The New York Times, like many newspapers, runs a weekly quiz in which readers can test their knowledge of newsworthy events that happened the previous week.
In the newspaper’s July 19 quiz, question number 4 (below) about U.S. Sen. Robert Menendez's recent federal trial conviction caught my eye. You’ll know why the minute you look at the multiple choice answers offered.
The last multiple choice charge is the correct one. Menendez was not charged with nor convicted of tax evasion.
He was convicted of participating in a vast international bribery scheme, steering aid and weapons to Egypt, and helping two businessmen in exchange for lavish gifts like gold bars and a car for his wife.
The verdict made him the first United States senator to be found guilty of acting as an agent of a foreign power.
The Garden State’s senior U.S. senator, who has said he will resign next month, told reporters gathered outside the Manhattan federal court after the verdict that he would appeal, and that he had faith higher courts would throw out the convictions.
Taxes on criminal proceeds: It will be a while before Menendez's legal and political entanglements are resolved. But the inclusion of tax evasion as an answer in The New York Times' quiz about the senator’s trial reminded me of one of the Internal Revenue Code’s most interesting provisions.
Illegally received income is taxable.
The Internal Revenue Service does not care how your got your money. It only is concerned that you report and pay the appropriate tax on your earnings. And not reporting illegal income is a crime.
We all know this because of the agency’s still most celebrated tax evasion case.
Doing tax crime prison time: Depression-era gangster Al Capone, who topped federal law enforcement’s most-wanted list, went to jail not for his alleged connection to brutally violent crimes, but for tax evasion.
Instead of gun-toting law enforcement officers on the Untouchables team, it was an accountant who brought Scarface down. He pointed out that 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 per 26 U.S.C. § 145.
Another more-recent high-profile tax evasion case was against 31-year CIA veteran Aldrich Ames, who was convicted of espionage as a Soviet spy. He also, said IRS investigators, failed to pay tax on the more than $2 million cash he got for betraying the United States.
On Apr. 28, 1994, Ames pleaded guilty to conspiracy to commit espionage and tax conspiracy to defraud the U.S. Government. He was sentenced to life imprisonment on the espionage charge and to 27 months' imprisonment on the tax charge.
Tax Court reaffirms tax on illegal earnings: The tax plea, however, did not stop Ames from trying to have the tax evasion charge dismissed.
He filed suit in United States Tax Court against the IRS, claiming, among other things, that the Double Jeopardy Clause of the Fifth Amendment to the U.S. Constitution protected him from "the assessment of any tax or civil penalties based upon his illegal espionage income."
The Tax Court disagreed. The May 28, 1999, opinion notes —
We hold that the imposition of a tax liability on petitioner's espionage income and/or the imposition of an accuracy-related penalty under section 6662(a) does not constitute punishment within the meaning of the Double Jeopardy Clause.
The opinions of this Court are replete with factual situations where taxpayers who were not the subject of criminal tax proceedings were found liable for tax and additions to tax on unreported income from legal and illegal sources. Here, petitioner is not being subjected to a greater tax rate or exposure than any other taxpayer, irrespective of whether said taxpayer had been subjected to criminal prosecution prior to a determination of a civil liability.
IRS reminders about illegal proceeds: The IRS repeatedly reminds taxpayers of their obligation to pay tax on all nonexempt income, including ill-gotten gains.
Each year, IRS Publication 17, Your Federal Income Tax for Individuals, notes 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.” That warning is on page 76 of the 2023 tax year edition.
That reminder is reiterated in the annual IRS Publication 525, Taxable and Nontaxable Income. In the other income section of that publication, the agency notes (on page 32) that, “If you receive a bribe, include it in your income.”
Kickbacks also are in Publication 525’s alphabetical list of taxable income. On page 35, 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.”
And found money or items of value, whether an innocent discovery or items that “fell off the back of a truck" also are taxable income. “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,” says the IRS on Publication 525 page 34.
Self-incrimination worries: I know, you’re thinking what crooks are going to admit to any government agency that they committed crimes. The IRS will just hand that information over to the Department of Justice or other relevant law enforcement agency.
Not necessarily. While there are some exceptions, taxpayer privacy is paramount at the IRS. The Right to Confidentiality in the Taxpayer Bill of Rights says we 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.
Federal tax law prevents federal employees from sharing tax return information. Specifically, Internal Revenue Code Section 6103, which generally prohibits the release of tax information by an IRS employee.
If an unlawful disclosure of tax data does happen, 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.
The bottom line is that the IRS just wants it lawful cut of your earnings, regardless of where you get legally or illegally.
Tax Felon Friday: In many criminal cases that involve financial transactions, tax evasion charges often are part of the charges. Hence The New York Times including that as one of its multiple choice answers in the Menendez case.
The tax charges are insurance for law enforcement. Even if the nontax criminal charges don’t stick, if the IRS has sufficient evidence, it can go after the accused for not paying tax on the illegal earnings.
Like the agency did with Capone.
When that happens, the case likely will show up here as a Tax Felon Friday post. In the meantime, if you want to catch up on all sorts of tax miscreants, the ol' blogs' special Tax Felon Friday page is a good place to start.
And if you want more tax crime posts, notably those that were published long before I gave them a special end-of-week feature, you can peruse, what else, the tax crimes category. You'll find this post at the top of that collection right now, so just scroll down for more.
You also might find these items of interest:
- IRS apologizes to billionaire whose tax info was leaked
- GOP presidential candidate found guilty of federal tax fraud
- Senate bill seeks expansion of Congressional whistleblower protections
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