What Happens If I Report Illegal Income To The IRS?

Inspired by another thread on casino winnings. It got me wondering what, exactly, the IRS would do if I actually reported income from illegal activities such as drug dealing, being a hit man for the mob, etc.

Say I was a drug dealer and wanted to be able to spend my illegal gains without worrying about the gummint slapping me in jail like they did to Scarface Al back in the day. Say, with my meticulous record keeping, I know that for last year I made a profit of $600,000. I proceed to declare such on my 1040. Of course, I have no documentation on this, no W-2, no 1099, no hand receipts.

OK, now let’s assume this does trigger an audit. I show the examiner my logs of all transactions: ten kilos of blow sold to the Purple Gang, for x dollars, cost was x dollars from purchase of said blow from Columbian supplier Carlos X, less car usage at x cents per mile to deliver to the meeting place, and so on. Let’s assume the examiner accepts all of my deductions as allowable and accepts my figures on net profit. Also, I’ve made quarterly deposits to the IRS as required by the self employed, so I’m OK there.

So I’m square with the IRS as far as my taxes. Are we done?

I have a feeling that there is gonna be more to this story, like them giving me a handshake and a big “Thank You” and then introducing me to these nice gentlemen from the DEA.

Can they/will they do this?

Yes, they can report you to the authorities and probably would.

On the other hand, as many a convicted Mob boss will tell you, the only crime they can often actually pin on you is tax evasion on that illegal income.

The proper thing to do, assuming giving up hte life of crime is an option you’ve already deemed impossible, is to call this work “consulting”. You can subcategorize it as HR (hitman), Logistics (Drug Running), etc.

That way you can report all your income and after you weasel your way out of the criminal charges, you can’t be accused of tax-evasion.

According to Cecil, they’ll rat you out.

Those pukes. Well, all right, then, no income tax for them. I’ll just stash it until I’m ready to move to the Caribbean and live on my own island.

Uh, just in case, let me mention this is all hypothetical. I’m just a consultant(pharmaceuticals). :wink:

Couldn’t you just buy some tax stamps for drugs?

I guess I’m pretty stupid.

How can the government justify taxing income from illegal activities?

“Don’t do this, but if you do, you owe us!” wtf?

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IMO: Just confiscate the whole bundle, which wouldn’t be a tax, but a part of justice & sentencing (with the justification that you shouldn’t be allowed to [keep] profit from any illegal activities after you have been caught). If you convert cash to other goods (say, a home), those other items are forfeit (up to the value of your illegally gotten gains).

But trying to say you owe Income tax on extortion money?

If there’s one thing slimier than used car salesmen, it’s sticky fingered politicians… :wink:

Taxing it isn’t the same as condoning it. The illegal activities are going to occur whether they’re taxed or not. And the real goal isn’t to collect the tax money, but to make it even more illegal – the criminal is now on the hook for both the original crime and the tax evasion.

But isn’t requiring a filing and disclosing sources during an audit then squealing on you a 5th Amendment problem?

Just call it all “merchandise”, and describe yourself as a “salesman”. Then during your audit, show your documentation of having bought 10 kilograms of merchandise from your supplier, sold in one-gram increments on such-and-such days, and so on. I don’t think the IRS can force you to disclose exactly what the merchandise is.

For the OP:

The IRS can report you to other authorities.

The other thing they’ll do if they realize that you’re doing something illegal is deny all of your deductions. The tax code makes all expenses for an illegal purposes nondeductible. This would include virtually everything a drug dealer would do. (With an average law-abiding tax client, that same rule makes traffic tickets nondeductible, so it has several applications).

The tax code essentially starts by saying “All income is taxable. No expenses are deductible.” It then goes into 6,000 pages of details to creates some exceptions - some income becomes nontaxable and some expenses become deductible in various ways. Obviously, no one is going to create an exception to make illegal income nontaxable or illegal expenses deductible, so the income remains taxable.

I had asked mom this (long time IRS employee) that although this is the official line, it rarely happens in practice. If something does not look like it will result in additional taxes they tend to just ignore it. There is no real incentive for them to do so and it is outside their purview to investigate further. If it all looks good on paper, they tend not to dig much. Most people who have any kind of illegal revenue stream have a cover for it anyway, a less than successful business endeavor of some kind or an arrangement to launder that stream through a legal business they have some affiliation with.

I am not a tax attorney or enrolled agent, but I once had a fifty-dollar honorarium from a speech that I declared under an “other income” line. I never heard a peep from the IRS further about it. I really doubt that they will audit someone for declaring income and paying taxes on it.

I bet they would if it was hundreds of thousands of dollars.

Maybe. But don’t sole proprietors do this all the time? I’ve been a photographer for most my life, and 95% of my income does not have W-2 or 1099 attached to it. Just personal checks from my clients. I declare every last cent of it.

If you file a Schedule C, you’re much more likely to be audited than if you file a straight 1040EZ.

I understand that.

But still, I can’t get around the notion of it seeming like “We asked you not to sell drugs, but since you did, we didn’t get our cut.”

I remember the waiver that Arnold had to sign in The Running Man, where he “agrees” that any recording of the show was property of the network, regardless if it was made by unknown methods or technology. :stuck_out_tongue:

My college roommate once accidentally filled in her grant money on the “illegal income” line. They called her in, she explained, and they filled out an amended return for her. She said they told her it happens a lot, and they usually call to ask people about it, just in case.

Yes, but in the hypothetical situation presented in the OP, LiveOnAPlane had $600,000 in ill-gotten gains, which means he can’t use the 1040EZ.

That is great! Check out the one from Texas!

You’re just making the #1 most common mistake there is. There is no single “we” in that sentence. The IRS didn’t ask you not to sell drugs. The IRS is a division of the Treasury Department, which is a division of the US Federal Gov, and neither of them asked you to not sell drugs. The US Congress asked you to not sell drugs. The Executive Branch is charged with enforcing that law, and they assigned that task to the Justice Department and the Drug Enforcement Agency.

So… really, the DEA and IRS are competitors. The IRS’s job is to collect taxes, but it can’t collect taxes if the DEA arrests everyone. The DEA’s job is to enforce drug laws and they don’t care if the IRS meets tax quotas or not. The bottom line is that government in the United States is not a single entity, they do not have a common goal and they are frequently not cooperative with each other.

So the interesting/unusual thing about this is that the IRS will report you to the DEA; by default, one would expect them not to.