One of the better-known stories about the IRS is that they were the government agency that brought down Al Capone. The gangster, rumored to have boasted that the IRS couldn't “collect legal taxes from illegal money,” would discover this was not the case when he was jailed for tax evasion. 

Almost a century later, the IRS's ability to collect legal taxes from illegal money remains true. While arguments have been made that reporting illegal activity to the IRS violates the right to avoid self-incrimination, the main idea is that those who make their money from illegal means shouldn't have an advantage over taxpayers who make their money legally.  

To avoid following in Capone's footsteps and being convicted of tax evasion, taxpayers need to report income related to all activities. This is regardless of the activity's legality. 

Illegal Activities 

Dealing drugs and illegal gambling: Even if it's not legal, taxpayers must report income from these activities to the IRS. This can include activities that are legal at the state level, such as growing marijuana, but remain illegal on the federal level. 

Income derived from illegal activities must be reported on: 

Receiving bribes must also be reported as income. Paying bribes, however, isn't tax deductible. In other words, you cannot get a tax break for your illegal activities by bribing officials to look the other way. 

Stolen Property 

It's not just income from activities. Taxpayers must also report the fair market value of stolen property to the IRS as part of their income. The exception is if a taxpayer returns stolen property to the owner. The return must be made within the same tax year. 

This mirrors the IRS's rules about acquiring property through legal means. A taxpayer who claims lost or abandoned property must also report it to the IRS. 

If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.