello’s tax activities. The IRS opened, closed, and reopened the case over a five year span. Three years after that, the government charged him with violating several criminal tax statutes, including Section 7122. This included charges that he:
Failed to maintain corporate books and records,
Failed to provide his tax accountant with complete corporate books and records,
Destroyed business records,
Hid income, and Paid employees with cash.
The judge instructed the jury that it had to find that Mr. Marinello did one of these acts “corruptly,” meaning “with the intent to secure an unlawful advantage or benefit, either for [himself] or for another.” The judge did not instruct the jury that it had to also find that Mr. Marinello knew he was under investigation and intended corruptly to interfere with that investigation.
The jury convicted Mr. Marinello and the conviction was upheld by the appeals court.
Tax Obstruction is Broad
Section 7212 makes it a felony to corruptly or by force to endeavor to obstruct or impede the due administration of this the tax code.
The Court noted that the words “obstruct or impede” are broad. They can refer to anything that blocks, makes difficult, or hinders according to the commonly understood meaning of these terms.
This suggests that a felony offense is committed if a taxpayer pays a babysitter without withholding taxes, fails to keep receipts for charitable donations, or neglects to provide every record to an accountant.
The Court Limits Tax Obstruction
But the court went on to note that the terms “obstruct” and “impede” also suggest an object—the taxpayer must hinder a particular person or thing, namely, the administration of the tax code.
This lead the Court to consider what all activities are included in administering the tax code. The Court considered its prior interpretations of the general non-tax Federal obstruction statute found in 18 U. S. C. §1503. The Court has previously held that making false statements to an investigating agent, rather than a grand jury, do not support a conviction for obstruction of justice.
The Court concluded that a taxpayer does not violate the tax-specific obstruction statute absent a “nexus” between the taxpayer’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. This excludes most routine day-to-day activities carried out by the IRS, such as processing tax returns.
The Administrative Proceeding Requirement
Given the above, the Court also concluded that there must be a proceeding at the time the taxpayer engaged in the obstructive conduct that was known by the taxpayer at the time.
The Court noted that it:
is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually. To use a maritime analogy, the proceeding must at least be in the offing.
It is not clear what all proceedings this applies to, whether it is a criminal proceeding, a civil audit, a civil collection, or other matter. Presumably, we the courts will provide an answer to this in the future when other disputes are heard.
The case does make it clear that tax planning activities and preparing tax returns not related to these administrative proceedings are not subject to the tax obstruction statute.
The Court’s interpretation of the tax obstruction statute is consistent with the bedrock principle that criminal statutes should be narrowly tailored so that individuals have clear notice as to what conduct constitutes a crime. It provides much needed clarity as to how this statute is to be applied–particularly for taxpayers who are attempting to plan their tax affairs or prepare tax returns. The case also rectifies different holdings taken by the various appeals courts regarding this tax obstruction statute.
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