SALT LAKE CITY (KTVX/NEXSTAR) — It’s tax season in the U.S., leaving many Americans to try and sort through the mess of W-2s and 1099s.
Making sure you report every bit of your income to the IRS can be a daunting task. Thankfully, the IRS has a handy list of income you need to report from taxable alimony to selling illegal drugs.
That’s right. Among the list of income the IRS asks you to report when you file your taxes is any income you receive from illegal activities.
“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,” the IRS website reads.
The IRS also asks taxpayers to report any stolen property’s full market value as income in the year they stole it, unless, of course, they return the stolen goods to their rightful owner. Bribes should also be included in your reportable income. The only time monetary gains are not required to be included in your taxable income is when it’s exempted by law, which famously does not include illegally earned money.
‘The Al Capone Rule’
The guideline is sometimes referred to as “the Al Capone rule,” Mark Steber, Chief Tax Information Officer at Jackson Hewitt, previously told NewsNation’s Nexstar.
“He made it famous a long time ago,” Steber explains. “Al Capone, and many others since then, many drug dealers, went to jail because all income is taxable unless it is specifically excluded under the law.”
Notably, the FBI convicted notorious crime boss and mobster Al Capone on tax evasion crimes for not paying taxes on his illegally obtained riches. Calpone ran a bootlegging crime syndicate during the height of the Prohibition Era of the 1920s. According to an account of Al Capone’s trial from the University of Missouri-Kansas City, Capone’s syndicate was grossing an estimated $105 million a year, but no income tax return had ever been filed in his name.
Two years earlier, the U.S. Supreme Court had ruled against another bootleggerManley Sullivan, who failed to file a return showing the profits from his illegal schemes. While U.S. Courts and prosecutors were unable to bring down Calpone’s empire on allegations of murder and bootlegging, they were able to topple it for not properly reporting his income.
“The IRS seems to have a knack for craving the drama in your life,” the Kaysville Police Department in Utah wrote on social media when sharing the revelation. “It’s as if they’ve set up shop with popcorn and a front-row seat, eagerly waiting for taxpayers to drop bombshells of financial intrigue.”
Won’t I get in trouble for reporting the income?
If you do report your income from illegal activity, you aren’t necessarily turning yourself over to federal authorities.
As Steber explained, tax experts helping you to file your taxes are there to ensure you file your return in compliance with the law. They aren’t required to “tell the federal authorities about [the] activity.” Because the income falls under the “other income” category, the IRS can’t exactly tell where the money is coming from, either.
Another item reported on line 8z on Schedule 1 for Form 1040? The fair market value of a free tour from a travel agency.
So why report it at all?
As Steber explained, some taxpayers will “report questionable information just so they can hedge their bets in case they do get caught.”
It’s also possible the income you’re reporting, though legal in your state, is illegal at the federal level.
Steber pointed to those who earn money working with cannabis in states where it has been legalized. As he explains, you’re able to report your net income from the cost of the product and deduct the cost of the good sold, but not the expenses, like transporting the cannabis.
“Under federal rules, you can deduct on your tax return, even though it’s illegal to have, you know, cannabis sales…you can have the income on your tax return, and you can report the net of cost income and not being in violation of tax rule,” he said. “But you can’t step over the line and start deducting your expenses for security guards and money [and] transportation.”
Ultimately, if you’re unsure about your taxes or how to report your additional income, Steber recommended speaking with a tax professional and, potentially, a tax attorney.
