Hacker News Reader

Comment by chris11 | Hacker News Reader

Are you saying that you made money selling drugs, told the IRS that the money was made illegally and nothing happened? I've heard that the IRS definitely focuses on collecting tax money and not how it was made, but I thought that people technically never admitted to anything when declaring illegal income sources. It looks like the applicable part on a 1040 would be line 21, which just asks for "other sources of income".

View on HN

During the course of facilitating a tax audit of a startup I worked at some years ago, I was told by the IRS agent conducting the audit that they in fact have an entire group of agents focused on compliance and audit for prostitutes. It turns out that the IRS' job is to collect money, not to make sure that rules established by other parts of the government are followed ;)

Not quite. What would happen is that people would get rung up on drug trafficking charges and then the IRS would pile on by taxing the undeclared illegal income. In the late 70s/early 80s, a case[1] made its way through the tax courts wherein a petitioner, a convicted drug dealer facing a jeopardy assessment from the IRS, filed a tax return for the prior year in which he declared income calculated net of COGS and other misc business expenses. The IRS disallowed these deductions, which if upheld meant that the petitioner would owe tax on his entire gross income. The petitioner sued and won, which established a precedent that didn't quite gibe with the political climate of the day. In response, the Senate Finance Committee promulgated a code amendment generally referred to as 280E[2], which prohibits those engaged in illegal activities from deducting ordinary and reasonable business expenses when reporting their net income to the IRS. Only COGS can be deducted, which for dispensaries and other non-manufacturing license holders, can result in an effective tax rate of 70% or more. In fact, it's quite easy to lose money and still owe taxes in the industry if you let G&A run away from you.

[1] https://scholar.google.com/scholar_case?case=702348433062253... [2] https://newrevenue.org/2013/03/13/marijuana-tax-code-section...

> told the IRS that the money was made illegally and nothing happened

Is there a checkbox on US tax forms for "illegally earned money"? Or are you expected to put that in a free-text field?

Man, I didn't know this would get so many responses, and I wished I could remember better from 30 years ago. So I apologize for the lack of detail (and I'm not a tax accountant anyway, so do not be taking this as advice or anything but an anecdote). But as I fuzzily recall, just put it in the "other income" box, deduct cost of goods, sorted.

One should also note that (as far as I can tell) the IRS does little more than a cursory glance at most returns to make sure the numbers add up, especially back then. Point being is that it's entirely possible one could have put "income from trafficking under-aged children into white slavery", deducted the cost of acquiring said children, and never gotten flagged because the numbers add up and it doesn't hit the "trying to weasel out of paying what's owed" flag in the computer. Dunno, I'm just relaying an anecdote with a lot of details left out, you sure as hell don't want to take this as tax advice.

Reply on news.ycombinator.com