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mmmmmmBacon12345 t1_j6fs0ev wrote

The IRS wants their cut, they always want their cut

In general though they don't send the feds after you because laws vary and its a question of what you did and what juridiction and they really don't care. The 5th amendment also protects you from having to say what you did to get that income.

But they can use failure to report illegal income as a way to get organized crime leaders like Al Capone. Some people clearly have significant income coming in yet only a small official income statement filed, the IRS wants their percentage off the rest of that pie


xCreamPye69 OP t1_j6fsa9m wrote

> they really don't care

Is this true? What if you're a successful drug dealer/weapons smuggler and you reported an income of $20 million? Will they turn a blind eye as long as you file your taxes?


nstickels t1_j6ft51s wrote

The IRS wouldn’t come after you for being a drug dealer/weapons smuggler. That doesn’t meant the DEA or ATF wouldn’t.


xCreamPye69 OP t1_j6fthnh wrote

That's exactly what I mean. Wont the IRS just report you right away for having illegal sources of income? Why on earth would you do so?


PerfectPercentage69 t1_j6fuatm wrote

It's a catch 22 that they have on purpose.

If you have an illegal source of income and don't report it, then IRS will come after you because they'll notice the discrepancy between your spending and reported income, so they'll have probable cause to search/arrest you. This will then give evidence for other federal agencies.

And if you report you illegal income, then IRS will be happy but the other federal agencies will come after you because now they know about it and have probable cause to search/arrest you.


Any-Broccoli-3911 t1_j6fu3bo wrote

You just declare your income you don't declare the source.

If you want to face a source, you can do money laundering for that. The IRS doesn't care about the money being laundered or not, they just want you to declare the good amount.


GenXCub t1_j6fxij3 wrote

That’s what money laundering is for. You claim to make money legally through a cash business, but it’s really your drug money. The IRS gets their taxes that way and you didn’t admit wrongdoing.


IfIRepliedYouAreDumb t1_j6gwcnl wrote

Money laundering is NOT what they are talking about though. There is a section on the 1040 where they ask you to declare income from illegal activities.

Money that has been laundered would be filed under the section pertaining to however you laundered it.

OP is asking why they have that line there


markroth69 t1_j6h889a wrote

Money from illegal activities: $0

Money from my, uh, consulting firm called Definitely Not an Extortion Racket: $1,000,000


IfIRepliedYouAreDumb t1_j6h8s3y wrote

You’re still not getting it. He’s not asking HOW to launder money, he’s asking WHY that line is there. And it’s there as a way to tax federally illegal revenues.

Things like casinos and brothels have historically fallen under this category. I’m sure marijuana could too, if you want to be able to receive digital payments (which is why a lot of dispensaries are cash only).

Also that’s not how money laundering works, if you’re receiving payments like that the cash would have to be laundered before then.


MisinformedGenius t1_j6gsnaq wrote

There's a lot of laws surrounding privacy for the IRS - they cannot just report you to other agencies. There was an exception put in for terrorism back, I think, in the Patriot Act, but in general, why would the IRS care? It's not like the DEA is going to pay them for tipping them off.


mothman83 t1_j6g7qj6 wrote

No they are actually are banned from doing this based only on your declaration. Outright ( see note below)


HOWEVER as you can imagine the amount of big time crooks reporting their illegal income is ummm infinitesimally small, so most of the time this does help catch crooks.


NOTE: If you get audited, you do have to account for the source of all your income . If at that time the IRS sees evidence of a financial crime ( ie MONEY LAUNDERING) which... THEY WILL if you are a big time criminal operator... then they can thro you in jail for that as well.


pdpi t1_j6gkjb7 wrote

You have to report your income, that’s the law. You obviously don’t want to report the profits you made from your criminal acts, but it would be extremely weird if the law carved out an exception for ill-gotten gains.


MikeLinPA t1_j6gj3u6 wrote

Maybe people should have legal incomes and report it. Problem solved.


2_short_Plancks t1_j6gxpup wrote

My wife used to work for the IRD in NZ (our version of the IRS in the US). They work under tax secrecy laws which supercede almost all other laws. They were literally not allowed to pass information to the police about illegal income, though they can demand information or assistance FROM the police.

Lots of illegal income would be declared, from drug money to money from prostitution (before it was decriminalized). Plenty of people wouldn't care about the cops coming after them, but wouldn't want to deal with IRD chasing them. At least here, IRD agents can enter your property without a warrant (accompanied by police), take all your stuff and have you arrested, in a way the police simply can't.


djinbu t1_j6hnkcg wrote

The IRS isn't really a law enforcement agency. They are a financial agency subject to act in accordance with the law and use law enforcement to perform their job. If you just tell them you've earned $4,000 through trade and markup with no particular structure and pay your taxes, they'll likely just like to see proof that you didn't earn more then you're claiming and move on.

They want their money with as little cost as possible. Unless they have reason to suspect you owe substantially more (enough to warrant investigation), they'll just move along beecher investigation costs a lot.


NemyMongus t1_j6g0q4t wrote

It is truly because the IRS wants the tax income. The IRS actually cannot legally disclose any taxpayers return information to a law enforcement agency unless the law enforcement agency gets a court order granting them access. The important thing there is that the IRS can't tip off law enforcement, law enforcement has to be the one to initiate the request. The only exception to this is if terrorism is involved. It still requires a court order but the IRS can be the one to request the court order.

This only applies to your actual tax filings though. If you get audited, any information they gather through interviews etc can be turned over to law enforcement if there is evidence of a crime being committed. That is probably a functional workaround. If you report illegal income on your taxes, you'll get audited and the witness testimony from the audit is turned over.


Megalocerus t1_j6gtoxg wrote

Since you are required to provide the return, there is a self-incrimination issue involved.


DrBoby t1_j6hog4w wrote

You are not incriminating yourself by saying "I'm a criminal". Can't be punished for just that.


Cetun t1_j6i4g8p wrote

Yea if you report illegal income there probably isn't receipts, so the IRS is going to be real curious as to how you came to that amount and suspicious that there might be more you aren't claiming.


WeDriftEternal t1_j6frub6 wrote

The law is you must report ALL income regardless of source, otherwise you're breaking the law.

Yes, the govt wants their cut. You make money, they get their piece of it and you have to follow the law like everyone else


xCreamPye69 OP t1_j6fs4gy wrote

But asking people to report on their illegal income is a form of self incrimination isnt it?


WeDriftEternal t1_j6fsdv2 wrote

You must report ALL income. Nothing else is relevant. Did you make income? The law states it must be reported.

If you're going to the fifth amendment route, you aint even the 100 millionth person to think of it, and the courts have already decided it, and it is as I said, you must report ALL income. In theory you can not report the "source" of some income, but it still must be reported... I know you're looking for some out or way around it, its not happening unless you break the law.


ELVEVERX t1_j6fuegu wrote

>its not happening unless you break the law

I mean that's already happening it's illegal income


WeDriftEternal t1_j6fuo8a wrote

Yes, but now you've committed another crime, and tax fraud often can have significant criminal charges attached to it. So you're digging a deeper hole. Although if you will be prosecuted for it would depend on the govt's decision on what to charge you with. Its just adding up potential charges against you. However, there's an easy solution around this: Don't do illegal things.


Frednotbob t1_j6gpp03 wrote

Yes, but whether it's legal or illegal is irrelevant to the IRS; it's income, regardless of the source.

They're essentially saying, 'If you're earning income from a source that is not listed in any of the above categories, this is your chance to tell us about it.'


mothman83 t1_j6g7ywm wrote

have you ever seen a tax form? you dont have to LIST precisely what the source of each dollar is. you can just write consulting and there you go...


... however if you get AUDITED ...... then you often DO have to declare the sources ....


zmz2 t1_j6hthru wrote

It’s not that you report it as “illegal income,” you just report it as “other income” and don’t specify the source. As long as you declare it and pay the taxes, the IRS doesn’t care where it came from.


BackRowRumour t1_j6fz9rd wrote

I suspect it is like the travel declaration. Not saying you're a wanted criminal becomes an offence because you actively lied, not just failed to report.


TJATAW t1_j6ghkml wrote

The courts decided that if the IRS did not give you a way to report the income, then the IRS can not take you to court to try and get their cut, and that you would not be guilty of not paying taxes on the income.

The IRS is only allowed to turn over your tax info when ordered to do so by a court. As an example, look at how difficult it was for the Ways & Means committee to get Trump's tax info. It took 3yrs, and went all the way up to the Supreme Court before they finally got the info.


Frednotbob t1_j6gpua8 wrote

>It took 3yrs, and went all the way up to the Supreme Court before they finally got the info.

To be honest, that was more about Trump fighting tooth and nail for three years to stop the court from getting the info.


tomalator t1_j6gilol wrote

Because if they can't bust you on the illegal activity, they can bust you for tax evasion they can prove are getting income you aren't declaring. That's how they got Al Copone, and it was only after that that money laundering became illegal to close another loop hole he was exploiting.

If you do declare the illegal income on your taxes, it can be used as evidence against you to get you on thr actual illegal activity you're doing.


Sentsuizan t1_j6gl0jx wrote

Not paying taxes on your illegal income is a separate crime from whatever you did to get that income.


NotAnotherEmpire t1_j6gl14n wrote

The first page of the tax code says that all income is taxable. The rest of the tax code is explaining what is not.

There is no exemption for illegal business, or illegal business practices. So you owe tax.


Templarofsteel t1_j6hb8i5 wrote

It's mostly a means of allowing for criminal investigations into large organized criminal groups. AS unless they are exceptionally careful their lifestyles can be radically out of sync with their purported incomes. IRS investigations often allow federal charges for these groups which in turn can be used to help other investigations. The regs do say that they can't report you for your criminal income but most people wouldn't believe that so it's doubtful many do.


Farnsworthson t1_j6hc027 wrote

Just to point out that no act is, technically, illegal until a court or equivalent finds that it was. Up to that point, however dubious its source, income is simply income. And, yes, the state wants its cut.


Jenna_Rein t1_j6fujbc wrote

Also, the US tax code is designed to progressive tax the increase of wealth regardless of the source.


Megalocerus t1_j6gu8q8 wrote

No, your house or stock can increase in value, changing your net worth, but it is not taxable until you sell it.


Randomstringofnum t1_j6gwjzd wrote

Wrong, when a home increases in value, so does it’s assessed price, assessments determine the value of the home, and property taxes are based on this value, a higher assessment means a higher tax bill.


markroth69 t1_j6h8ecp wrote

But that's local property taxes. Not federal income taxes. The U.S (federal) (Income) tax code does not progressively tax wealth. It progressively taxes income.


Jenna_Rein t1_j6ifsdo wrote

Literally, what I said…you are taxed on the increase in your wealth, at some point.

However, specifically the increase in home values has an exempted amount - 250,000/500,000 based on filing status and ownership tests, is excluded before capital gains hit.


Megalocerus t1_j6lhskh wrote

No, it's not true at all. You are taxed on income, not the increase in wealth. I can have my wealth plummet due to a stock market drop, but owe taxes on my interest income even as my wealth drops. I can go into debt on my $100K income so my wealth is negative, but I still owe taxes on the $100K. Wealth has nothing to do with it except maybe if I die with more than 11 million, and then it is the change of ownership that is taxed--a kind of transaction.


FellowConspirator t1_j6hr50w wrote

Income is income. The IRS doesn’t really care where it comes from, as long as y they get their share. If you report it as “off-shore sex work” or “donations for digital paintings” or some such, they don’t care. Their job is to collect taxes.

The IRS is looking for evidence that you’ve paid what they think they’re old, or have documentation to justify the discrepancy. They are not an agency equipped to chase down criminals that pay their taxes.


tylerlarson t1_j6i4ty9 wrote

The logic is really simple:

You owe income tax on your income. There is no exception saying that illegal activity is tax-free. (The only exceptions have to be written as laws, the IRS doesn't get to decide.)

Therefore, even illegal activity is technically taxable.

It's also pretty easy to see if you made a ton of money you didn't declare on your income tax because if you spend it then it had to come from somewhere.


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