If you make money from illegal activities, it is crucial that you report it on your annual income tax return. As odd as that might sound, it is true, and attorneys may advise clients to claim that income to avoid tax evasion charges. Remember, tax evasion is how the federal government finally sent 1930s Chicago mob boss and bootlegger Al Capone to prison.
According to CNN, the Internal Revenue Service considers even illegally acquired money subject to taxation. In instructions for filling out forms, it states “income from illegal activities, such as money from dealing illegal drugs, must be included in your income,” and directs you to the exact line on which to report it in your tax forms.
However, those who commit illegal acts typically are not going to admit it by confessing to the IRS. There are some who do, mainly those who have been charged with embezzling funds. By declaring this money as income, they avoid federal charges.
Another reason for declaring illegal income is that the IRS cannot use that information to bring criminal charges against you, nor refer your case to local authorities. The federal agency is bound by the privacy rights of individual citizens as established in several federal laws, as well as its own internal policies and procedures. However, that does not mean the IRS cannot pass along information from third-party sources, such as people they interview while conducting an audit.
Capone is not the only famous person sent to prison for tax evasion. According to the New York Daily News, pro baseball player Pete Rose was convicted of filing false tax returns; he was handed a five-month prison sentence in 1990. Chuck Berry, a famous 1950s-era rock and roll singer, spent time in jail in 1979. Baseball player Darryl Strawberry also spent a few months in prison, as did comedian Richard Pryor and Hollywood madam Heidi Fleiss.