Cecil’s classic column [here] says that the IRS invites people to declare embezzled or other illegal income because “income-tax evasion is often the only thing prosecutors can pin on big-time crooks”.
In the UK, it doesn’t work like that. If I wanted to pay tax on the proceeds of my life of crime, there’s nowhere on the tax form to declare it. Can anyoe shed any light on why this might be?[ul]
[li]The UK authorities have ways of getting at big-time crooks that aren’t available to US prosecutors? (Sounds a bit unlikely.)[/li][li]No big-time crooks in the UK? (Surely not.)[/li][li]Our Inland Revenue just never thought of it? (Maybe…)[/li][/ul]
Any suggestions? (Or better still, facts?)
I don’t know how to go about it in the UK, but as a court reporter in U.S. Tax Court for many years, I’ve always remembered one trial in particular, where a guy was being tried for tax evasion on his millions of dollars of illegal income. One of the witnesses was another drug dealer – who assured the IRS that he had indeed reported his drug income on his tax return: Under the line for “other income,” he listed it as “selling fruit.” Turns out he was more scared of the IRS than the Colombians.
I don’t know anything about the UK tax system (being Canadian), but how do you deal with self-employment income in your income tax? Crime is just an unusual means of self-employment!
There are other US forms with questions they never expect you to answer “yes” to. The only reason I can think of why these questions are needed is that, as a prosecutor, it gives you a charge that the defendent can’t weasel out of. Of course, if you can prove that criminal income wasn’t reported, that means that you can prove there is criminal income, therefore there is a crime. Makes the question seem redundant.
Some more examples of silly questions (warning - big PDF files):
page 6 of the I485 (application for a “green card”) or pages 7 through 9 of the N400 (application for naturalization). For the military questions in the N400, keep in mind this form could be filled out by a 90 year old.
In Australia, you would declare your illegal income in the same way as you would declare legal income by putting the amount in the same box on the form. However, you might identify your occupation as ‘professional thief’ for example. Under Australian Privacy laws, the tax department can’t pass this information on to Law enforcement agencies so if you are an altruistic crook & wish to contribute to the community by paying your taxes, you can do so. It’s a fact that some do.
The downside of all this of course is that upholding the privacy rules is in the hands of the public servants also handling the tax information. There’s nothing to stop them giving an anonymous tip-off to police, even though it would be against their conditions of service & if caught, would face disciplinary action or perhaps even lose their job.
The classic case for this sort of thing is Al Capone. He was so good at covering his tracks that The Gummint could never really pin anything on him. Until one day when they found some of Capone’s encoded ledgers. After breaking the code, the ledgers showed that Capone had lots of money coming in. They couldn’t necessarily prove that the money was earned illegally, but they could easily prove that he never paid taxes on it. So Capone went away for tax evasion, went mad from syphallus, and died.
Just goes to show: Pay your taxes or you’ll get syphallus.
The UK has the “schedular system” of tax. The tax legislation contains a schedule setting out various types of income – rental income, employment income, income from your own business or profession, income from investments, etc. This facilitates the application of different rules regarding deductions, withholding tax, payment dates, etc to different types of income.
The result is that, unless your income falls into one of the items in the schedule, it’s not charged to tax. Now, some of the items are fairly broad, so there aren’t too many kinds of income which are exempt from tax because they don’t fall anywhere in the schedule, but there are a couple. Gambling winnings used to be one; it may still be.
Illegal income was not considered to fall under any of the schedules, and used indded to be tax-free. I don’t know, but I strongly suspect that it no longer is; the legislation will have been amended to prescribe that illegal earnings fall into one or other category in the schedule – possibly Schedule D Case II which includes (among other things) income arising from “an adventure in the nature of a trade”.
This would explain why there isn’t a specific head for it in the tax return – it falls under one of the other, broader heads.
One other point should be noted. I’m not familiar with UK tax administration, but most countries have (at least) two kinds of tax return – a simplified one for your ordinary Joe who derives his income from his job, and may a modest amount of investment earnings, and a full one – a very full one – for the minority of taxpayers who occupy themselves with adventures in the nature of trades, and suchlike. If the simplified returen doesn’t cover your circumstances, it’s usually your responsibility to get the full return and complete it. It’s possible that the full return would mention illegal earnings explicitly.
Can anyoe shed any light on why this might be?[ul]