If you haven’t filed your taxes yet this year – you have less than a month until the April 18 deadline (in some states), which means you still have time to report your income. While doing so, don’t forget to report income you collected from illegal activity or profits from items you stole.
Yes, you read that right. IRS guidelines say you must include in your income money made from illegal activities, like dealing illegal drugs or thievery.
According to the IRS’s Publication 17, “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.”
When it comes to reporting stolen property, you’ll need to report the item’s (or items’) fair market value – unless you return the item in the same year.
The guideline is sometimes referred to as “the Al Capone rule,” Mark Steber, Chief Tax Information Officer at Jackson Hewitt, tells 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.”
In the 1930s, the infamous gangster from Chicago was charged with tax evasion because, according to authorities, he wasn’t paying taxes on the income he was earning from the mob activities he was orchestrating. Capone was ultimately convicted on charges of tax evasion and prohibition and spent seven years in federal prisons.
If you do report your income from illegal activity, you aren’t necessarily turning yourself over to federal authorities.
As Steber explains, 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.
Why report the illegal income at all then? As Steber explains, some taxpayers will “report questionable information just so they can hedge their bets in case they do get caught.”
The IRS didn’t respond to Nexstar’s request for comment regarding illegal activity or stolen goods being reported on tax returns.
It’s also possible the income you’re reporting, though legal in your state, is illegal at the federal level.
Steber points 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 says. “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 recommends speaking with a tax professional and, potentially, a tax attorney.