Yes, IRS Asked Taxpayers To Claim Stolen Items and Illegal Income

But there's a loophole to get out of declaring on stolen goods.

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Claim

Guidelines published by the IRS ahead of the 2022 tax year explained how taxpayers can claim items they have stolen, or earnings from illegal activities.

Origin

Criminals, beware. Just because you got away with an illegal activity doesn’t mean the IRS isn’t going to come after your earnings.

That’s because just ahead of the 2021 tax season, the IRS released guidelines that required taxpayers claim items they have stolen, as well as earnings from illegal activities. 

The claim made headlines in publications that joked potential criminals were “running out of time” to return stolen goods to avoid paying taxes on them. And went viral when the financial Twitter account @litquidity took to social media to remind taxpayers that “tax szn is around the corner.’ 

And it’s true. Publication 17, which contains the IRS general rules for filing federal income tax returns, lists illegal activities under “other income” — categorized as self-employment activity — required to be reported to the federal tax agency. 

Screengrab/IRS 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,” read the 2021 the IRS guidelines.

The guidelines also require that those who steal property must report fair market value as income in the year that the item was stolen. Of course, one can avoid paying taxes on such items so long as the person returns them to the person they were stolen from in the first place. 

Screengrab/IRS Publication 17

The handy regulations also list how to report embezzled funds, notes that bribes are considered “nondeductible expenses,” and notes that kickbacks, side commissions, and “push money’ must also be included in the Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from self-employment activity.

It’s not just items or earnings obtained through illegal activities. That watch you found in the gym locker room? Yep, it’s taxable. 

“If you find and keep property that doesn’t belong to you that has been lost or abandoned (treasure trove), it’s taxable to you at its fair market value in the first year it’s your undisputed possession,” noted the IRS.

Snopes spoke with an accountant who said that while the reporting requirements themselves aren’t new, there was previously a separate form specifically for reporting illegal activity income. It’s unclear to what extent people actually used the form in the past.

It’s not exactly clear whether law enforcement will be given information about individuals who report income from illegal activities. What is clear is that anyone under the age of 65 who made more than $12,550 in 2021 is required to file by April 18, 2022. 

Sources

Dolan, Debra. “Time Is Running out to Return Stolen Goods to Avoid Paying Taxes on Them.” Https://Www.Wdbj7.Com, https://www.wdbj7.com/2021/12/29/time-is-running-out-return-stolen-goods-avoid-paying-taxes-them/. Accessed 30 Dec. 2021.

“IRS Asks That Criminals Provide Its Cut of Stolen Property, Illegal Income.” KXXV, 29 Dec. 2021, https://www.kxxv.com/news/local-news/irs-asks-that-criminals-provide-its-cut-of-stolen-property-illegal-income.

Publication 17 (2021), Your Federal Income Tax | Internal Revenue Service. https://www.irs.gov/publications/p17. Accessed 30 Dec. 2021.

“Stole Something? IRS Says Stolen Property and Bribes Must Be Reported as Income.” Usatoday, https://www.usatoday.com/story/money/2021/12/28/irs-says-stolen-property-must-reported-and-twitter-goes-wild/9035694002/. Accessed 30 Dec. 2021.

https://twitter.com/litcapital/status/1475508403732721664?s=20. Accessed 30 Dec. 2021.