Stolen property must be reported as income on taxes: IRS


An image of IRS guidance telling people to report any property they stole as income on their taxes is real. (AP Photo/Susan Walsh, File)


Yes, you’re supposed to report anything you stole this year as income on your tax returns — unless you return it.

An image circulating on social media of guidance from the Internal Revenue Service telling taxpayers to do so has some people confused and others wondering whether it’s fake.

But the rule is real. It’s included in the IRS’s 2021 federal income tax guide.

“If you steal property, you must report its fair market value in your income in the year you steal it unless you return it to its rightful owner in the same year,” the guide says.

Similarly, the IRS wants you to report income from any illegal activities.

“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,” the guide says.

That rule was the subject of a Prohibition-era Supreme Court case that would later be the basis for American gangster Al Capone’s conviction in 1931: United States v. Sullivan.

Manly Sullivan was convicted in 1922 of evading federal taxes on the income he earned through “running illegal whiskey” in violation of the Volstead Act, according to The Mob Museum.

A U.S. circuit court of appeals, however, reversed Sullivan’s conviction. It ruled that, while income from illegally trafficking liquor was subject to taxation, the Fifth Amendment to the U.S. Constitution — which protects against self-incrimination — protected Sullivan from declaring that income on his tax returns.

But the U.S Supreme Court in 1927 reversed the court’s decision.

“We see no reason to doubt the interpretation of the Act, or any reason why the fact that a business is unlawful should exempt it from paying the taxes that, if lawful, it would have to pay,” Justice Oliver Wendell Holmes Jr. wrote in the majority opinion, according to Justia.

A few years later, the case was used as precedent to convict Al Capone of tax evasion, Politico reported.

During Prohibition, Capone ran a massive crime ring that “netted huge profits” from illegally trading liquor, according to the National Archives and Records Administration. But for years, Capone, who “became a legendary symbol of the violent gangsterism of the Prohibition era,” wasn’t prosecuted for his crimes.

Then, in 1930, he was indicted for income tax evasion after an investigation by the federal government. He was found guilty in October 1931 and sentenced to 11 years in prison and ordered to pay $80,000 in fines and court costs.

“During the trial, the prosecution documented Capone’s lavish spending, evidence of a colossal income,” the National Archives and Records Administration said. “The government also submitted proof that Capone was aware of his obligation to pay federal income tax but failed to do so.”

This story was originally published December 28, 2021 10:46 AM.

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Bailey Aldridge is a reporter covering real-time news in North and South Carolina. She has a degree in journalism from the University of North Carolina at Chapel Hill.

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