Consequences of Declaring Illicit Income to the IRS: Legal and Financial Implications

Declaring income from illegal activities to the Internal Revenue Service (IRS) is a complex and risky decision. While the likelihood of the IRS discovering this information might initially seem low, the potential consequences can be severe. If you do declare such income, the IRS could initiate an investigation, leading to criminal charges and substantial financial penalties.

Understanding the Risks

Firstly, it is important to understand that the IRS does not care how you obtained the funds; they only require that you report the income. If you declare illicit income, the IRS will likely investigate the source of the funds, which could lead to charges under the Racketeer Influenced and Corrupt Organizations Act (RICO) and confiscation of all assets involved. Such actions could result in a sentence of 20 years or more in prison.

IRS Investigation and Reporting

Even if the IRS suspects illicit income, they may not immediately report the individual to law enforcement. However, they have the legal authority to seize assets and may pursue civil penalties and fines, as well as demand the payment of back taxes and interest. While the IRS typically does not directly cooperate with law enforcement, their findings can be used in criminal proceedings.

Legal Advice and Documentation

The most prudent action in dealing with illicit income is to consult with a tax attorney. Legal professionals can help navigate the complexities of tax law and provide guidance on how to handle the situation in a way that minimizes risk. It may be advisable to reclassify the income as 'other income' on your tax forms or report it through a Schedule C as a legitimate business, though these steps do not eliminate the inherent risks.

Case Studies and Legal Precedents

In the past, drug dealers and other criminals have reported 'miscellaneous income' to the IRS to avoid scrutiny. This strategy has worked in some cases, given the 1931 conviction of Al Capone for tax evasion as a precursor to other crimes. However, the IRS has case law supporting its right to seize assets and impose penalties when it discovers illicit activity.

Conclusion

Declaring illicit income to the IRS is a highly risky endeavor. It opens up the individual to potential criminal prosecution, severe financial penalties, and asset forfeiture. It is strongly recommended to seek legal advice and consider reclassifying the income in a less risky manner. Ignorance of the law is not a defense, and those who engage in such actions should be mindful of the potential consequences.