Al Capone, the infamous bootleggar, was convicted not for bootlegging, but for tax evasion.
My question is, are you legally required to report and pay taxes on illegal earnings? And, if so, how can you do that without incriminating yourself?
You’re supposed to report all earnings (with very few exceptions). However, I don’t think there’s a way to report illegal earnings without getting yourself in trouble.
I believe Cecil discussed this. Briefly, the line is there as a way to trap crooks – if you prove they had unreported earnings, they go up for tax fraud. If you report this, the IRS might alert other law enforcement agencies.
Actually, not long ago the Feds busted a marijuana grower in california that was supplying a legal cannibis club. He actually HAD reported his income from the sale of all the pot as “pressed flowers”. Go figure.
-Dani
Then there’s the story (probably an UL) in which a drug dealer, having been sent to prison for a fair number of years, reported all his income from drug trafficking and listed things like his cell phone bill as a business expense, and therefore, a tax deduction. The IRS said you can’t do that, as you weren’t engaged in a legal business. The dealer took the IRS to court and won as the judge said that the tax law didn’t say that he couldn’t take the deductions if he admitted the earnings.
Anyone want to just put $10 in illegal earnings on the form, just to see what happens? LOL
It seems like someone could take this to court if they cared to do so. They could argue that if they have to report their illegal earnings, they should be barred from being prosecuted for doing so, lest their right to not incriminate themselves be violated.
Per my mom who has worked in IRS criminal investigations. Your tax records are no different than any other types of financial data. Cops get a warrant, they can have it, otherwise the POV of the IRS, they would rather have the money than bust you for your illegal dealings. Remember you would be dealing with alot of regional variation in some cases, like prostitution or gambling that are legal in some areas. They do not report people to law enforcement for reporting illegal income. They go to great lengths to be non-biased in their handling of tax issues. In fact I believe that IRS employees can be disciplined/fired for disclosing info from tax returns to an outside source (unless to comply with a court order). To avoid easy busts by law enforcement its not uncommon for many criminals to claim shady but legal job titles (I’m not a prostitute, I am a freelance streetwalking massuse, yeah, thats it…)
Personally, from everything I have heard, I would be more concerned with law enforcement reporting me to the IRS than the other way around.