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I read this in 9gag.

So what should we do if we are in this situation?

If thieves and criminals can just say I have this income and don't tell the source, can legitimate businessmen do the same?

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  • I'm not familiar with 9gag. Is this IRS doc real?
    – Evorlor
    Commented Dec 29, 2021 at 15:38
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    @Evorlor: Yes, it is real. IRS Pub. 525, search for "Illegal activities" and "Stolen property". Commented Dec 29, 2021 at 16:15
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    This is a lot like the visa and landing card questions - it's not about expecting people to comply, it's just there to give the prosecution one more bargaining chip (ie: additional charges) when they're caught doing something else really illegal.
    – J...
    Commented Dec 29, 2021 at 17:17
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    Remember: they didn't nail Al Capone for smuggling, bribery, murder, or extortion. They nailed him for income-tax evasion.
    – Mark
    Commented Dec 29, 2021 at 22:14
  • How exactly they do that
    – obfuscated
    Commented Dec 31, 2021 at 7:56

2 Answers 2

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NAL, but I used to work for the IRS. GS-0592-08, AUSC W/I CSCI (for non-feds, that means General Sector, series 0592 grade 8, Tax Examiner, Austin Service Center, Division -> Wage & Investment, Section -> Collections Services and Compliance Operations. Yeah, no joke.) And I wanted to add some insider insight to help clarify some of the thoughts already shared here.

First off, I feel like clarification is needed because lay people get especially confused about this very, very easily: the IRS is an agency exactly like the FBI, except the IRS falls under the US Dept of Treasury and the FBI falls under the US Department of Justice. Like all federal agencies, both the FBI and the IRS exist to enforce federal law. They're both law enforcement agencies. And again, the difference is the kind of law they enforce: the FBI enforces federal criminal law. The IRS enforces federal tax law.

The IRS does not need (and wouldn't accept, not that the FBI would try - completely different jurisdictions) any help whatsoever from the FBI in enforcing tax law, including criminal tax law. The IRS does not disclose tax information; the confidentiality of taxpayer information is more intense than HIPAA. Literally nothing short of an act of Congress or a certain breed of court order can compel the IRS to disclose federal income tax information. (Not going to get into charitable orgs in this answer, but even then, the IRS doesn't make those filings public - the orgs themselves do, public self-reporting is a requirement of maintaining their tax-exempt status.)

The FBI didn't get Al Capone; the IRS did. For tax evasion.

Anyway, in answer to the OP's question:

THE IRS IS NOT ACTUALLY CONCERNED WITH THE ORIGIN OF THE INCOME AS LONG AS YOU PAY TAXES ON IT. Anything and everything beyond federal tax law falls outside the IRS's scope.

Which is why uou can write quite literally anything you want on line 80 (or whatever it is these days) of your 1040A (occupation) (technically, as long as you don’t perjure yourself, not that anybody's counting.) It's pretty much just a footnote anyway. As a tax preparer, you can skip it, and even if that line weren’t specifically, explicitly protected by the 5th Amendment, it wouldn't matter if it weren’t, because the IRS does not disclose federal income tax information with any other agencies or organizations under any circumstances. As long as whatever you put there is factually accurate - if you fill it out at all. You can answer in Klingon; nobody cares (unless you write something funny, which we actually appreciate btw ;) ), because it's not necessary to process your return.

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

"Sources of income" means "all the money you got paid, as best as you could record it" - if you got paid cash waiting tables (tips) or slinging heroin, the IRS doesn't care as long as you report the income. You can write "slinging heroin" (it's the IRS, not the DEA) but tax preparer would probably pick the code for "inside sales."

When the IRS participates in joint task forces, it is because the IRS's ability to track money is second to none (and even then, IRS involvement in task forces are usually related to terrorism.) The IRS occasionally assists other agencies with criminal law enforcement efforts, but the IRS doesn’t prosecute them and doesn’t involve confidential tax information in them. For example, as far as the IRS is concerned, if you embezzle a hundred grand and then launder it, the IRS’s criminal jurisdiction they’d be pursuing you for would be underreporting (and probably tax evasion.) If you embezzle a hundred grand, but file and pay your quarterly withholding (I never worked in Underreporter but I'm pretty sure fraud would be considered self-employment since by definition it's off the books) you’re in compliance with the IRS’s criminal jurisdiction.

And yes, you have the right to itemize deductions, but not every expense is necessarily allowable - for example, some expenses have limits on how much can be deducted. So even if an expense was related to earning income, it doesn't mean you can necessarily claim it, or all of it; gas mileage driving to places you rob at gunpoint, sure - bullets? I guess if hunters or game tourism or shooting ranges / instructors can deduct bullets, a hitman could too, but I’d expect to get flagged for audit to see how much of what is actually permissible. But even if some or all of those deductions ended up being disallowed and you wound up with a balance due, as long as the IRS determines that you were not intentionally seeking to avoid or circumvent tax law, it wouldn’t be a criminal [tax] matter. I'd have to look, but if parking tickets aren't allowable, I strongly doubt bail, fines, restitution, etc. in conjunction with being criminal convictions associated with earned income would also not be allowable. The only way other agencies would gain visibility into this would be if someone were dumb enough to go to court at the conclusion of an audit, at which point the tax situation would become a matter of public record.

To illustrate the lengths to which the IRS seeks to facilitate voluntary taxpayer compliance in meeting their obligations, when I was at the IRS in the mid-2000s, there was a program for drug dealers to file quarterly withholding as self-employed using a sort of special sticker book provided by the IRS to use in lieu of receipts.

If a professional tax preparer or tax planner were assisting someone who discloses, or starts to disclose that this is actually illegal source income - the tax preparer just puts in a code for whatever comes closest to describing the occupation that earned the most income and the taxpayer doesn't have to be specific as long as they are not untruthful. (Honestly, you really can write whatever you want. Nobody cares. People put stuff down like "pirate" and "bridge troll" as well as stuff like "slinging heroin", "bookie," "racket," "al qaeda", etc.)

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    In practice, the IRS might not proactively share information with the FBI. But the IRC does permit such sharing, if required by court order: "... any return or return information with respect to any specified taxable period or periods shall, pursuant to and upon the grant of an ex parte order by a Federal district court judge or magistrate judge under subparagraph (B), be open (but only to the extent necessary as provided in such order) to inspection by, or disclosure to, officers and employees of any Federal agency who are personally and directly engaged in..." (1/2)
    – user168715
    Commented Dec 29, 2021 at 18:06
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    "...preparation for any judicial or administrative proceeding pertaining to the enforcement of a specifically designated Federal criminal statute (not involving tax administration) to which the United States or such agency is or may be a party, or pertaining to the case of a missing or exploited child" (2/2)
    – user168715
    Commented Dec 29, 2021 at 18:06
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    I worked for a federal financial regulator with someone who previously worked for the IRS as an in-office auditor. This answer is in line with what that co-worker said and how our department worked with tax returns and the IRS.
    – Cliff
    Commented Dec 30, 2021 at 2:13
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    If I declare I have earned $100k in drug trafficking and then I get audited, what happens? Will I have to show receipts/bills for the $100k?
    – gerrit
    Commented Dec 30, 2021 at 8:22
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    In order to file the original return claiming the income, you'd have to demonstrate some kind of accounting (the drug dealer sticker-booklets, or something.) If you got audited, all of your financial transactions would come under review for however far back the audit covers. The IRS would have to find some degree of proof of you having somehow attained that as income, and depending on how they classified it, you could easily end up owing 80K as a result (windfall tax.) It could go a lot of ways; personally, I recommend none of them :P Commented Dec 30, 2021 at 9:30
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The most recent Supreme Court Rulings on the matter is that of Garner v. United States in tandem with United States v. Sullivan.

Sullivan ruled that the 5th amendment does not permit a tax payer from refusing to file a tax return with the IRS, and thus one must report on income even if it's illegal income. Garner expanded on this by holding that while one cannot claim 5th amendment protections against self-incrimination as a way to avoid filing a tax return, one could list the source of all illegal income (or perfectly legal income for that matter) as "5th Amendment" rather than "Gambling Winnings" (Garner had listed his illegal gambling income on his IRS returns for the past three years as gambling winnings and listed his profession as "Professional Gambler" on one year's returns. The Federal Government used this as evidence of his guilt of illegal gambling and the court held that in order for the protection to apply, Garner would have to assert 5th amendment protection in order for it to apply on the documentation.).

In fact, in certain cases, you can even deduct expenses necessary to make your ill-gotten gains. If the deductions exist for purchasing a vehicle for income gain, then by all means deduct the cost of your getaway car used in the bank robbery. And the ski mask. And the gun. (Wikipedia lists the most qualified expense as legal fees associated with fighting criminal charges related to your income crime, which are deductible, I just always remember the hyperbole).

Declaring an income source as 5th Amendment protected is not an admission of committing a crime... but invoking a right to refuse to divulge the source as it "MIGHT" serve to incriminate you. It might not incriminate you. The reason why legitimate businesses don't do this is, well, it might not incriminate you... but there is no rule saying the IRS can't ask the FBI to find out what's what.

And while the IRS has the best conviction rate of any federal agency (or second best, next to the Secret Service), 9 out of 10 cases brought to court by the feds end in a conviction... so you really don't want the FBI looking at you.

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    Does that mean you can put "5th Amendment" on perfectly legal and legitimate income?
    – Sam
    Commented Dec 28, 2021 at 17:48
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    @Greendrake money laundering is not a tax avoidance scheme, its an asset seizure avoidance scheme. If you steal someone's stuff, declaring it on your tax return means you won't get charged with tax crimes too, it doesn't make the thing legally yours. Same thing applies to money; if you make a bunch of money off the illegal drug trade, put it in a bank account, and then report the income to the IRS, the IRS will say "thanks for paying your taxes" and then the FBI will still seize your obviously illegally acquired income. Commented Dec 28, 2021 at 18:45
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    As a matter of fact, money laundering would be a particularly stupid tax avoidance scheme, given that (as far as I understand) it is typically more expensive than just paying taxes on the income Commented Dec 28, 2021 at 18:55
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    @Sam There are no innocents, only the badly interrogated…
    – SCP-738
    Commented Dec 28, 2021 at 19:45
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    I used to work for the IRS and this is significantly factually inaccurate. Adding an answer to explain and correct this. Commented Dec 29, 2021 at 12:36

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