NFIB Small Business Legal Center Fights IRS’ Efforts to Criminalize Even Legal Conduct

Date: January 15, 2018

Last month the Supreme Court heard arguments in a case that’s important to all taxpayers, but particularly small businesses, which tend to file more complicated tax returns and have more paperwork associated with them. In Marinello v. United States, the Court will decide whether federal prosecutors went too far in charging a business owner with obstruction of justice – a felony — for failing to keep records that were not affirmatively required by law.

The case concerns a small business owner – Carlo Marinello – who ran a cash-only freight courier business and admitted to failing to pay his taxes. But the behavior at issue in the case concerned Mr. Marinello’s destruction of certain business records before he learned that he was subject to an IRS audit.

The government is using Mr. Marinello’s case to push an aggressive interpretation of Section 7212 of the Internal Revenue Code. The government argues that business owners and other taxpayers may be subject to felony prosecution for doing anything that might make a future Internal Revenue Service audit more difficult. Even Supreme Court Justice Kagan acknowledged that Section 7212 was “ungodly broad.” We agree, and argued in a brief filed with the Court that, among other things, a decision for the government threatens to: (1) criminalize a wide array of lawful business conduct, (2) vastly increase the costs to small businesses of ordinary course tax compliance, and (3) result in businesses paying more taxes than they owe in order to avoid being accused of a felony. For example, if federal prosecutors allege a “corrupt” motive, a small business owner might be prosecuted for an otherwise legal decision to structure business finances in a way that might make the source of certain income unclear, or for failing to keep receipts.

The good news is that many of the Supreme Court justices seemed to share our skepticism of interpreting section 7212 as broadly as the government proposes. A decision in the case is expected before June. To keep up with this and the other work of the NFIB Small Business Legal Center, go to\legal.

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