As you wind down the year, cleaning out drawers and emptying wallets of receipts, don’t forget to report to the IRS any income you brought in from drug deals, bribes, stolen goods, prostitution or other illegal activity.
According to IRS publication 17, the Internal Revenue Service wants taxpayers to include on their forms “income from illegal activities, such as money from dealing illegal drugs.” Make sure you put that on “Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity,” the IRS wrote.
The agency also requests that “if you steal property, you must report its fair market value,” but only if you don’t “return it to its rightful owner in the same year.”
The somewhat obscure provisions went viral this week after a popular finance-meme social media account and daily newsletter author pointed them out.
The IRS didn’t immediately return an NBC News request for comment.
Humorous as they appear on their face, the statutes are law and have been on the books for years. Prohibition-era gangster Al Capone was indicted on tax evasion after prosecutors alleged that his stated income didn’t match his lavish lifestyle.
“All income, from whatever source, is taxable income, unless excluded by an act of Congress,” Gary Schroeder, a Maryland-based tax preparer, said. “If you receive $500 to kill your neighbor’s annoying rooster, or find $1 on the street, or embezzle from your employer, that’s all taxable income, as well as your paycheck from flipping burgers at McDonald's.”
In practice, it’s rare for those who break the law to then turn around and dutifully log their ill-gotten gains for the government to review. But there are exceptions.
People who are convicted or expected to be convicted of embezzlement will report the income to avoid getting prosecuted for tax evasion on the proceeds, Stephen Moskowitz, a San Francisco tax attorney, told NBC News.
If a person declares and pays taxes on their illegal activities, then they also get to deduct the cost of any restitution as well, he said.
Income for activities that may be legal at the state level, such as marijuana production, but illegal at the federal level is also disclosed in this manner, he said.
“This law exists. It’s a revenue raiser,” Moskowitz said.
“Congress requires that you report all of your income — whether legitimate or not,” said David Cay Johnston, an investigative journalist who specializes in tax code issues. “There are people who file tax returns and list as their occupation criminal activities like 'prostitute.'”
Because tax returns are confidential and the IRS can’t share the information unless law enforcement has a case and gets a court order to get access to a taxpayer’s records, this is less risky than it sounds.
In 2020, there were 324 tax fraud convictions, according to the United States Sentencing Commission, down from 595 in 2016, a 45 percent decrease.
“The ‘tax gap’ — the difference between the taxes that are owed and the taxes that are collected — runs in the hundreds of billions of dollars a year,” Schroeder said.
“While a portion of that gap is the unreported profit from illicit drug sales, the gap also includes the folks who ‘skim’ by not reporting some or all of their income that is paid in currency,” he said.
In 2019, the IRS added a question to forms asking taxpayers to declare whether they had engaged in cryptocurrency transactions. In 2020, the IRS moved it to the top of Form 1040. Last year, the agency said it seized $3.5 billion in cryptocurrency assets.