As tax season begins, the IRS published guidelines for 2022, which included how taxpayers can claim earnings from illegal activities. Meaning, if you stole or earned money from bribes or selling drugs, you must report it. According to the IRS, make sure you include that on “Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity”. For example, if you stole property, you’ll have to report its fair market value. But, don’t worry, you can avoid the taxes if you “return it to its rightful owner in the same year”. 
These guidelines aren’t new but this reminder is going viral for how ridiculous it sounds. After all, what criminal will send out a report of his crimes? And if he’s already committing crimes, tax evasion doesn’t seem like a big deal.
Please Report Crimes to the IRS
These regulations included many legal details on how to report illegal activity. For instance, how to report embezzlement and how bribes are considered “nondeductible expenses”. Furthermore, if you hold by “finders keepers,” the objects you find are taxable too.
“If you find and keep property that doesn’t belong to you that has been lost or abandoned (treasure trove), it’s taxable to you at its fair market value in the first year it’s your undisputed possession,” noted the IRS.
In short, it doesn’t matter how you earn it. “All income, from whatever source, is taxable income, unless excluded by an act of Congress,” Gary Schroeder, a Maryland-based tax preparer, said. “If you receive $500 to kill your neighbor’s annoying rooster, or find $1 on the street, or embezzle from your employer, that’s all taxable income, as well as your paycheck from flipping burgers at McDonald’s.”
The good news is people convicted of embezzlement can avoid prosecution for tax evasion, according to Stephen Moskowitz, a San Francisco tax attorney. Plus, they can deduct the cost of restitution. But is that worth reporting themselves? Maybe, yes.
Getting Convicted For Tax Evasion
“They can’t collect legal taxes from illegal money,” Al Capone once famously boasted. That’s certainly not true now, but it wasn’t true then either. The FBI knew the famous Chicago gangster was guilty of murder and many other crimes, but he managed to slip away the charges against him. But then came a game-changer.
On May 16, 1927, the U.S. Supreme Court ruled in U.S. v. Sullivan that “[g]ains from illicit traffic in liquor are subject to the income tax would be taxable” (274 U.S. 259). In 1930, Capone was dubbed “Public Enemy Number One” after the St. Valentine’s Day Massacre where members of a rival gang were shot. At the time, Capone thought himself invincible but his downfall was already in place.
While he showed off his opulent lifestyle, the feds slowly built up a case against him. Despite his wealth, he never filed a federal income tax return and claimed he didn’t have taxable income. The IRS “followed the money” and successfully indicted Capone on 22 counts of federal income evasion. On October 17, 1931, the judge found him guilty and sentenced him to 11 years in prison, an unheard-of decree at the time. Plus, he owed a fine of $50,000 ($798,055 in today’s dollars) in addition to court costs and paying up taxes of $215,000 (now, $3,431,640). 
Report All Income — Legitimate or Not
It’s an incredible punchline, how of all the crimes the notorious mobster committed, he got caught for tax evasion. And that might be the main idea behind the IRS’s announcement. If the police can’t catch you stealing a million dollars, the IRS might.
“Congress requires that you report all of your income — whether legitimate or not,” said David Cay Johnston, an investigative journalist specializing in tax code issues. “There are people who file tax returns and list as their occupation criminal activities like ‘prostitute.’” Since tax returns are confidential, the IRS can’t legally share the content unless the police provide a court order to access the person’s tax records.
Meanwhile, in 2020, the United States Sentencing Commission reported 324 tax fraud convictions — a 45% decrease from the 595 convictions in 2016.  “The ‘tax gap’ — the difference between the taxes that are owed and the taxes that are collected — runs in the hundreds of billions of dollars a year,” Schroeder said. “While a portion of that gap is the unreported profit from illicit drug sales, the gap also includes the folks who ‘skim’ by not reporting some or all of their income that is paid in currency.” 
So, as crazy as it sounds, it might actually be wise for criminals to report their crimes.
- “Yes, IRS Asked Taxpayers To Claim Stolen Items and Illegal Income.” Snopes. Madison Dapcevich. December 30, 2021
- “Al Capone Convicted On This Day In 1931 After Boasting, ‘They Can’t Collect Legal Taxes From Illegal Money’.” Forbes. Kelly Phillips Erb. October 17, 2021
- “Tax Fraud Offenses.” USSC. 2020
- Don’t forget to declare income from stolen goods and illegal activities, IRS says.” NBC News. Ben Popken. “ December 30, 2021