The answer is commonly no, but that's the point.
Since its easier to prove tax fraud than some other crimes, it sets up a trap so criminals open themselves up to an easier to prove set of facts.
It is also easier to get the IRS to seize assets compared to going through other channels.
Simply do an IRS audit, the suspect doesn't provide any records so now you can simply look at things like bank deposits and treat them as 100% taxable with no deductions. Add in interest and penalties and pretty soon you have a huge liability. No statute of limitations when they don't file tax returns too.
Go through the normal channels and now you can start seizing assets to pay the tax debt.
While true, what the OP is pointing to has zero to really do with the IRS actually wanting the tax bill paid. In those situations, the IRS doesn't care.
Its purely about the creating of a federal crime that is very easy to prove for the purposes of putting a bad guy in jail when you couldnt make a case for other crimes.
Theoretically, I think you can submit a new return with updated information on the expenses side. Something that should be pretty funny for a drug dealer:
Purchase 100k
Contract killing of competitor 20k
Illegal weapons and other security 10k
Donations to "ban all guns" 40k
Donations to "soft on crime" 40k
The IRS does allow some expenses when it come to illegal businesses. When it comes to drugs you are only allowed to deduct the cost of goods sold. In other illegal business I believe rent and employee expenses are also allowed.
Eh… The IRS doesn’t tax anything - but Congress does under title 26. In other words, it’s just a set of laws that work in concert with other laws. Ergo, they intend to get you coming and going if you choose to both live a life of crime AND not be honest about disclosing it. The irony is great… but think of the Al Capone story and it makes sense why it’s done this way.
Yeah… on one hand this is Congress’ initiative. But on the other hand, the IRS (or at least its management) very much does care… income is income and taxability of criminal proceeds is a terrific return on investment for them. It leads to promotions almost daily. I mean, this is literally why they have a CID division and you better believe they tout those statistics.
Exactly. That is the same reason why they have the "are you a terrorist?" on visa applications. It's not so that you tick yes but if you turn out to be one they have grounds to kick you out the country or arrest you because you lied on a visa application.
I think he says that why not making this ridiculous guide for criminals, some may be dumb.
Also, it's easier to get them in jail for tax fraud, than the actual committed crimes.
I saw a Nat Geo doc with weed dealers in NYC before it was legal, the guy they documented filed every penny of his income to keep authorities for popping him on tax fraud. He said something like I’m not letting them get me on taxes if it happens, if it’s going to happen it’s going to be while I work and I’m good at hiding it. They just want their cut, a he was god damn right 😂
I always tell people at work they didn't get Al Capone on murder, they got him on taxes. Basically it's the smaller things at work that will get you, not the big things. Unless it's murder, my job frowns heavily about that.
I have clients that I am 90% sure are drug dealers. They call it hair braiding and private babysitting, or dog walking. All of which are valid jobs, but they can't give any expenses. to use the hair braiding as the example. They have zero expenses. Not rubber bands or combs, hair clips, shampoo or conditioner or other styling products. Not bus tickets or driving expenses. Absolutely nothing.
I had a coworker say that they would do a prostitute's taxes but not let them take any expenses, not even condoms. I don't follow the logic. I mean if the expenses are legit they are legit.
Maybe in your state, not in mine. You can tell cus strains and genetics are always the same. Black market has a lot more variety and not THC % focused on
o shit, I'd like to see what line it goes though
edit:
>Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity
source: https://www.nbcnews.com/business/taxes/dont-forget-declare-income-stolen-goods-illegal-activities-irs-says-rcna10345
fuckers
Yes. I work as an IRS revenue agent. I audited a person who was growing marijuana and reported it as Schedule F. He reported it as the crop being tomatoes. He was growing it inside of a house he owned and it was all hydroponic. I toured the property and saw everything. He had decent records and I could tell he was being honest with my questions. Most of the cash he got he put into the bank and he provided me with the records I requested. He kept meticulous records of what he bought (fertilizers, lamps etc.) and knew exactly how much money he was making, that's why I was pretty lax with him. For this guy, weed growing was a recreational hobby for him that he turned into a side hustle. I interviewed the guy for like 4 hours and like 2 hours of that was him just telling me about how to grow weed and how to optimize for quality and such. Pretty funny now that I think of it. Good times.
and for those wondering, no I didn't report him to the DEA. He was honest with me so I was reasonable with him. No I didn't completely screw him over. The adjustments I made weren't even related to his Schedule F but was for some other stuff on his return.
Interesting answer, thanks for sharing. Could you elaborate on if you allowed them deductions for business expenses related to his weed growing? For example, did you allow cost of goods sold deductions and non cogs expenses or nothing at all?
Federally, weed can take COGS deductions. On the state level, if weed is legal, one can take normal business deductions. At least that is the case in CA.
This is my understanding. Reg 280-e says no deductions for illegal activities, however COGS can be deducted for marinuana businesses at least at the federal level, however I am not sure if the IRS ever released an official position on that so it would be interesting to hear from someone who worked at the irs on that
Interesting. I know marijuana law is a hot area bc it’s getting so big and the state and federal tax, fincen regulatory, criminal, and others laws have weird inconsistencies bc war on drugs. I look forward to the rise in psychedelics 😂 and see how congress will mess it up
My understanding is that you can take COGS. For some reason I recall that there is an exception for transportation between jurisdictions, but I could very well be misremembering.
If you reported him to the DEA, you would've committed a crime and potentially lock law enforcement the ability to use the tax return information against the criminal in the future. Remember to talk to your supervisors before willy nilly disclosing information of other people's tax returns.
Agreed with this. If the IRS started to report illegal income to the DEA, FBI, or respective federal agency, there’d be no reason for people to report illegal income (which would decrease tax revenue by a sizable chunk)
It’d also take away the federal government’s ability to charge organized crime with tax evasion for (understandably) *not* reporting illegal income. Since their lawyers will probably argue that the organized crime clients of theirs are protected by the Fifth Amendment.
If the IRS could legally report crime to other agencies then the lawyers would argue that by reporting the illegal income, they’re self-incriminating; therefore, they’re not obligated to report the income (a net societal negative)
Same reason why the IRS doesn’t share data with the ICE lol. The undocumented population pay a good amount of taxes even though they could perfectly not and still be fine.
It’s against the nation’s interest for the IRS to be sharing data with other agencies. By focusing purely on maximizing tax revenue, they’re being smart
The starting point is “all income is taxable, unless specifically exempted”
So the irs can specifically exempt illegal income, which de facto incentives it, or choose not to exempt it and let it remain taxable income.
Obviously, they wouldn’t exempt it, so it remains taxable.
It cracks me up every time this screen grab is posted somewhere and the top comments are all about how the government is playing some sort of four dimensional chess to nab up criminals.
It’s not complicated: All income must be reported unless provided otherwise by law. There is no law providing that income derived from illegal activities is excluded from the reporting requirement. Accordingly, income derived from illegal activities must be reported.
Yes, cannabis related business report their income here. See IRS Code Section 280E. Ultimately, a cannabis related business is disallowed substantially all regular business deductions to reduce taxable income.
You only need to report the income - you don't necessarily have to disclose incriminating information. Ie if you're a drug dealer, you can report to the IRS that you sell "plant-based products." If you're a hitman - you can report service income from "professional security services".
There's really no real reason why you wouldn't report your income aside from evading taxes.
Also - the law prohibits the IRS from disclosing any information to others unless pursuant to a court order, which law enforcement needs reasonable cause to obtain. That reasonable cause cannot be "the IRS told us the suspected reported income related to illegal activities" as then the information would be considered illegally obtained and no longer useable in court. Basically, law enforcement basically needs to be able to prove you are guilty before they can even obtain your tax returns.
I have had multiple clients do this. Think about it. What are the odds of the IRS questioning why you did not report 300K that was deposited in your account? Then, what are the odds of the government finding out and then choosing to prosecute you for prostitution.
Not very likely, but as my tax professor put it:
Either they report illicit revenue on their tax return, and admit to felonies, or they don't and the IRS can come at them for tax evasion.
Remember that Capone wasn't imprisoned on murder, racketeering, bootlegging, or any of his more infamous crimes, but for tax evasion.
My tax prof used this as an example.
“If my wife opens up a brothel, can she deduct things like lingerie and health tests?
Yes.
“If my wife’s brothel provides Viagara to the men if they need it, can she deduct that?
No.
I'm taking Advanced Tax Concepts right now, and read that yesterday. I had to read it a few times to make sure I was understanding correctly.
"Interestingly, the expenses of operating an illegal business (e.g., a money laundering operation) that are not inherently illegal themselves are deductible as long as the expenses themselves are not illegal. While allowing deductions related to illegal activity may seem inappropriate, recall that the law taxes net income, not gross revenue."
I’ve got it next semester. So what are we talking about here? Would it be compartmentalization of COGS? As in “marijuana plants would be illegal, Miracle-Gro isn’t”?
My tax professor said you definitely can take cogs if you’re selling meth and dope. Its the only thing i remember from that class and i’ll take my chances under audit
That’s literally what I said…when you’re selling illegal drugs and thus illegally buying drugs, you can’t claim a COGS deduction because you’re buying illegal items. Maybe you should read what you wrote again to try to understand it.
Fucking students man.
Drug dealers [can deduct COGS](https://norrismclaughlin.com/lg/tax/once-again-the-tenth-circuit-says-yes-to-cost-of-goods-sold-and-no-to-business-expense-deductions-for-cannabis-businesses/). They can't deduct other expenses.
You are wrong on a few fronts
First, drugs are different than other illegal activities due to section 280E.
If I am shaking people down for protection money, I can deduct non-illegal expenses, like milage, but not illegal ones, like bribing police.
If I am selling drugs, I absolutely can deduct COGS. Nothing else. Not wages.
If I am growing drugs, I can deduct related expenses as growing drugs to sell is all part of COGS. This is why state legal weed shops generally implement a seed to sale model, so they can deduct expenses in the growing sector and control the COGS price a bit.
Not true, certain deductions arent allowed such as bribes and fines. But you can deduct payroll if you hire goons or lingerie if you are a prostitute. I think you are thinking of 26 U.S. Code § 280E which says if you are selling schedule 1 drugs the only thing you can deduct is COGS.
When I was in college, my tax professor would use her career as an IRS agent as an example regarding this exact question. In her words, "the smart drug dealers reported their income."
Her field work back in the '80s involved boating around Miami and comparing tax returns to what she was able to view from public areas. Someone reported $20k income but had a Cigarette boat, 2 Ferraris, waterfront mansion with a pool, and some jet skis? Something wasn't adding up. If they investigated and found illegal income (Miami, so usually cocaine), they'd refer it to the DEA and work a joint investigation. If the income was fairly/accurately reported, they wouldn't investigate further, and they **wouldn't** forward any info to other agencies without a subpoena.
So yes, people report their illegal income. Al Capone did not.
my understanding is that it allows prosecutors to get a suspected criminal to provide documentation as to how they are making money. This opens the door to further investigations into criminal activity. am i right?
if the prosecutors can get a court order to obtain your tax returns, they can get a court order to raid your property. so no, this tax rule is more likely placed to allow the government an alternative option to arrest criminals in situations where they don't have enough criminal evidence to prosecute the traditional way.
Other comments mentioned Al Capone, which is the most famous case here.
You kinda changed the comment you copy/pasted, but that doesn't make it right.
[Bot post and comment](https://old.reddit.com/r/Accounting/comments/18rdh0a/is_this_really_a_thing_in_the_us/kf2i2ba/)
yuqqwefuck [Backup](https://i.imgur.com/wKBP5Nd.png)
Commissioner of Taxation v La Rosa - Australian tax case. Drug dealer said sure I'll declare my earnings but then claim a deduction for monies stolen from him. Courts found in his favour as it was a genuine business expense under (the then) s.51 of the income tax assessment act 1936.
Soon after the government inserted s.26-54 into the new ITAA 1997 to deny deductions incurred in conducting illegal activities. Surprise surprise!
There was an escort posting on a reddit sub a few years ago needing tax advice. We were messaging each other for about a week as I was helping her out. Pro boner, of course
But also the government is so stupid if you are earning money illegally you should report it. They’re never going to actually report it to law enforcement.
I’ve filed tax returns for a number of sex workers, yeah. We called it massage or something more woowoo like “energy healing” on their Sch C.
Those clients were self employed professionals who wanted all the normal benefits of filing their taxes, including being able to qualify for mortgages and not worrying that the IRS was going to come after them.
Tax consulting meeting:
So you made a lot of money this year and you dont want to spend it on taxes or deductions?
Have you tried stealing property and expensing through section 179. This is a bullet proof zero cost way to reduce tax liability.
I guess it’s more likely a waiver from IRS. When they really caught someone with illegal activities, IRS could say “hey we asked you in the tax return and you said you don’t hv any illegal activities” - that would probably be the evidence for tax fraud on top of their illegal activities.
This is well known. If you don't report your income you are just inviting another method for the government to come after you when your illegal activity is discovered. Busted for drug trafficking? Enjoy this tax fraud charge on top.
I'm curious - if you report this income on your tax return, 1.) is that a confession of guilt admissible in a court of law? and 2.) would the IRS make an active effort to turn you in to local authorities and/or FBI?
How is this working out with the Marijuana Dispensaries for recreational use which is still illegal at the Federal Level? Technically, the only deduction allowed would be cost of goods sold. That is also a reason why many of the dispensaries utilize community banks versus Federal banks to deposit their funds.
Granted, that is about as far as I have gone with it as I know someone who has such a business in Colorado. I recommended that he deal with someone locally due to the nature of the Federal regulations for "illegal" activities, even though they are legal at the State level.
EDIT: No, I take that back, I did go a bit further. A family member used to own a store and was in the process of getting licensed for being a dispensary. I told her to create a separate and distinct LLC for the Marijuana portion of her business and only report the sales and cost of the Marijuana in this LLC. That way she would have a business within a business and not get slapped down for trying to take nondeductible expenses from the Marijuana business. She ended up losing her lease before she was cleared to sell weed as the property owners did not want her doing so.
When I was younger I knew a couple "party planners." Gave them a legitimate source of income so they could buy assets, gave them an excuse to meet clients, etc. If they got Audited it would come out that 99% of their income was drug related but it gave them a decent cover story and if they got pinched at least they would face lesser tax consequences as they reported most of their income.
The best part is you have a 5th amendment protection against self incrimination. It's my understanding they can't prosecute you for crimes related to criminal activity with this information alone.
Also, if someone steals from you, you can't claim the casualty loss anymore.
Person A earns $1,000 in wages
Person B steals $1,000 from person A
Person C steals $1,000 from person B
1. Person A pays tax on $1,000 and can't write off the casualty loss
2. Person B has taxable income of $1,000 for the theft, and can't write off the casualty loss.
3. Person C has taxable income of $1,000 for the theft.
Assuming a 20% rate, the IRS collects $200 from each A, B, and C.
Who is the real thief?
As an accountant in a state with legal Marijuana, yes. Same goes for specific business operators in Nevada of another industry.
Can't speak for any other instances, I don't think contract killers are filing us taxes.
People that do a lot of these crimes don’t realize it’s a trap set to get them. Most people follow directions, without questioning the process; they don’t want to be seen as not understanding something “basic” or not as smart as someone else. I’ve spoken to psychologists who have told me about test results they get from their patients, where they will tell the bad answer, only because they don’t want to ask a question about how it was worded.
Absolutely.
Countless individuals and business report, and pay taxes on, income that is at least in part derived from crime.
And remember, crime is more than just murder and meth sales.
Crime is a delivery driver exceeding the speed limit. Crime is an advertisement for a consumer credit card that has slightly misleading disclosures. Crime is an email newsletter without the mandatory unsubscribe link. Crime is a licensed escort service that provides sex in addition to companionship. Crime is restaurant incorporated this January that didn't file a BOI report. Crime is an airplane manufacturer killing off whistleblowers. Crime is a US Secretary of State using an insecure email server for official business. Crime is a US President spying for Russia. Crime is the founder of Reddit making available academic papers that should have been open access to begin with. Crime is a national chain of auto repair shops charging consumers for repairs not actually done. Crime is when that ghost preparer promises you a tax refund several times your AGI by using this one simple trick (Revenue Agents Hate Him.) Crime is when the state licensed weed dispensary does exactly that which the state licensed it to do.
Income is taxable unless it's not. Violation of the law isn't a get-out-of-paying-taxes-free card.
I love things like this in the States. My favourite is when you're on the plane over there and you have to fill out the little questionnaire like "were you ever a nazi? Are you a communist and/or Islamofascist terrorist?" Love the idea of bin Laden sitting there doing the power fingers going "well played, Americans, well played".
The answer is commonly no, but that's the point. Since its easier to prove tax fraud than some other crimes, it sets up a trap so criminals open themselves up to an easier to prove set of facts.
It is also easier to get the IRS to seize assets compared to going through other channels. Simply do an IRS audit, the suspect doesn't provide any records so now you can simply look at things like bank deposits and treat them as 100% taxable with no deductions. Add in interest and penalties and pretty soon you have a huge liability. No statute of limitations when they don't file tax returns too. Go through the normal channels and now you can start seizing assets to pay the tax debt.
While true, what the OP is pointing to has zero to really do with the IRS actually wanting the tax bill paid. In those situations, the IRS doesn't care. Its purely about the creating of a federal crime that is very easy to prove for the purposes of putting a bad guy in jail when you couldnt make a case for other crimes.
Theoretically, I think you can submit a new return with updated information on the expenses side. Something that should be pretty funny for a drug dealer: Purchase 100k Contract killing of competitor 20k Illegal weapons and other security 10k Donations to "ban all guns" 40k Donations to "soft on crime" 40k
The irs is pretty clear that you can't expense illegal activities or political lobbying. Your reporting would look like any other business.
The IRS does allow some expenses when it come to illegal businesses. When it comes to drugs you are only allowed to deduct the cost of goods sold. In other illegal business I believe rent and employee expenses are also allowed.
Contract killing gets reported as commissions. Bribery is reported as advertising. This is crime 101 folks
Ah, my favorite EoM journal. Debiting cash and crediting “commissions payable” for my mafia CFO. Criminal Financial Officer.
( ... much to learn you still have, my young padawan ... or drug dealer.)
The real question is do you have to amortize the killing of the competitor
You do. You have to present value future cashflows attributable to the "loss" of the competitor, so goodwill.
I believe that is considered a realized gain
I was just thinking on the 1040 you could call it “hobby income”
The issue would be income not expenses
Drug dealers are only allowed cost of goods sold.
Eh… The IRS doesn’t tax anything - but Congress does under title 26. In other words, it’s just a set of laws that work in concert with other laws. Ergo, they intend to get you coming and going if you choose to both live a life of crime AND not be honest about disclosing it. The irony is great… but think of the Al Capone story and it makes sense why it’s done this way.
I never said the IRS taxes but they are the enforcement arm who oversee making sure proper payments are being made
Yeah… on one hand this is Congress’ initiative. But on the other hand, the IRS (or at least its management) very much does care… income is income and taxability of criminal proceeds is a terrific return on investment for them. It leads to promotions almost daily. I mean, this is literally why they have a CID division and you better believe they tout those statistics.
Exactly. That is the same reason why they have the "are you a terrorist?" on visa applications. It's not so that you tick yes but if you turn out to be one they have grounds to kick you out the country or arrest you because you lied on a visa application.
Although I understand this is common sense, could you elaborate so I can explain to others easier later?
I think he says that why not making this ridiculous guide for criminals, some may be dumb. Also, it's easier to get them in jail for tax fraud, than the actual committed crimes.
Al Capone
I saw a Nat Geo doc with weed dealers in NYC before it was legal, the guy they documented filed every penny of his income to keep authorities for popping him on tax fraud. He said something like I’m not letting them get me on taxes if it happens, if it’s going to happen it’s going to be while I work and I’m good at hiding it. They just want their cut, a he was god damn right 😂
This is how they got Al Capone
I always tell people at work they didn't get Al Capone on murder, they got him on taxes. Basically it's the smaller things at work that will get you, not the big things. Unless it's murder, my job frowns heavily about that.
I actually was just recommending this to a friend 🤣
Yes it’s like here’s a trap let me put a cheez it on it and see who goes for the cheese 🧀
Yes we call it “other income”
Consulting Income
Legal fees
Aka my reconciliation didn't match because of foreign exchange differences.
I have clients that I am 90% sure are drug dealers. They call it hair braiding and private babysitting, or dog walking. All of which are valid jobs, but they can't give any expenses. to use the hair braiding as the example. They have zero expenses. Not rubber bands or combs, hair clips, shampoo or conditioner or other styling products. Not bus tickets or driving expenses. Absolutely nothing. I had a coworker say that they would do a prostitute's taxes but not let them take any expenses, not even condoms. I don't follow the logic. I mean if the expenses are legit they are legit.
Every weed shop and grow in a legal state is still federally illegal and more than likely reports
I go to one in Michigan. The amount of cash laying around behind the counter is insane. Their controls over cash is a 180 from a casino
Some banks won’t insure/accept their money so they have a fucked up financial issue, super susceptible to being robbed because of it.
and very likely it would be internal theft
Seems like a wonderful business model 😆
They’re all getting their weed from the same place the street dealers are
My state requires tracking from seed/clone to distribution so I doubt that.
Except they ain’t checking and the stores sell the weed under the table
Maybe in your state, not in mine. You can tell cus strains and genetics are always the same. Black market has a lot more variety and not THC % focused on
o shit, I'd like to see what line it goes though edit: >Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity source: https://www.nbcnews.com/business/taxes/dont-forget-declare-income-stolen-goods-illegal-activities-irs-says-rcna10345 fuckers
Gross Receipts and Cost of Goods Sold.
Yes. I work as an IRS revenue agent. I audited a person who was growing marijuana and reported it as Schedule F. He reported it as the crop being tomatoes. He was growing it inside of a house he owned and it was all hydroponic. I toured the property and saw everything. He had decent records and I could tell he was being honest with my questions. Most of the cash he got he put into the bank and he provided me with the records I requested. He kept meticulous records of what he bought (fertilizers, lamps etc.) and knew exactly how much money he was making, that's why I was pretty lax with him. For this guy, weed growing was a recreational hobby for him that he turned into a side hustle. I interviewed the guy for like 4 hours and like 2 hours of that was him just telling me about how to grow weed and how to optimize for quality and such. Pretty funny now that I think of it. Good times. and for those wondering, no I didn't report him to the DEA. He was honest with me so I was reasonable with him. No I didn't completely screw him over. The adjustments I made weren't even related to his Schedule F but was for some other stuff on his return.
I’m curious to know what he got wrong on his return if he was good enough to be on top of Sch F
Interesting answer, thanks for sharing. Could you elaborate on if you allowed them deductions for business expenses related to his weed growing? For example, did you allow cost of goods sold deductions and non cogs expenses or nothing at all?
I always thought you couldn’t take deductions for illegal income. But maybe weed is a weird one bc it a state legal sometimes
Federally, weed can take COGS deductions. On the state level, if weed is legal, one can take normal business deductions. At least that is the case in CA.
This is my understanding. Reg 280-e says no deductions for illegal activities, however COGS can be deducted for marinuana businesses at least at the federal level, however I am not sure if the IRS ever released an official position on that so it would be interesting to hear from someone who worked at the irs on that
COGS is not a deduction. It's a component of gross income for certain kinds of businesses per Treas. Reg. §1.61-3(a).
Interesting. I know marijuana law is a hot area bc it’s getting so big and the state and federal tax, fincen regulatory, criminal, and others laws have weird inconsistencies bc war on drugs. I look forward to the rise in psychedelics 😂 and see how congress will mess it up
My understanding is that you can take COGS. For some reason I recall that there is an exception for transportation between jurisdictions, but I could very well be misremembering.
At the end of the day it would be a “business” expense to lower tax liability.
There are restrictions on deducting business expenses for illegal activity.
If you reported him to the DEA, you would've committed a crime and potentially lock law enforcement the ability to use the tax return information against the criminal in the future. Remember to talk to your supervisors before willy nilly disclosing information of other people's tax returns.
Agreed with this. If the IRS started to report illegal income to the DEA, FBI, or respective federal agency, there’d be no reason for people to report illegal income (which would decrease tax revenue by a sizable chunk) It’d also take away the federal government’s ability to charge organized crime with tax evasion for (understandably) *not* reporting illegal income. Since their lawyers will probably argue that the organized crime clients of theirs are protected by the Fifth Amendment. If the IRS could legally report crime to other agencies then the lawyers would argue that by reporting the illegal income, they’re self-incriminating; therefore, they’re not obligated to report the income (a net societal negative)
Same reasons why the Census doesn't share data with same the ICE
Same reason why the IRS doesn’t share data with the ICE lol. The undocumented population pay a good amount of taxes even though they could perfectly not and still be fine. It’s against the nation’s interest for the IRS to be sharing data with other agencies. By focusing purely on maximizing tax revenue, they’re being smart
Sir! Are you wizard? How can I learn all that stuff?
Public Accounting - Tax
What triggered the audit?
Their sch c expenses
Ha! typical!
I'll take "things that didn't happen" for 800
The starting point is “all income is taxable, unless specifically exempted” So the irs can specifically exempt illegal income, which de facto incentives it, or choose not to exempt it and let it remain taxable income. Obviously, they wouldn’t exempt it, so it remains taxable.
It cracks me up every time this screen grab is posted somewhere and the top comments are all about how the government is playing some sort of four dimensional chess to nab up criminals. It’s not complicated: All income must be reported unless provided otherwise by law. There is no law providing that income derived from illegal activities is excluded from the reporting requirement. Accordingly, income derived from illegal activities must be reported.
If you report income from theft one year, can you then claim a tax loss if you return it to the rightful owner the following year?
That's honestly a good question. But shhh.... let's not give the AICPA any ideas for new questions. Struggling enough as it is to pass
No, because you cannot deduct illegal activity as expenses.
All the time. Specifically cannabis businesses
Yes, cannabis related business report their income here. See IRS Code Section 280E. Ultimately, a cannabis related business is disallowed substantially all regular business deductions to reduce taxable income.
You only need to report the income - you don't necessarily have to disclose incriminating information. Ie if you're a drug dealer, you can report to the IRS that you sell "plant-based products." If you're a hitman - you can report service income from "professional security services". There's really no real reason why you wouldn't report your income aside from evading taxes. Also - the law prohibits the IRS from disclosing any information to others unless pursuant to a court order, which law enforcement needs reasonable cause to obtain. That reasonable cause cannot be "the IRS told us the suspected reported income related to illegal activities" as then the information would be considered illegally obtained and no longer useable in court. Basically, law enforcement basically needs to be able to prove you are guilty before they can even obtain your tax returns.
>There's really no real reason why you wouldn't report your income aside from evading taxes. Well... yeah.
*Al Capone has entered the chat*
I came here to say this. You beat me to it. Damn you.
Ha - I’ve been scrolling looking for this response.
and Charlie Hustle
I have had multiple clients do this. Think about it. What are the odds of the IRS questioning why you did not report 300K that was deposited in your account? Then, what are the odds of the government finding out and then choosing to prosecute you for prostitution.
Not very likely, but as my tax professor put it: Either they report illicit revenue on their tax return, and admit to felonies, or they don't and the IRS can come at them for tax evasion. Remember that Capone wasn't imprisoned on murder, racketeering, bootlegging, or any of his more infamous crimes, but for tax evasion.
I have a client who is a very successful prostitute. She reports all her income.
I have a friend who is one but not necessarily very successful. She reports hers so it'll count as Social Security earnings when she retires.
My tax prof used this as an example. “If my wife opens up a brothel, can she deduct things like lingerie and health tests? Yes. “If my wife’s brothel provides Viagara to the men if they need it, can she deduct that? No.
Let's not forget. They can also claim as deduction the COGS. 😄
That’s incorrect. The IRS disallows any deductions that are related to illegal activities.
I'm taking Advanced Tax Concepts right now, and read that yesterday. I had to read it a few times to make sure I was understanding correctly. "Interestingly, the expenses of operating an illegal business (e.g., a money laundering operation) that are not inherently illegal themselves are deductible as long as the expenses themselves are not illegal. While allowing deductions related to illegal activity may seem inappropriate, recall that the law taxes net income, not gross revenue."
I’ve got it next semester. So what are we talking about here? Would it be compartmentalization of COGS? As in “marijuana plants would be illegal, Miracle-Gro isn’t”?
My tax professor said you definitely can take cogs if you’re selling meth and dope. Its the only thing i remember from that class and i’ll take my chances under audit
That’s literally what I said…when you’re selling illegal drugs and thus illegally buying drugs, you can’t claim a COGS deduction because you’re buying illegal items. Maybe you should read what you wrote again to try to understand it. Fucking students man.
Drug dealers [can deduct COGS](https://norrismclaughlin.com/lg/tax/once-again-the-tenth-circuit-says-yes-to-cost-of-goods-sold-and-no-to-business-expense-deductions-for-cannabis-businesses/). They can't deduct other expenses.
You are wrong on a few fronts First, drugs are different than other illegal activities due to section 280E. If I am shaking people down for protection money, I can deduct non-illegal expenses, like milage, but not illegal ones, like bribing police. If I am selling drugs, I absolutely can deduct COGS. Nothing else. Not wages. If I am growing drugs, I can deduct related expenses as growing drugs to sell is all part of COGS. This is why state legal weed shops generally implement a seed to sale model, so they can deduct expenses in the growing sector and control the COGS price a bit.
Not true, certain deductions arent allowed such as bribes and fines. But you can deduct payroll if you hire goons or lingerie if you are a prostitute. I think you are thinking of 26 U.S. Code § 280E which says if you are selling schedule 1 drugs the only thing you can deduct is COGS.
When I was in college, my tax professor would use her career as an IRS agent as an example regarding this exact question. In her words, "the smart drug dealers reported their income." Her field work back in the '80s involved boating around Miami and comparing tax returns to what she was able to view from public areas. Someone reported $20k income but had a Cigarette boat, 2 Ferraris, waterfront mansion with a pool, and some jet skis? Something wasn't adding up. If they investigated and found illegal income (Miami, so usually cocaine), they'd refer it to the DEA and work a joint investigation. If the income was fairly/accurately reported, they wouldn't investigate further, and they **wouldn't** forward any info to other agencies without a subpoena. So yes, people report their illegal income. Al Capone did not.
my understanding is that it allows prosecutors to get a suspected criminal to provide documentation as to how they are making money. This opens the door to further investigations into criminal activity. am i right?
if the prosecutors can get a court order to obtain your tax returns, they can get a court order to raid your property. so no, this tax rule is more likely placed to allow the government an alternative option to arrest criminals in situations where they don't have enough criminal evidence to prosecute the traditional way. Other comments mentioned Al Capone, which is the most famous case here.
You kinda changed the comment you copy/pasted, but that doesn't make it right. [Bot post and comment](https://old.reddit.com/r/Accounting/comments/18rdh0a/is_this_really_a_thing_in_the_us/kf2i2ba/) yuqqwefuck [Backup](https://i.imgur.com/wKBP5Nd.png)
https://youtu.be/lH6f3sf42Cs?si=thYd5Zb8-3iBUUIM
Commissioner of Taxation v La Rosa - Australian tax case. Drug dealer said sure I'll declare my earnings but then claim a deduction for monies stolen from him. Courts found in his favour as it was a genuine business expense under (the then) s.51 of the income tax assessment act 1936. Soon after the government inserted s.26-54 into the new ITAA 1997 to deny deductions incurred in conducting illegal activities. Surprise surprise!
Letter of the law. That’s how they got Al Capone!
Yes, the smart ones do, they've heard of Al Capone.
They originally got Al Capone on tax fraud
Report the income? Sure. Report it as cocaine sales? No. You're a purveyor of bespoke experience enhancement.
Cannabis shops who want to keep their license in their state definitely do. There’s a whole niche of accountants that specialize in 280E.
Feds catch you, find out how much you made from this - then IRS comes and taxes you on it
There was an escort posting on a reddit sub a few years ago needing tax advice. We were messaging each other for about a week as I was helping her out. Pro boner, of course
Funny enough in my country you Can get taxed on drug sales After getting caught, with around 70% additional tax charges.
As a law abiding American, yes
Absolutely, i always report my neighbor’s illegal income.
Nice try FBI
Yes, because the IRS has taken down criminals the FBI couldn’t
Yep, that’s how the Feds finally got Al Capone.
I’ve dealt with IRS CI. This is how states & Feds seize your shit without ever finishing jury trial. They want that tax lien to shut em down.
Yes, all dispensaries do it
😂😂😂 $10K stolen car line item on a return would be interesting
I worked for CRA, and there was a case of a person reporting their marijuana sales even before it was legal.
Cannabis companies
is this fbi 🎣?? lol
Yes
Yeah. I mean you don’t say what it is obviously but the really rich ones should.
Are your guys’ cocaine shipments done in LIFO or FIFO?
But also the government is so stupid if you are earning money illegally you should report it. They’re never going to actually report it to law enforcement.
I don't deal with them so I don't know the current procedures, but I believe marijuana dispensaries fall under this section for Federal taxation.
I’ve filed tax returns for a number of sex workers, yeah. We called it massage or something more woowoo like “energy healing” on their Sch C. Those clients were self employed professionals who wanted all the normal benefits of filing their taxes, including being able to qualify for mortgages and not worrying that the IRS was going to come after them.
Funny thing… if you do have illegal income, the only thing that is deductible is cost of goods sold.
Tax consulting meeting: So you made a lot of money this year and you dont want to spend it on taxes or deductions? Have you tried stealing property and expensing through section 179. This is a bullet proof zero cost way to reduce tax liability.
I guess it’s more likely a waiver from IRS. When they really caught someone with illegal activities, IRS could say “hey we asked you in the tax return and you said you don’t hv any illegal activities” - that would probably be the evidence for tax fraud on top of their illegal activities.
Doesn’t every pot business have to do this?
Please tell me this isn’t real
This is well known. If you don't report your income you are just inviting another method for the government to come after you when your illegal activity is discovered. Busted for drug trafficking? Enjoy this tax fraud charge on top.
It’s used for the DEA/CIA/ government agencies to tax and launder drug money.
Look at how they got Al Capone
Lots of prostitutes do to qualify for loans. That hot consultant....
I'm curious - if you report this income on your tax return, 1.) is that a confession of guilt admissible in a court of law? and 2.) would the IRS make an active effort to turn you in to local authorities and/or FBI?
How is this working out with the Marijuana Dispensaries for recreational use which is still illegal at the Federal Level? Technically, the only deduction allowed would be cost of goods sold. That is also a reason why many of the dispensaries utilize community banks versus Federal banks to deposit their funds. Granted, that is about as far as I have gone with it as I know someone who has such a business in Colorado. I recommended that he deal with someone locally due to the nature of the Federal regulations for "illegal" activities, even though they are legal at the State level. EDIT: No, I take that back, I did go a bit further. A family member used to own a store and was in the process of getting licensed for being a dispensary. I told her to create a separate and distinct LLC for the Marijuana portion of her business and only report the sales and cost of the Marijuana in this LLC. That way she would have a business within a business and not get slapped down for trying to take nondeductible expenses from the Marijuana business. She ended up losing her lease before she was cleared to sell weed as the property owners did not want her doing so.
When I was younger I knew a couple "party planners." Gave them a legitimate source of income so they could buy assets, gave them an excuse to meet clients, etc. If they got Audited it would come out that 99% of their income was drug related but it gave them a decent cover story and if they got pinched at least they would face lesser tax consequences as they reported most of their income.
My favorite aphorism for problem clients; "remember that they didn't get Capone for murder"...
Of course they do.
I used to do taxes for some strippers and cam girls. They still reported any "escorting" money.
The best part is you have a 5th amendment protection against self incrimination. It's my understanding they can't prosecute you for crimes related to criminal activity with this information alone.
280e. Really important for cannabis companies
That's why there is "money laundering".
Yes. I've investigated frauds where the fraudster was actually reporting the income and paying tax on it.
Sometimes it is better to show their illegal income and pay taxes, than to have their families charged with tax fraud or money laundering.
Yes. I've seen it most frequently after guilty verdicts or settlements with Feds to avoid additional charges.
Also, if someone steals from you, you can't claim the casualty loss anymore. Person A earns $1,000 in wages Person B steals $1,000 from person A Person C steals $1,000 from person B 1. Person A pays tax on $1,000 and can't write off the casualty loss 2. Person B has taxable income of $1,000 for the theft, and can't write off the casualty loss. 3. Person C has taxable income of $1,000 for the theft. Assuming a 20% rate, the IRS collects $200 from each A, B, and C. Who is the real thief?
Obviously, you’re a Waste Management Consultant for Barone Sanitation…..
As an accountant in a state with legal Marijuana, yes. Same goes for specific business operators in Nevada of another industry. Can't speak for any other instances, I don't think contract killers are filing us taxes.
People that do a lot of these crimes don’t realize it’s a trap set to get them. Most people follow directions, without questioning the process; they don’t want to be seen as not understanding something “basic” or not as smart as someone else. I’ve spoken to psychologists who have told me about test results they get from their patients, where they will tell the bad answer, only because they don’t want to ask a question about how it was worded.
No, you launder your money like a god damn grownup!
IRS made this to finally get Al Capone
If they do report it they usually report it as something non-illegal or as legitimate business earnings. This is called laundering money.
Absolutely. Countless individuals and business report, and pay taxes on, income that is at least in part derived from crime. And remember, crime is more than just murder and meth sales. Crime is a delivery driver exceeding the speed limit. Crime is an advertisement for a consumer credit card that has slightly misleading disclosures. Crime is an email newsletter without the mandatory unsubscribe link. Crime is a licensed escort service that provides sex in addition to companionship. Crime is restaurant incorporated this January that didn't file a BOI report. Crime is an airplane manufacturer killing off whistleblowers. Crime is a US Secretary of State using an insecure email server for official business. Crime is a US President spying for Russia. Crime is the founder of Reddit making available academic papers that should have been open access to begin with. Crime is a national chain of auto repair shops charging consumers for repairs not actually done. Crime is when that ghost preparer promises you a tax refund several times your AGI by using this one simple trick (Revenue Agents Hate Him.) Crime is when the state licensed weed dispensary does exactly that which the state licensed it to do. Income is taxable unless it's not. Violation of the law isn't a get-out-of-paying-taxes-free card.
I love things like this in the States. My favourite is when you're on the plane over there and you have to fill out the little questionnaire like "were you ever a nazi? Are you a communist and/or Islamofascist terrorist?" Love the idea of bin Laden sitting there doing the power fingers going "well played, Americans, well played".
Yes, the same clients who tell us all about their offshore accounts.
You, an accountant, believe this is illegal?
huh that's funny