An Australian man gets to deduct stolen drug money from his income for tax purposes (second item). Does American tax law work similarly?
An Australian court ruled Wednesday that a convicted heroin dealer can claim a $165,000 tax deduction for money that was stolen during a drug deal. ...First, do you have to pay income tax on illegal income? Wouldn't the government just seize all the money involved? Or do you then have to pay taxes over and above the seizure? Wouldn't the Fifth Amendment prevent you from having to declare illegal income? Second, I wasn't aware that stolen property is tax deductable.The ATO had been trying to make La Rosa — who served a 12-year jail term for dealing heroin and amphetamines — pay tax on his 1994-95 income, which it estimated at $337,000.
But La Rosa insisted his taxable income should be reduced because half that sum had been stolen.
The money had been buried in La Rosa's backyard and was dug up to spend on a drug deal in May 1995, but was stolen during the transaction by unknown people, the court was told.
Update:
Make sure to read Ron's comment.
My father was in the Criminal Investigation Division of the IRS for 20 years. Their job is to find criminals that aren't paying their taxes on illegal income and arrest them for tax evasion.When he was in the Audit division he said he'd often seen returns that said things like "$100,000 smuggling" and as long as they paid the right amount of taxes they wouldn't do anything to them.
You do have to pay income tax on illegal income in the US. Your tax return is confidential and cannot be legally shared with any other government agency like for example the FBI.
My father was in the Criminal Investigation Division of the IRS for 20 years. Their job is to find criminals that aren't paying their taxes on illegal income and arrest them for tax evasion.
When he was in the Audit division he said he'd often seen returns that said things like "$100,000 smuggling" and as long as they paid the right amount of taxes they wouldn't do anything to them.
The obvious cynical conclusion is the government is more concerned with getting its tax money than arresting criminals. But there is a flip side, in that it gives you a way to arrest people who make money off crime, but don't directly commit it.
The classic example of this was Al Capone. He made lots of money off organized crime, but since he wasn't directly involved and there was no RICO at the time, the government couldn't touch him. Then his accountant turned on him and turned the books over the the IRS. They arrested him for tax evasion.
Of course all my knowledge is about 10 years old. I don't know if there have been changes.
Ron: Thanks for the second-hand info. Stories like that must be common given the state of the law that you describe, but it's still weird.
It is pretty common to read that people get convicted on tax evasion, but not on the crime itself. Tax evasion is easy to prove: you got the money and you didn't delcare it. Black and white. Criminal convictions are complicated, a lot of technicalities, intent is an issue, etc.
What I thought was interesting, thanks btw, was that the IRS doesnt share info. Makes sense in a way, but what if someone declared being paid for terrorism or murder? Yowie.
Things may have changed. The relevant law is section 6103 of the IRS code.
Looking at subsection i.3 it seems they can disclose information about other federal crimes and they can disclose information related to "Danger of death or physical injury".
I don't even play a lawyer on TV, but the statute is interesting reading.
Thanks for checking that, Ron. I feel better. BTW, did your dad get to pack heat in his job?
Jim:
Yep, Dad packed heat every day. I think CID is the only division of the IRS that does.
Toward the end of his career he headed a multi-agency group as part of the war on drugs. The IRS's ability to put people away others couldn't was well known.