Most people would generally conceive of more serious tax crimes and tax felonies as acts where a person must voluntarily or intentionally take some action to accomplish or further the fraud. Typically, when a taxpayer is engaged in a tax impropriety through a mistake or an oversight, a monetary penalty can be sought, but generally, a taxpayer will be free from concerns about a federal prison sentence. The potential of a prison sentence is reserved for alleged tax crimes where a person willfully violates the tax laws. This approach to tax penalties makes sense because although nobody wants to pay more in taxes, facing the possibility of a federal prison sentence in addition to the tax obligations and penalties is far worse.
Thus, an interesting question is raised by the matter Marinello v. United States, No. 16-1144 in which a taxpayer faces felony tax obstruction charges for his failure to keep accurate business books and records. Supporters claim that Marinello is the victim of prosecutorial abuse because he did not engage in the requisite type of conscious conduct required to trigger felony tax charges. However, others claim that Marinello’s actions regarding keeping business records went beyond justifiable mistakes or inaction and crossed the line making his actions a felony.
On June 27, 2017, the United States Supreme Court granted certiorari to consider Marinello’s challenge to his felony conviction previously upheld in the Second Circuit.
In 1990, Marinello started a trucking company. For those who may not remember the state of technology in the early 1990s, this was not a time where it was easy to go out and buy QuickBooks or another type of off the shelf accounting software. Rather, most accounting and bookkeeping for small business was done by hand by a professional accountant or bookkeeper. For large or established businesses, paying an accountant is generally just a cost of doing business. However, in a fledging start-up where every penny matters, an accountant can seem far beyond the company’s financial means.
Marinello claims this was the case when he started his business. He states that he solely focused on growing and developing his business. Unfortunately, this purported single-mindedness and lack of inquiry resulted in some major record-keeping errors. For one, Marinello did not pay close attention to the line between his personal and business assets and routinely commingled funds. Furthermore, Marinelli failed to keep bank statements and records and did not file taxes over the course of approximately two decades.
In 2005, Marinello apparently realized that his company books were in disarray and sought the advice of an accountant. But, the accountant was unable to assist Marinello immediately due to the poor state of business records. However, he did instruct Marinello to begin gathering bank statements and other information and to return once he had. However, even still, Marinello delayed for more than a year before returning to the accountant with a portion of the requested records.
Due to these actions, Marinello came to face felony tax obstruction charges. At trial, the taxpayer was convicted of committing one count of tax obstruction, four counts of failing to file personal income tax returns, and four counts of failing to file corporate tax returns with the Internal Revenue Service. He was sentenced to serve 36 months in federal prison. He is currently appealing only the felony tax obstruction charge.
Here, the question the U.S. Supreme Court must consider is whether behaviors of the type engaged in by Marinello constitute felony tax obstruction when the taxpayer is unaware of a pending IRS criminal tax investigation or of a pending audit.
On one hand, the court could consider facts of this nature without a showing of actual knowledge of an investigation to be a recipe for prosecutorial overreach and far beyond what was intended by Congress. Essentially, if the Second Circuit’s interpretation of the tax obstruction statute stands, felony tax obstruction charges will simply become a means for prosecutors to manufacture felony charges in a situation that would otherwise only justify misdemeanor charges. The presence of a felony charge and the specter of a potential federal prison sentence fundamentally alters the pre-trial and audit process calculus in a highly unfavorable manner for the accused.
Other observers seem to frame the issue differently seeing tax obstruction as more of a continuum of conduct rather than a bright-line rule. Supporters of this interpretation of the statute are likely to frame the question is the sense of, “How far is too far?” That is, it is reasonably understandable for a new business owner to fail to keep certain records. However, is it still reasonable if the business owner failed to keep records, didn’t file taxes, and destroyed bank statements? What if the taxpayer also commingles funds and utilize check cashing services to potentially conceal income?
Critics of this approach would claim that none of the above matters because without a mens rea element a conviction cannot be entered. Essentially, the court will be called upon to navigate a technical question that will nevertheless have significant potential impacts on all taxpayers who may be slightly careless or not have a 100% firm grasp of the U.S. Tax Code.
Taxpayers who have potential missteps in their tax or financial past should keep a close eye on this matter because it could significantly expand liability for felony tax obstruction. If you are considering fixing your tax compliance problems before facing an audit or criminal tax enforcement action, the lawyers and CPAs of the Tax Law Offices of David W. Klasing stand ready and willing to help. To schedule a confidential reduced rate consultation, please call 800-681-1295 or schedule online today.
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