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View Full Version : Re: Are you required to report "Illegal Income" on your tax return?


qazwart
06-02-2010, 11:22 AM
Article: http://www.straightdope.com/columns/read/295/are-you-required-to-report-illegal-income-on-your-tax-return.

There are a lot of states that require tax stamps to be placed on illegal drugs. I always wonder about the legality of this. If you don't buy the stamps, you can be charged with tax evasion, yet buying the stamps will cause the tax authorities to rat you out.

I can see several possible issues involved. First there's forced self incrimination which we're more or less constitutionally protected against. If I am required to report ill gotten gains for tax purposes, then it seems that the tax authorities can't inform the proper authorities when I do my civic duty as required by law.

Second, there's a privacy issue. I would assume that my tax records can't be perused by the police and other authorities just for giggles. If there is some need to sort through my tax records, you'd need a warrant. I would assume this would preclude the tax authorities just passing along without first getting a warrant.

Has there been any court cased on this subject? I can see three cases: One would be someone reporting their illegal income, and then the IRS informing the police who then arrest that person. Another would be someone buying a tax stamp. That information is sent to the police who get a search warrant and build up a case based solely on the fact a tax stamp was purchased. In both of these cases, could the fact a person paid taxes on illegal income or substances be the sole basis of any warrant or investigation?

The last case would be someone arrested for illegal selling of the drugs, then charges with tax evasion for not buying a tax stamp. Can the state charge a special tax on an illegal substance and then prosecute people for not paying taxes on that? This, to me is different from the income tax. The income tax is on "all income" which would include legal and illegal income. The tax stamps are specifically for doing something that is illegal to begin with. Can the state charge a special tax for something that is specifically illegal. (Not only has the court found you guilty for killing Mr. Smith, but we also find you guilty of tax evasion for not buying and affixing a murder tax stamp.)

Yes, I know about the opium tax certificates (http://www.scripophily.net/treasdepinre.html) in the early 20th century. In those cases, you had to buy a tax stamp for opium. Those stamps were not available, thus generally making opium illegal. But that was different. Opium itself was legal. If I did go to the tax office and and managed to buy an opium tax stamp, I wasn't breaking any law buying the opium.

campp
06-02-2010, 12:55 PM
I think, in the case of tax stamps for illegal income from drugs, you pay the tax anonymously, and keep track of the stamp serial numbers (or some data). Later, if you are busted, you produce the serial numbers and avoid tax cheating charges.

John W. Kennedy
06-02-2010, 01:18 PM
These are pretty much the same as various arguments that have been brought up by income-tax evaders. At the best, they'll get you nowhere. At the worst, you could end up with a Contempt citation for wasting the court's time. See any website on "why tax-denial advice is bullshit".

md2000
06-02-2010, 02:12 PM
These are pretty much the same as various arguments that have been brought up by income-tax evaders. At the best, they'll get you nowhere. At the worst, you could end up with a Contempt citation for wasting the court's time. See any website on "why tax-denial advice is bullshit".

But... This isn't tax denial, the usual "ha ha, income tax is unconstitutional" crap.

It's a legitimate question - why it does not violate the constitutional right to avoid self-incrimination. The state charges you for failure to admit to committing a crime.

Irishman
06-02-2010, 03:20 PM
Interesting questions. How can they simultaneously say "these drugs are illegal" and "if you are going to bring these drugs in, you need to buy a tax stamp". How can you tax it if it is illegal?

I agree it is different than the income tax issue, where income tax law is written such that all income from any source must be listed, then any exceptions or allowances are listed as deductions. Putting a slot for criminal gains is just to protect against loophole arguers - "But that embezzlement wasn't salary, wage, tip, gift, donation, capital gains, property income, or income from sales of anything. There wasn't a line to enter it."

Stentor 2.5
06-02-2010, 04:04 PM
Cecil's column is out of date. There was an article (http://www.slate.com/id/2229094/) on it in Slate. Basically, you have to report the income but you can fudge on or refuse to disclose where it came from. Also, nowadays the IRS can't report a person to law enforcement authorities if their tax returns imply they've been engaged in illegal activities.

Canadjun
06-02-2010, 04:09 PM
I am most emphatically not a lawyer, Canadian, American, Outer Slobovian, or otherwise, but I wonder if a way the "Tax stamp" issue could be enforced is because it would be a state taxing a product that is illegal according to Federal law but not illegal according to state law? Since the product is not illegal in the jurisdiction relevant to the tax stamps, there is no contradiction.

Then again, I am probably full of it. :D

qazwart
06-02-2010, 05:11 PM
These are pretty much the same as various arguments that have been brought up by income-tax evaders. At the best, they'll get you nowhere. At the worst, you could end up with a Contempt citation for wasting the court's time. See any website on "why tax-denial advice is bullshit".

It's not tax denial. I agree the U.S. has a complete right to tax me. The question I have is simply one of self incrimination. How can the government expect me to be a good citizen and pay taxes on the income I got for holding up liquor stores if they'll arrest me as soon as I turn in my 1040?

Actually, I just checked and Sullivan v. U.S (1927) seems to come into play. This was during prohibition. Sullivan was a druggist and apparently sold booze on the side. The government charged him with tax evasion and Sullivan argued that his fifth amendment right against self-incrimination prevented him from reporting his income. The court ruled that he had to report his income, but he could claim a privilege from stating where that income came from.

Thus, you can rob liquor stores, and still be a good citizen by paying your taxes. I believe that campp is also correct. In states that tax illegal drugs, you can buy the stamps anonymously and later prove that you did in fact pay taxes.

Of course, I doubt that people who engage in crime are all that careful with taxes anyway, but it just seemed to me that if you are legally required to pay taxes, you have to have to be able to do it in such a way, so you don't incriminate yourself in the process.

Al Bundy
06-02-2010, 05:29 PM
If you are doing something illegal, I say don't advertise. Go all the way and count on doing the penalties concurrently if caught.
It is true that many big time crooks are jailed for tax evasion as this is easier to prove than the original crime. Again, do a better job of criminal to begin with.

qazwart
06-03-2010, 10:24 AM
If you are doing something illegal, I say don't advertise. Go all the way and count on doing the penalties concurrently if caught.
It is true that many big time crooks are jailed for tax evasion as this is easier to prove than the original crime. Again, do a better job of criminal to begin with.

Actually, I doubt most criminals are all that interested in paying taxes. If you're building a meth lab, you're probably not too concern about building a stronger community.

However, if you think about it, it's pretty easy to get busted for not paying taxes since you could be civilly charged and not criminally charged. Civil charges need less proof for guilt. Plus, if you're really successful, the IRS might notice the millions of dollars pouring into your bank account. That'll definitely trigger a tax investigation and even reveal your actual crime. You might be better off saying you're in the "security" or "insurance" business, and paying your taxes rather than risking getting caught because of all the money you have floating around you.

Interesting story about Crazy Eddie told by Sam Antar, the CFO and nephew and main witness against Eddie Antar. Sam said that Crazy Eddie first simply skimmed sales tax. They'd charge sales tax, but never gave it to the state and understated their actual sales. They had millions of dollars stuffed into their basement because they couldn't really spend it or put it in a bank because the tax authorities would know they were making way more money than they claimed. Apparently, there is a fear of the taxman even in crooks.

John W. Kennedy
06-03-2010, 01:55 PM
It's not tax denial.I didn't say it was. I said, "These are pretty much the same as various arguments that have been brought up by income-tax evaders," and suggested looking it up. The self-incrimation argument has been raised by tax evaders; it doesn't fly.

purplemystic
06-03-2010, 03:26 PM
What's interesting is that for most illegal operations, standard operating costs are allowable deductions. Ie, someone running a gambling ring may deduct salaries, rents, cost of materials, etc from their taxable profits.

Drug dealers are the exception to this rule, and may only deduct the cost of goods sold (ie, the actual drugs) from their gross income.

To the point of using this as a way of getting to otherwise untouchable criminals- look at the history of Al Capone, who was nabbed on tax evasion charges.

Raguleader
06-08-2010, 07:13 AM
Apparently, there is a fear of the taxman even in crooks.

Reminds me of a great Batman cartoon where the Joker was informed that he had inherited 10 million bucks from an old enemy, only later to discover that most of the money did not exist.

The problem? The IRS wanted their cut of the 10 million. Cops? No problem. Batsy-boy? Sounds like fun.

The IRS? You could get in TROUBLE dealing with THEM!:D

A few months ago, I met an IRS fellow who once had the unusual honor of processing the tax paperwork for a drug dealer. Basically, the guy got nabbed for dealing pot, and was told that he'd be getting charged for both the drug charges AND the tax evasion... UNLESS he paid his back taxes.

So he basically had to ass-pull a figure on how much money he made and how much he spent on his business so the IRS guy could figure out how much money the guy would pay to avoid additional penalties. All this after they put him in jail, of course (the drug guy was put in jail, the IRS fellow is still at large;))

FNAWright
06-10-2010, 12:33 PM
"There are a lot of states that require tax stamps to be placed on illegal drugs"

I'm pretty sure this is a federal law.

I'm surprised by the question and responses - doesn't anyone remember the story of Al Capone?

Czarcasm
06-10-2010, 12:39 PM
Reminds me of a great Batman cartoon where the Joker was informed that he had inherited 10 million bucks from an old enemy, only later to discover that most of the money did not exist.

The problem? The IRS wanted their cut of the 10 million. Cops? No problem. Batsy-boy? Sounds like fun.

The IRS? You could get in TROUBLE dealing with THEM!:D

A few months ago, I met an IRS fellow who once had the unusual honor of processing the tax paperwork for a drug dealer. Basically, the guy got nabbed for dealing pot, and was told that he'd be getting charged for both the drug charges AND the tax evasion... UNLESS he paid his back taxes.

So he basically had to ass-pull a figure on how much money he made and how much he spent on his business so the IRS guy could figure out how much money the guy would pay to avoid additional penalties. All this after they put him in jail, of course (the drug guy was put in jail, the IRS fellow is still at large;))I can just imagine the audit-"I gotta bring in receipts?!?"

Raguleader
06-10-2010, 10:09 PM
I can just imagine the audit-"I gotta bring in receipts?!?"

So the story goes, the IRS was happy with whatever plausible number the guy could ass-pull. It wasn't about getting an exact cut, it was about getting a cut, period, I suppose. Trying to audit him would probably be more work for no gain for them in any case.

Mtgman
06-14-2010, 12:30 PM
Reminds me of a great Batman cartoon where the Joker was informed that he had inherited 10 million bucks from an old enemy, only later to discover that most of the money did not exist.

The problem? The IRS wanted their cut of the 10 million. Cops? No problem. Batsy-boy? Sounds like fun.

The IRS? You could get in TROUBLE dealing with THEM!:DDetective Comics #180, Joker's Millions (http://en.wikipedia.org/wiki/Joker%27s_Millions). It was also picked up by Batman the Animated Series and the title was retained. I never saw the animated version, so I don't know if they included the frame-jobs that Bats did on the Joker like he did in the original. Basically Batman fabricated evidence at a couple of crime scenes which would cast suspicion on the Joker. Now the Joker had in fact committed the crimes, but the evidence which pointed his way was doctored up by Batman. This was back in the day(1952) when it was apparently ok to frame someone in a legal sense as long as they had actually done it and you just needed the extra evidence to prove it.

Enjoy,
Steven

t-bonham@scc.net
06-15-2010, 04:20 PM
If you don't buy the stamps, you can be charged with tax evasion, yet buying the stamps will cause the tax authorities to rat you out.I don't think that is correct -- there are strict regulations prohibiting the IRS from revealing private information about taxpayers, even to other government law enforcement bodies.

Wasn't that one of the things Richard Nixon got caught at -- trying to get IRS tax info on the people on his 'Enemies List"?

qazwart
06-16-2010, 12:15 PM
I don't think that is correct -- there are strict regulations prohibiting the IRS from revealing private information about taxpayers, even to other government law enforcement bodies.

Wasn't that one of the things Richard Nixon got caught at -- trying to get IRS tax info on the people on his 'Enemies List"?

Well, the stamps aren't the IRS thing. The IRS is about federal tax and this usually involves state tax. Still, that was one of the questions we had.

Turns out that this is in fact an issue. Therefore, you're allowed to buy these stamp anonymously and the tax authorities in most states have to respect your right against self incrimination. That is, they can't simply report you to the police without a warrant requesting the information.