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Not reporting illegal income is a tax crime

Jail Cell Silhouette

As a true crime junkie (I blame my first newspaper reporting job covering the police beat) and tax geek, the headline about a senior bank official's guilty pleas to embezzlement and tax evasion immediately caught my eye.

The Michigan man, a bank senior vice president, confessed in court on March 6 to embezzling $870,000 from the financial institution between 2014 and 2021.

Then he compounded his troubles by involving the Internal Revenue Service. Specifically, according to the press release issued by the U.S. Attorney's Office for the Western District of Michigan, the 56-year-old Grand Rapids man —

"… generated taxable income from this activity between 2016 and 2020.  However, he concealed this income from his tax preparer when that person prepared his tax returns.  As a result, each year [he] underreported his taxable income knowing that it was subject to taxation and with the intent to avoid payment of those taxes."

While the embezzled amount is not, relatively speaking, that large, it no doubt caused a lot of problems for the bank clients whose accounts were pilfered. I feel safe speculating that his victims are hoping that at sentencing, the judge will opt for the upper end of the maximum 30-year jail term allowed.

And even though federal officials didn't provide details on the tax revenue lost, the man's guilty plea to defrauding Uncle Sam means he could face up to another five years in federal prison for the tax charges.

Reporting illegal income: Those possible jail terms, 5 years and 30 years, are this weekend's By the Numbers figures.

They also are a good reminder that you need to report all your income, even ill-gotten gains.

Yes, it's a tax cliché, but The Untouchables weren't able to nab the country's most-wanted man during the Prohibition Era for any of his alleged violent crimes. Instead, it was an accountant who showed that Al Capone violated Title 26, the tax component, of the United States Code (U.S.C) by not reporting or paying tax on his earnings from illegal alcohol bootlegging.

Scarface ended up in Alcatraz after being convicted in 1931 of five (out of 22) counts of tax evasion (26 U.S.C. § 145).

IRS lists taxable illegal earnings: The IRS reminds taxpayers of this income reporting requirement every year in its Publication 525, Taxable and Nontaxable Income.

Here are some illegal but taxable earnings examples from the document's section on other income.

First up in the alphabetical list is bribes. Publication 525 says, "If you receive a bribe, include it in your income."

Then there are kickbacks, which often are described as a form of negotiated bribery. The IRS says, " You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity."

What about that apocryphal electronics equipment that "fell off the back of a truck?" Yep, it counts as taxable income. Publication 525 notes, under the found property entry, that, "If you find and keep property that doesn't belong to you that has been lost or abandoned (treasure trove), it's taxable to you at its FMV [fair market value] in the first year it's your undisputed possession."

Don't forget about gambling winnings. Nowadays, thanks to the Supreme Court's ruling allowing for more legal sports betting across the United States. In these betting cases, there usually is a tax statement that helps winning taxpayers and the IRS know the taxable amount.

But if you're still making illegal bets with bookies and they do pay off, those under-the-table gambling winnings are taxable.

Finally, so that you don't end up in the same boat — although not a vessel headed to Alcatraz Island, which now is a national park — the IRS reminds us that, "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity."

Tax privacy prevails: I get it. You're hesitant to follow tax law to the letter because you don't want the IRS to rat you out to other law enforcement agencies.


Not to worry. Although federal investigative branches work together on cases, like the FBI and IRS-CI in the Michigan embezzlement/tax fraud case, the tax agency says the criminal tips don't come from its agents.

Taxpayer privacy is paramount, says the IRS. In fact, it's part of the IRS' Taxpayer Bill of Rights. Under the Right to Confidentiality, the IRS says taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law.

If unlawful disclosure happens, taxpayers have the right to expect appropriate action to be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

Plus, federal tax law prevents federal employees from sharing tax return information. That's covered under Internal Revenue Code Section 6103, which generally prohibits the release of tax information by an IRS employee.

Sure, there are some exceptions, including when law enforcement agencies believe a person's tax information is necessary for the investigation and prosecution of non-tax criminal laws. But here investigators must show a court why they need the info and get an order to compel the IRS to release the tax information.

The tax agency isn't just routinely handing over the data to other feds when Joe Smith lists "burglar" as his occupation on his Form 1040.

The bottom line is the IRS wants you to voluntarily obey the tax laws, which means the agency gets its proper cut of your earnings, whether they are legal or illegal.

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