If a person steals property or makes money from illegal activities, the IRS requires them to report that on their income tax return.
Many Americans will soon get their W-2 forms to report legitimate income on their 2023 tax returns. But what about ill-gotten gains?
VERIFY reader James also asked, “Can you VERIFY if the IRS website really states if you have stolen property you must report stolen property?”
Does the IRS require people to report income from stolen property and illegal activities?
Yes, the IRS does require people to report income from stolen property and illegal activities.
WHAT WE FOUND
The Internal Revenue Service (IRS) writes in Publication 17, which covers general rules for filing tax returns, that if a person steals property, they must “report its fair market value” as income – unless they return it to its rightful owner within the same year.
Taxpayers must also include any money made from illegal activities, such as selling drugs, in their income on Form 1040, the IRS says. That form is the same document used to record additional income like prize winnings and unemployment payments.
But stealing isn’t the only thing that should be reported – bribes and kickbacks count as income too, the IRS says.
While tweets about reporting stolen property to the IRS have garnered a lot of attention recently, tax officials and the federal government have been cracking down on criminals for over 100 years. Congress enacted the Revenue Act of 1921, which requires people to pay taxes on all income regardless of how it was obtained.
United States v. Sullivan, a Prohibition-era Supreme Court case of a South Carolina bootlegger, brought the issue of reporting money from illegal activities to the federal government. According to the Mob Museum’s website, defendant Manly “Manny” Sullivan appealed his 1922 conviction for evading federal taxes from running illegal whiskey. Sullivan claimed that filing a tax return on gains from criminal activity violated his right against self-incrimination under the Fifth Amendment of the U.S. Constitution.
Supreme Court records show the federal government won that case in 1927, establishing the precedent that the Fifth Amendment does not protect the recipient of income made through illegal activities from prosecution for refusing to make returns under the income tax law.
The Supreme Court decision set the stage for the prosecution of mobster Al Capone in 1931, according to the Mob Museum. IRS officials estimated Capone’s income at more than $1 million from 1924 to 1929, and claimed he evaded about $219,000 in federal taxes when he failed to file any tax returns.
Capone was convicted of tax evasion on Oct. 18, 1931 and later sentenced to 11 years in federal prison, fined $50,000 and charged $7,692 for court costs, along with $215,000 plus interest due on back taxes, according to the FBI.
In 1994, the government also prosecuted Aldrich Ames, a 31-year veteran of the Central Intelligence Agency (CIA) who had been spying for the Russians for nearly a decade, and his wife for tax evasion after they failed to declare nearly $2 million in payments from the Soviet Union, according to the FBI.