Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough

“We consider whether conspiring to make the government’s job harder is, without more, a federal crime.” United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993) (Kozinski, J.) This article addresses the question of “whether acting or conspiring with others to make the Internal Revenue Service’s (“IRS”) job harder is, without more, a federal crime.” The issue is occasioned, as it was in Caldwell, by broad judicial statements and government claims as to the scope of the tax obstruction crimes. If read literally, these variously worded interpretations would criminalize otherwise legal actions involving no deceit but with an intent to make the government’s job harder. Judge Kozinski, for the Ninth Circuit, answered no to the question in the context of a tax defraud conspiracy. As interpreted, the defraud conspiracy is one of a panoply of federal obstruction crimes. This Article focuses on the obstruction crimes that are likely to be encountered in a tax setting. Many of the lessons to be learned in the tax obstruction area are useful in other obstruction contexts as well as in the general area of so-called white collar crime. Taxpayers and tax practitioners often structure transactions and take return reporting positions with the intent to avoid an IRS audit, a practice sometimes called “audit avoidance.” When doing so, most taxpayers and practitioners do not intentionally underreport or underpay tax liabilities, falsify the reporting on tax returns they sign or prepare or otherwise engage in conduct that is false or dishonest. These taxpayers and tax practitioners prefer to avoid waving the red flag in front of the IRS bull. They know that an IRS audit involves significant costs, disruption and angst, even if the IRS accepts the taxpayer’s positions or, worse, if the IRS decides to fight and the taxpayer prevails after litigation. The government sometimes asserts that otherwise legal conduct with the intent to impair, impede or influence an audit – audit avoidance – may be a criminal obstructive act. Where individual or multiple actors are involved in tax setting, the government may use the Omnibus Clause of the tax obstruction statute. Where two or more actors are involved, the government may assert the “defraud conspiracy,” which in a tax context is called a Klein conspiracy. The notion in each case is that otherwise legal acts with a motive to impair, impede, or influence an IRS audit are criminalized. As thus articulated, the notion fails to recognize that some activity covered within that broad statement is not criminal. Judge Kozinski forcefully held that the notion is too broad, rejecting the government’s claim that “conspiring to make the government’s job harder is, without more, a federal crime.” The government continues to repackage the notion, hoping it will find traction in some court somewhere. In the meantime, by continuing to make the claim through indictments by grand juries it controls, the government has a powerful in terrorem tool to influence the behavior of taxpayer and tax practitioner communities. The question in this Article, as in Caldwell, is whether the government’s claim of criminality for making the IRS’s job more difficult, without more, is wrong. I conclude that it is. Judge Kozinski’s question is the right question for the tax obstruction crimes, including the Klein conspiracy he addressed in Caldwell, and his answer is correct for the tax obstruction crimes.