As strange as it may sound, U.S. federal tax law requires that stolen property, bribes, kickbacks, and income from other illegal activities be reported as income. And, embezzlers, thieves, and bootleggers are allowed to take deductions for costs relating to generating that criminal “income.”
Due to an extensive network of hidden criminal earnings and witnesses unwilling to testify against him (for fear of their lives), infamous American gangster Al Capone was not prosecuted for illegal activities. He was, however, targeted and convicted of not paying taxes.
The government can collect taxes on illegal activity if it can be proven that an individual received income. Soviet spy Aldrich Ames earned more than $2 million cash for espionage. He was charged with tax evasion because none of the money was reported on his tax return.
Regarding stolen property, IRS instructions note that “if you steal property, you must report its fair market value in your income in that year you steal it, unless in the same year, you return it to its rightful owner.”
The IRS allows embezzlers, thieves, and bootleggers to take deductions for costs related to their criminal activity. A taxpayer who was guilty of violating the Securities Act of 1933 was allowed to deduct the legal fees spent defending himself.
For additional information on “tax absurdities” go to
- What may have been reasons for the tax law actions that may seem absurd?
- What changes would you recommend regarding current tax laws?
- How might a tax system be created to encourage business innovation and job creation?
- Have students research various unusual examples of deductions that have been allowed or disallowed by the IRS.
- Have students present proposals for revision in the current tax laws.