Taxation of illegal income in the United States | Hacker News Reader

Taxation of illegal income in the United States

en.wikipedia.org

85 pointsbobbiechen61 comments

At least one state wants their tax money from illegal income. North Carolina has an Unauthorized Substances Tax, where you buy a tax stamp covering your possession of the items (various drugs and/or moonshine).

https://www.ncdor.gov/taxes-forms/other-taxes-and-fees/unaut...

From talking to folks I used to know at the Department of Revenue, they have never sold any stamps to people in advance of the cops arriving on the scene. Only to stamp collectors.

The tax rate for marijuana is $3.50 for each gram (or fraction thereof) above 42.5 grams. Bulk spirituous liquor is $12.80 per gallon.

Other states do this and even the federal government, I think. They're shooting themselves in the foot. If the path to legal possession is tortuous and likely to incriminate you then you're protected from divulging it and your nonpayment of taxes is wholly legal on the grounds attempting to collect makes the state violate the 5th.

The widespread use of parallel construction -- and even merely its plausibility -- means that the IRS's current stance on reporting illegal income is likely suspect as well.

There have been a number of cases where the legality of requiring tax payment on illicit income hinges on the state tax authorities providing a means of paying said taxes completely anonymously.

Of course they do not expect anyone to pay - this is merely so they can Capone people. It's much easier to nail people for tax evasion than for the actual crimes they committed in a lot of cases.

The irs is prohibited from sharing taxpayer info without a warrant. There have been many cases in the past where your fifth amendment rights have not prevented tax liability or criminal charges for illegal income.

I know, but that doesn't mean it's right.

Ya and the NSA was prohibited from spying on American citizens without a warrant - hows that going?

>The irs is prohibited from sharing taxpayer info without a warrant.

Ok, sure. And I'm supposed to do the dishes before my wife comes home, too.

> Only to stamp collectors.

Or to stamp "collectors?"

The section on marijuana is particularly interesting. You are apparently allowed to deduct ordinary business expenses, even if the business in question is illegal. However, Congress has explicitly disallowed these deductions in the case of illegal drug trafficking. Since marijuana is illegal federally, the courts have ruled that medical and recreational marijuana businesses that are legal under state law may not deduct any of their ordinary business expenses from their federal taxes.

I wonder if that passed the 14th amendment’s equal protection clause. Curious how Congress’ exception is written. Maybe if they tied it to anything on the scheduled substances list then it would pass the 14th amendment.

Edit: > if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law

Ah yes, they wrote it that way. Ok.

It would be interesting to see this challenged for the case where interstate commerce isn't involved. I know the federal government has regularly asserted jurisdiction under the premise that drugs that don't cross state lines still affect interstate prices. I doubt it would be successfully challenged, but it would still be interesting to see it challenged. (I'm not a lawyer. This is not legal advice.)

All commerce is interstate commerce since the constitution got shredded by the courts.

What would be the challenge to affirm, the right to take a tax deduction on purely intrastate commerce? The feds might like that case because it furtheraffirms their ability to tax anyway they seem fit on purely intrastate commerce too.

I think it relies on you taking the deductions to begin with and the IRS saying “heyyy waaait a minute, some of these deductions in the trafficking of scheduled substances violate Section 230E, the others good though!” Which .. isnt really that farfetched but aside from the tax court case you could be facing a defrauding the US government criminal charge, and other stuff actual lawyers might be more aware of.

Slight but important correction. These business are not legal at the state level, their products are decriminalized. Since, as you noted, they are illegal federally, the best states can do is decriminalize. They cannot override the fed status.

Has that actually been decided? The businesses are legal under state law, and if they aren't selling across lines then it's starting to get into gray areas on what enforcement power the feds actually have. Which is probably why they haven't really pushed the issue, because they have reason to believe it wouldn't go their way.

So long as Wickard v. Filburn remains precedent, it is really quite settled. The only question is if it will be enforced. Since the states had voted to legalize it, it is obviously politically unpopular to clamp down on them, but they will likely continue to make the operational aspects of these business very difficult (banking, credit card processing, etc).

> Wickard v. Filburn

At the risk of exposing just how much I am not a lawyer, doesn't that decision rely on the interpretation that the farmer's activities did have a plausible effect on the wider market? Wouldn't that be a tougher sell in the case of cannabis, where there is no national market?

> remains precedent

The current Supreme Court really seems willing to toss aside precedent. I wonder what direction they'd go on this issue.

In the case, the farmer was growing wheat for his own personal use. The justification was that by growing his own, he was opting out of the market, and therefore his actions fell under the commerce clause.

In the case of cannabis, these are literal businesses engaging in the act of buying and selling. Illinois and probably other states differentiate the amount that can be sold to a customer depending on whether or not they are residents or from a different state.

The notion of national market versus not is a red herring; markets are concepts, not tangible things, and the concept exists independent of the government itself. Making something illegal doesn't stop the sale of it, otherwise there would be no point in the DEA existing.

As for the supreme court, one can hope.

This was tested, specifically about weed, in 2005

https://en.wikipedia.org/wiki/Gonzales_v._Raich

The product is Schedule 1 at the Fed level. That is still very much illegal no matter what the states do. But the state can choose not to pursue law enforcement and/or prosecution. And that is what decriminalization is.

The States are at the mercy of the Fed schedule. States can do a lot of things. Legalize is not one of them. The best a state can do is decriminalize.

Put another way, as we all know, these dispensaries are overflowing rich in cash. Why? Because they can't get bank accounts? Why? Because of a lack of true legalization. Again, this is the difference between legalization and decriminalization.

Federal drug enforcement has jurisdiction over the states which have passed bills legalizing these products, and it is the stated position of Federal drug enforcement that they will not pursue any enforcement related to these substances in these states.

Thus the products and the businesses are de facto legal, even if they are de jure not.

That "stated position" is not a legal defense.

What makes something illegal? Someone saying "this is illegal"? Or the ability and intent to enforce that statement?

There are plenty of states/cities with old laws on the books calling all sorts of random things illegal. A search for "old unenforced laws" will yield plenty of humorous examples. But the things these old, unenforced laws refer to are not things that are considered "illegal", except generally in the context of articles about old unenforced laws.

What's the difference between a law that says "this is illegal" but the authorities have no interest in actually pursuing, and a law that says "this is illegal" but the authorities have no interest in actually pursuing?

There's no difference between 'a law that says "this is illegal" but the authorities have no interest in actually pursuing' and 'a law that says "this is illegal" but the authorities have no interest in actually pursuing'.

My definition of "illegal" is "you can be arrested, charged, and convicted."

Intent and actors can change. A DA who says "I won't prosecute {x}" is under no obligation to continue, or even be consistent with, that policy, and the next DA is certainly not bound by it.

That's the point. The states aren't legalizing. They can't. Fed supercedes them. But at the state level they can't choose not to enforce state law, not to prosecute. And that's decriminalization.

The omnibus spending bill, at the federal level decriminalizes state legal medical marijuana. All prosecution is prohibited

Yes, it’s brutal. With the Tax Cut and Jobs Act you can incorporate more expenses in to indirect COGS but sales, marketing, opex, admin are non-deductible.

The legal pot industry will have good profit boost once its economic model is legalized. People in Congress have been trying for over a decade and momentum is building.

I'm not sure. In Canada it's legal and so much money was invested prices plummeted in terms of the cost of marijuana. Maybe not surprising since you can easy grow more than demand.

Once enough producers and retailers go under then you'll probably find some nice equilibrium, but margins will be very small.

In their examples section they mention how a double agent was charged with tax evasion based on $2m of undeclared income from bribes.

But if the agent WERE to mention the income on their tax documents, even as "Unspecified due to 5th amendment protection" that surely would be incriminating enough to cause further investigation from the state. (I assume the US government keeps a close eye on their agents papers).

I'm just not sure how you're supposed to declare ill-gotten gains without 5th amendment worthy self-incrimination.

Presumably investigating someone over that would violate their 5th amendment rights, no?

> Presumably investigating someone over that would violate their 5th amendment rights, no?

You may wish to reread the 5th amendment.

Go on. How is forcing someone to testify against themselves with the threat of criminal charges (tax fraud!) and then using that information in a criminal investigation not a 5th amendment violation.

I’m not a lawyer, I don’t know anything. I’m just curious.

The fifth amendment prevents forcing anyone to testify against themselves, but does not stop investigations.

You asserted that the 5th should prevent an investigation, but it will do nothing of the sort:

> Presumably investigating someone over that would violate their 5th amendment rights, no?

I asserted that 5th amendment should prevent the government from using this coerced testimony.

Would this not taint any investigation started on the basis of coerced testimony? Why would the exclusionary rule not kick in here?

As far as I understand in a criminal context no adverse inference may be drawn from ones refusal to self-incriminate. How would investigating someone for refusing to self-incriminate to the IRS not be exactly that?

E: Found some related literature which I am reading now https://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?art...

If the government asks if you, Bill the graffiti artist, painted any graffiti on the wall of a giant chicken, and you said no. They could still apply a penalty for lying to an LEO if that exists as a law if they can catch you later.

Of course, but the fifth amendment only protects you from self-incrimination if you explicitly invoke it (or keep your mouth shut). Not if you lie.

Does this mean you could fill in illegal income in your taxes and then for the source put down "I plead the 5th"?

Then that would give them a reason to investigate.

They cannot ask you what you're pleading the 5th for, but they can go investigate it, and nail you when and if they find proof of illegal activity.

What if everyone included "I plead the fifth" in their tax filings? Perhaps as a form of protest, or because CFAs and distributors of tax-filing software started adding it to their boilerplate?

>and you said no

You're assuming you have to answer them; the 5th amendment allows you to refuse to respond in any way.

Refusing to respond isn't lying.

>I asserted that 5th amendment should prevent the government from using this coerced testimony.

Again, you did no such thing:

> Presumably investigating someone over that would violate their 5th amendment rights, no?

An investigation can be initiated, and can proceed, without any testimony whatsoever from the accused.

Which coerced testimony are you attempting to refer to? The cops show up and ask you about your tax return, and you say "". Either they continue to investigate you or they don't, but you have not been coerced into saying anything at all.

Obviously, you've been correct the whole way.

> Presumably investigating someone over that would violate their 5th amendment rights, no?

>I asserted that 5th amendment should prevent the government from using this coerced testimony.

This kind of revisionist interpretation, that a poster will engage in to make an altogether different assertion, is not uncommon on HN. Pointing it out gets downvoted, overall making the conversations worse because it's viewed as nitpicking, when it's really just trying to avoid bad faith...wasn't there an article posted about this recently?

I believe that the current legal situation goes further than just keeping people from being compelled to testify. Pleading the 5th also can't be used as evidence against someone (because that would be a form of compulsion), or even as probable cause.

Would someone pleading the 5th count as probable cause? I would hope not. That would go against the idea that you can't be punished for exercising a right.

The answers on https://law.stackexchange.com/questions/76594/if-you-are-a-l... strongly suggest that the IRS generally would not share these papers with other law enforcement agencies (except under very special circumstances).

They don't not share them out of the goodness of their hearts. They're so intentionally understaffed and overworked that they probably don't have time to refer all but the most egregious cases.

If the goal of the IRS is to collect as much tax money as possible, they would, in such a case, have all the incentives to protect your illegal business from being busted.

The IRS has testified against the government on behalf of defendants, but you are still open to harm from illegal parallel construction.

The IRS couldn't manage to keep the detailed tax records of every american out of propublica's hands... Does anyone think they can keep them out of other agencies hands?

I would imagine that in cases where you're earning a significant enough amount of money, the issue isn't whether the government knows you're up to no good, the issue is whether they have admissable evidence that you're up to no good.

My contention is that the mere knowledge that you are reporting income is actionable information to the government and the IRS has no way to guarantee it does not get out.

We should work under general provision: if data is gathered, it will be used. Even if it is not legal today for IRS to do something, it does not mean it will not be tomorrow. And law unfortunately works backwards too.

>I'm just not sure how you're supposed to declare ill-gotten gains without 5th amendment worthy self-incrimination.

curiously, i think similar situation, yet different outcome - "bad guys" aren't required to register their machine guns :)

https://en.wikipedia.org/wiki/National_Firearms_Act#Exceptio...

"The United States Supreme Court has ruled in Haynes v. United States that the Fifth Amendment to the United States Constitution exempts felons—and, by extrapolation, all other prohibited possessors—from the registration requirements of the Act. "

The idea is to have a legal basis to take your money (or part thereof) away should you be convicted of said illegal activity.

That’s why they amended the constitution to collect income taxes. The 16th amendment was necessary for a variety of reasons.

The Supreme Court - the constitutional court - kept squashing attempts to collect one.

It might not be important that it undermines your 5th amendment right when the 16th amendment allows any means necessary - or doesnt limit collection methods.

Well, what's the alternative? Income is only illegal after trial and conviction, and that may not be black and white. If you are a gardener driving a truck that fails emission regulations, you may at some point be fined, but otherwise you just pay taxes on your earnings like everyone else?

Stupid question: can you report your income as illegal on purpose in order to pay tax on it because you fear the wrath of the IRS more than the police? If you don't specify the exact nature of your crimes but only that you wish to pay them more money, will you get audited or get in trouble with the police/DA?

Your tax exempt entities (retirement accounts, non profits) are exempt from a lot of criminal liability because they dont have a tax reporting dilemma.

If only Al Capone used a non profit right? Makes me wonder what might be going on now.

Joker's take on the issue: https://www.youtube.com/watch?v=QK0UxenfV4Q

Tax rate for illegal income should be 100%.

Reply on news.ycombinator.com