In Marinello v. United States, an opinion released yesterday, the Supreme Court adopted a narrowing interpretation of the tax code’s broadest criminal provision, the “tax obstruction” statute 26 U.S.C. § 7212(a). The Court’s opinion is good news for taxpayers, their advisors, and the sound administration of the law.
Marinello concerned whether the crime of “corruptly … endeavor[ing] to obstruct the due administration” of the tax laws (i) prohibits obstruction only of pending IRS audits and collection efforts, or (ii) instead applies more broadly. The government urged that the crime included conduct well before any IRS audit, so long as it was motivated by a desire to cheat on one’s taxes – including otherwise-lawful conduct like dealing in cash, or avoiding the creation of records not required by law.
DOJ urged a broad interpretation of the tax obstruction statute because the tax laws themselves are broad: tax administration is “continuous, ubiquitous, and universally known,” DOJ argued. But the Court correctly recognized that the breadth of the tax laws is itself a reason for caution, to avoid making every lapse in bookkeeping or business judgment a potential tax crime. And a person of ordinary moral sensibilities might recognize that (say) using cash or discarding receipts makes the IRS’s job harder. He might even realize some of these practices could invalidate a tax deduction, if he thought about it. But he would not believe such conduct to be a crime. On the government’s view, it could be – limited only by DOJ’s self-restraint.
Marinello wisely prohibits that result, requiring the government to prove the intent to obstruct a pending or foreseeable tax administration “proceeding” before it can obtain a § 7212(a) conviction. That “proceeding” must be something beyond processing tax returns and refunds, or other functions IRS performs in the background. In practice, Marinello means DOJ will charge tax obstruction only where obstructive conduct concerns some direct interaction between a taxpayer and an IRS employee – an audit, civil summons enforcement, dealings with the Appeals Office, enforced collection, Tax Court proceedings, or a tax crime investigation.
Off limits to DOJ going forward are tax obstruction charges based on pre-audit activities, like employing or promoting fraudulent tax shelters, or accounting misconduct. Of course, such conduct can still be prosecuted using the more traditional crimes like tax evasion, conspiracy, or filing false returns.
And that’s the main virtue of Marinello: holding the government to its burden of proof under the traditional tax crimes. DOJ’s pre-Marinello view (followed by most circuits until today) let the government salvage felony tax charges in failed tax evasion cases. Indeed, the primary effect of § 7212(a) in cases without a pending proceeding was to make tax obstruction a backstop felony charge when the defendant’s conduct looked like tax evasion, but the government could not prove a tax loss or the falsity of a document submitted under penalties of perjury. The broad view, in other words, made it easier for the government to charge felonies that should have been declinations or misdemeanors like failure to file.
Moreover, the broader view of § 7212(a) allowed the government to bring charges based on otherwise-legal conduct which did not directly threaten the integrity of the tax system, but merely risked doing so. Indeed, DOJ frequently used § 7212(a) to prosecute lawful conduct that, it contended, was rendered illegal by an intent to cheat on one’s taxes – actions like dealing in cash, as in Marinello, or using offshore banks or shell companies.
But there’s no reason for such a broad crime to exist. The DOJ has a valid prosecutorial interest in false returns and the underpayment of taxes. If a taxpayer intends for dealing in cash or other pre-“proceeding” conduct to result in underpaid taxes or false returns, the government should prosecute with the traditional tools at its disposal. But it should be compelled to pay the price those statutes require: proving an actual harm to the tax system via a false return or lost tax revenue. Otherwise-legal conduct several degrees removed from the government’s real interests should not be enough.
In other words, tax crimes are intended to protect the federal fisc and ensure the integrity of self-reporting. They do not create a general code of accounting or business ethics. No harm, no foul.
Marinello also answers the question of whether audit avoidance – tax planning intended to lower the audit profile of a client’s return or transaction – can, by itself, be tax obstruction. The answer is no, except in the exceedingly rare cases where a “proceeding” is already pending. But that answer provides only limited comfort, as DOJ can still pursue overly aggressive planning for clients under other statutes.
In sum, Marinello continued the Court’s recent trend of reining in DOJ’s interpretation of broadly worded white collar crimes. And it appropriately recognizes that prosecutorial discretion and mental state requirements are not reliable limits on criminal laws broad enough to reach innocent conduct. The net effect will be holding DOJ’s feet to the fire, deterring it from bringing cases that don’t provably implicate the core interests of tax enforcement.