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Legal, illegal, IRS expects income reported for taxing

It might seem counterintuitive, but the government doesn't care how you make your money when it comes to taxes. However you earn your income, the Internal Revenue Service wants it reported so that appropriate taxes can be collected. Filing instructions make it clear that income, even from illegal activities, must be recorded and reported.

It will come as no surprise to Washington, D.C., area readers of this blog that the instruction isn't one that is typically followed by those who make their livings through illegal means.

Still, there are times when a person might want to opt for reporting illegal income. For example, if one has been convicted of a crime from which they derived financial gain, they might find it beneficial to report the income for that year's return to avoid complex tax issues and any possibility of being convicted of tax evasion. Even someone who thinks they might be on the brink of being caught for suspected illegal activity might choose to report illegal gains to avoid possible tax charges and penalties.

Some might see such reporting as the pinnacle of giving up your Fifth Amendment right against self incrimination. Not necessarily. The IRS is blocked by law from informing law enforcement about income reported on returns from illegal activity short of terrorism. But an agency could get the information by obtaining a court order. And the IRS isn't prohibited from sharing information obtained as a result of an audit with other agencies.

Considering the potential repercussions that can result from disclosure of any information, from whatever the source, persons concerned about being scrutinized by the IRS would be wise to consult an experienced tax attorney.

Source: WPMT-TV, "The IRS wants to tax your illegal income," Matt Bushey, Feb. 28, 2013

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