routinely administers the tax code; that’s what withholding is all about. Now, the U.S. Supreme Court has agreed to hear a case this term that will determine whether, under tax code Section 7212(a), taxpayers need to know that they’re under investigation before they can be accused of corruptly obstructing or impeding the due administration of the tax code. Key: Your actions need not be illegal for you to be guilty of obstruction under Section 7212(a). (Marinello v. U.S., No. 15-2224, 2017)
Taxpayer behaving badly. Marinello was alleged to have committed the following corrupt acts before he became aware of any IRS investigation: He failed to file tax returns, didn’t keep corporate books and shredded what books he did keep, used business income to pay his personal expenses and destroyed bank statements. He also paid employees in cash—which normally isn’t a crime—and didn’t file W-2s or 1099s—which is bad, but generally not considered a crime.
He was convicted and he appealed, arguing that guilt under Section 7212(a) at least requires knowledge of a pending IRS action or investigation—a fact the government hadn’t proved. The 2nd Circuit disagreed. It interpreted the section and Marinello’s corrupt acts broadly to include even failures to act (i.e., omissions), such as failing to file W-2s. This may be the problem for the Supreme Court.
Due administration of the tax code. The Supreme Court will have to decide if it agrees with the 2nd Circuit’s interpretation. Using the appellate court’s logic, for example, several friend-of-the-court briefs filed in support of Marinello noted that the following payroll acts could be considered obstruction under Section 7212(a):
- Failing to file W-2s or 1099s
- Routine shredding of tax returns and supporting documentation that are long past their retention date
- Even paying in employees in cash (which is legal, provided you withhold all the appropriate taxes).