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Are you including ‘income from illegal activities’ on your tax return?

On Behalf of | Mar 27, 2013 | Uncategorized

With the calendar moving ever closer to Tax Day, thousands of Americans are now spending their evenings gathering documents and filing out their tax returns. While the Internal Revenue Service of course wants you to report all forms of income, did you know this also includes illegal income?

Believe it or not, the IRS mandates that all income derived through illegal activity must be reported and is subject to taxation.

Consider a section from the agency’s official instructions: “Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.”

Here, the taxpayer only needs to provide the IRS with an estimate of their illegal income and no accompanying paperwork. However, in the event the taxpayer is audited, IRS agents will come looking for a paper trail and, in the event it cannot be produced (which is often the case), they will ask for the contact information of associates who can verify the estimated income.

This idea of reporting income from white collar crimes, drug crimes or other criminal offenses naturally raises a host of questions.

Why would anyone ever consider reporting illegal income?

While most offenders choose to skip this step, experts indicate that those who have been arrested and charged with a crime, or who are on the brink of apprehension often choose to do so. The reason? They can avoid two set of criminal charges, including one for the underlying offense and one for tax evasion.

“I knew the money was taxable, there was no doubt about that,” said one former accountant who faced embezzlement charges on three separate occasions. “I had already been caught, and I didn’t want to face federal tax charges.”

Can the IRS provide the information on illegal income to law enforcement officials?

According to legal experts, the IRS is legally prohibited from sharing information on taxpayers’ returns with any law enforcement agency that does not have a court order granting it access. (The only exception being terrorism.)

However, they also point out that the law in this area is littered with loopholes. For example, while information from a tax return may not be shared without a warrant, supplemental information gleaned by the IRS from outside sources (i.e., witnesses) during an audit investigation is not subject to this restriction.

“Do they report you to other agencies?” asked one criminal defense attorney. “Absolutely.”

Stay tuned for more from our San Antonio criminal defense blog …

If you have been charged or are currently under investigation for any white collar crime, be certain to contact an experienced legal professional.

This post was provided for informational purposes only and is not to be construed as legal advice.


Fox-43, “The IRS wants to tax your illegal income,” Steve Hargreaves, Feb. 28, 2013