It’s tax season for everyone — including hardened criminals.
Yes, Uncle Sam expects to collect taxes on all kinds of shady dealings. It might seem needlessly thorough and wildly optimistic, but the IRS lists many illegal activities that count as income in Publication 17, its all-purpose guide for individual taxpayers.
Following are some crimes that, believe it or not, come with a tax bill.
How the IRS catches criminals evading taxes
Before we get into taxed criminal activity, though, you might be wondering why the IRS bothers.
It would take a special kind of criminal — honest or stupid, depending on your point of view — to report their ill-gotten gains and dutifully pay taxes on them. So how does anyone ever get caught?
It’s actually pretty simple: The IRS pays handsome rewards to people who snitch on these tax scofflaws:
“Internal Revenue Code (IRC) Section 7623 provides for awards to whistleblowers who submit information to the Internal Revenue Service (IRS). Claims for award that provide specific and credible information regarding tax underpayments or violations of internal revenue laws and that lead to proceeds collected may qualify for an award. […]
In general, the IRS will pay an award of at least 15 percent, but not more than 30 percent of the proceeds collected attributable to the information submitted by the whistleblower.”
However, you may not get an award for ratting out your co-worker or neighbor. Only actions involving proceeds that exceed $2 million or that involve an individual making more than $200,000 a year qualify. Whistleblowers who were part of the tax evasion they’re reporting get a smaller reward too.
Rewards for providing information are also subject to taxes, according to the IRS.
One of the shortest and clearest sentences of IRS Publication 17 states:
“If you receive a bribe, include it in your income.”
A couple pages later, it also says:
“You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity.”
Another IRS publication provides more specific information about what constitutes these activities and warns, “Engaging in the payment of bribes or kickbacks is a serious criminal matter.”
2. Drug dealing
The IRS vaguely casts a wide net over “illegal activities” but specifically mentions drug dealers:
“Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity.”
3. Stolen property
Good news: You can just “borrow” property for a while without owing taxes on it. In a section on stolen property, the IRS says:
“If you steal property, you must report its fair market value in your income in the year you steal it unless you return it to its rightful owner in the same year.”
So, criminals: Remember to make returning what you stole part of your annual year-end tax planning. You can always steal it again later, unless your New Year’s resolution is to turn over a new leaf.
If that’s too much hassle, make sure to ask your victim what the fair market value of the property was so you can properly figure your tax.
4. Smuggled goods
If you’ve heard about how mobster Al Capone was eventually brought down for tax evasion, you’re familiar with this one.
A 1927 Supreme Court case about bootlegging during Prohibition (smuggling alcohol illegally), United States v. Sullivan, was the basis for arresting Capone, who trafficked in alcohol, drugs and more.
5. Spying income
In the 1990s, a CIA agent turned spy for Russia and his wife were caught and charged with espionage in part due to $2 million in spy income that they failed to pay taxes on. “The prosecutors did not formally accuse the couple of tax evasion,” The New York Times says, but just remember that’s a no-no.