If a criminal wants to avoid prosecution for income tax evasion, can
he declare the illegally earned income without raising a red flag for
law enforcement?  what laws apply?

Dear mattdemaret-ga;

You posed a very intriguing question that cannot be answered with a
simple YES or NO in all instances. Let me try to explain:

The IRS specifically addressed illegal income in several places on
it?s web site. Ironically the Internal Revenue Service instructs tax
payers on it?s official web site, ?If you receive a bribe, include it
in your income.?

INTERNAL REVENUE SERVE
DEPARTMENT OF THE TREASURY
http://www.irs.gov/publications/p17/ch13.html

It also says. ?Illegal income, such as stolen or embezzled money, must
be included in your gross income.?

INTERNAL REVENUE SERVE
DEPARTMENT OF THE TREASURY
Tax Trails - Miscellaneous / Other Income
http://www.irs.gov/individuals/article/0,,id=140253,00.html


At no time does the Internal Revenue Service say or imply that
reporting an illegal bribe would not set off bells and whistles. In
fact, on another portion of this same site the IRS warns that the
Internal Revenue Service?s Criminal Investigation?s Division will
investigate ?Illegal Source Financial Crimes? such as Tax Violations,
Money Laundering, Currency Crimes, and Asset Forfeiture and illegal
incomes derived from such things as Telemarketing Fraud, Healthcare
Fraud, Financial Institution Fraud, Insurance Fraud, Gaming, Public
Corruption, Organized Crime Issues among other perhaps.

INTERNAL REVENUE SERVE
DEPARTMENT OF THE TREASURY
Illegal Sources Financial Crimes - Publication 3860
http://www.irs.gov/compliance/enforcement/article/0,,id=125269,00.html

It goes on to say:

?According to the Internal Revenue Code, income derived from any
source, including illegally earned income, is subject to income tax.?

?IRS Criminal Investigation?s objective in the Illegal Source
Financial Crimes Strategy is to identify, investigate, and assist in
prosecuting the most significant Illegal Source tax violations,
currency, and money laundering offenders, and tracing their assets
domestically and internationally for forfeiture purposes. IRS-CI will
continue to stress complete financial investigations in order to
identify and document the foreign and domestic earnings and assets of
the individuals and organizations under investigation.?

The notion that illegal income is taxable and thus mandatory to report
was affirmed in the following case:

?Illegal income. Income earned illegally is taxable. James v. United
States, 366 U.S. 213 (1961); Rutkin v. United States, 343 U.S. 130
(1952).

INTERNAL REVENUE SERVE
DEPARTMENT OF THE TREASURY
Part 25. Special Topics 
Chapter 18. Community Property 
Section 2. Income Reporting Considerations of Community Property
25.18.2.1  (02-15-2005)
Income Reporting Considerations of Community Property (2)(H)
http://www.irs.gov/irm/part25/ch13s02.html


Now, the IRS Criminal Investigations Division?s mission is to
investigate potential criminal violations of the Internal Revenue Code
and related financial crimes ?in a manner that fosters confidence in
the tax system AND COMPLIANCE WITH THE LAW.? Obviously their
fundamental purpose is to follow up on "red flags" as you so aptly put
it.
 
INTERNAL REVENUE SERVE
DEPARTMENT OF THE TREASURY
Criminal Investigations Division
http://www.irs.gov/irs/article/0,,id=98398,00.html

Their authority is derived from numerous statutes:

"The authority to enforce Federal laws is derived from a variety of
statutes. These statutes may assign the *ENFORCEMENT OF ANY GIVEN LAW*
[emphasis mine] to a particular department such as the Treasury
Department, an agency of a department such as the IRS, or simply that
the enforcement falls to the legal arm of the government, the
Department of Justice (DOJ)."

INTERNAL REVENUE SERVE
DEPARTMENT OF THE TREASURY
Criminal Investigations Division
Part 9. Criminal Investigation 
Chapter 1. Criminal Investigation Mission and Strategies 
Section 2. Authority 
http://www.irs.gov/irm/part9/ch01s02.html#d0e300

Being a Federally commissioned law enforcement agency it seems logical
that if one were to report illegal income from narcotics sales or
murder for hire, for example, that one would place himself in jeopardy
of an investigation (or a parallel investigation) into his or her
activities surrounding that income.

Bribes and kickbacks are specifically mentioned in TITLE 26, Subtitle
A, CHAPTER 1, Subchapter N, PART III, Subpart F, Sec. 952 and in the
US Tax Code:

http://www.fourmilab.ch/ustax/www/t26-A-1-N-III-F-952.html
http://www.fourmilab.ch/ustax/www/t26-A-1-B-VI-162.html#(c)

The question then arises in some circles ?Doesn?t my 5th Amendment
right to protect myself against self incrimination also by extension
protect me from the law requiring me to report illegal income??

From what I have seen the answer thus far is NO. I?ve not seen a
single case where anyone who was prosecuted for not reporting illegal
income be exonerated on this basis (Al Capone and a notable sports
figure both immediately come to mind).

?Capone agreed it didn't make sense for the government to try and
collect legal taxes on illegal income. Filing such a return, he
figured, would violate the Fifth Amendment right not to incriminate
one's self."
AL CAPONE REVISITED
http://www.shout.net/~bigred/Capone.html

Why is that you might ask? Well, because the government is already
aware of this approach and has already armed themselves with backup
precedents:

?There is no constitutional right to refuse to file an income tax
return because of the Fifth Amendment (United States v. Sullivan, 274
U.S. 259 (1927)). In Sullivan, the court upheld a conviction for
failure to make a return. It held the Fifth Amendment generally does
not authorize one to refuse to state their amount of income.?

AUDIT-SPOOFING
Common Tax Protest Schemes
http://www.unclefed.com/Audit-Proofing/step4-2.html

So you see, whether or not the reporting of illegal income prompts a
parallel criminal investigation into one?s criminal enterprise may
depend in large part on many factors, including but not limited to
perhaps, what the enterprise is, where it took place, how lucrative it
might have been, what it involved and many other factors. Note that I
am a RESEARCHER not a LAWYER (and our disclaimer below) but since
there are published laws in place (like the RICO Act, for example)
that facilitate the freezing and confiscating of criminally-derived
assets, it is not at all improbable that one could very well face
prosecution outside the scope of the tax code for these kinds of
activities, even though in the majority of cases it does seems to work
most often the other way (in other words, a criminal prosecution more
often seems to be followed up by a prosecution under US Tax Codes than
the other way around).

I hope you find that my research exceeds your expectations. If you
have any questions about my research please post a clarification
request prior to rating the answer. Otherwise, I welcome your rating
and your final comments and I look forward to working with you again
in the near future. Thank you for bringing your question to us.

Best regards;
Tutuzdad ? Google Answers Researcher


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REPORTING

Maybe I'm off base, but what happens if you substitute the word
"undocumented" for "criminal" in describing the income.   How much
does the IRS know about how the income is generated?  Provided the
laws for paying taxes owed and reporting income earned are followed,
is the IRS really going to figure out that the money was earned
illegally?

Your question was, "If a criminal wants to avoid prosecution for
income tax evasion, can he declare the illegally earned income without
raising a red flag for law enforcement?  what laws apply?"

The answer to your question is findable via a Google search,
://www.google.com/search?hl=en&lr=&rls=GGLD%2CGGLD%3A2004-01%2CGGLD%3Aen&q=%22voluntary+disclosure%22++site%3Airs.gov&btnG=Search

As stated in the first reference under the above search,
http://www.irs.gov/newsroom/article/0,,id=104361,00.html
Voluntary Disclosure Practice

(1)  It is currently the practice of the IRS that a voluntary
disclosure will be considered along with all other factors in the
investigation in determining whether criminal prosecution will be
recommended.  This voluntary disclosure practice creates no
substantive or procedural rights for taxpayers, but rather is a matter
of internal IRS practice, provided solely for guidance to IRS
personnel.  Taxpayers cannot rely on the fact that other similarly
situated taxpayers may not have been recommended for criminal
prosecution.

(2)  A voluntary disclosure will not automatically guarantee immunity
from  prosecution; however, a voluntary disclosure may result in
prosecution not being recommended.  This practice does not apply to
taxpayers with illegal source income.

(3)  A voluntary disclosure occurs when the communication is truthful,
timely, complete, and when:

a.  the taxpayer shows a willingness to cooperate (and  does in fact
cooperate) with the IRS in determining his or her correct tax
liability; and

b.   the taxpayer makes good faith arrangements with the IRS to pay in
full, the tax, interest, and any penalties determined by the IRS to be
applicable.

(4) A disclosure is timely if it is received before:

a.  the IRS has initiated a civil examination or criminal
investigation of the taxpayer, or has notified the taxpayer that it
intends to commence such an examination or investigation;

b.  the IRS has received information from a third party (e.g.,
informant, other governmental agency, or the media) alerting the IRS
to the specific taxpayer?s noncompliance;

c.  the IRS has initiated a civil examination or criminal
investigation which is directly related to the specific liability of
the taxpayer; or

d.  the IRS has acquired information directly related to the specific
liability of the taxpayer from a criminal enforcement action (e.g.,
search warrant, grand jury subpoena).

(5)  Any taxpayer who contacts the IRS in person or through a
representative regarding voluntary disclosure will be directed to
Criminal Investigation for evaluation of the disclosure.  Special
agents are encouraged to consult Area Counsel, Criminal Tax on
voluntary disclosure issues.

Thank you for adding that Richard. It was quite helpful.

I appreciate it.

tutuzdad-ga