Don’t Do the Crime If You Can’t Do the Time

Americans are raised from childhood to believe that crime doesn’t pay. But any adult who opens their eyes realizes crime actually pays quite well. As Glenn Frey sang in his 1985 hit, Smuggler’s Blues, “It’s the lure of easy money, it’s got a very strong appeal.” And so a Ponzi schemer buys lavish homes in Palm Beach and the Hamptons. A U.S. Senator accepts gold bars and wads of cash to lobby for a foreign country. A crypto scammer collects penthouses in the Bahamas and makes lavish political donations that he candidly admits are bribes. On and on it goes, until the unexpected day comes when suddenly crime doesn’t pay, and the whole thing comes crashing to a halt.

It’s worth taking a closer look at some of the indictments that come down when the music stops. Bernie Madoff pled guilty to 11 felonies, including securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, theft from an employee benefit plan, and making false filings with the SEC. New Jersey Senator Bob Menendez is facing three felonies, including conspiracy to commit bribery, conspiracy to commit honest services fraud, and conspiracy to commit extortion under color of official right. And former crypto king Sam Bankman-Fried goes to trial next month on 13 charges, including wire fraud, conspiracy to commit money laundering, and campaign finance violations. Notice what none of them were charged with? Failing to pay tax on their loot!

That’s right, boys and girls. Crime doesn’t just pay, it pays tax-free. Or does it?

Code Section 61 states that “Except as otherwise provided in this subtitle, gross income includes all income from whatever sources derived.” And you won’t be surprised to learn there’s no statutory exception for illegal income. IRS Publication 17 tells taxpayers to report “income from illegal activities, such as money from dealing illegal drugs.” Even worse, “if you steal property, you must report its fair market value,” unless “you return it to its rightful owner in the same year.”

The good news is, as long as you’re reporting your income, you can deduct most of your legitimate business expenses. Items that are “contrary to public policy,” like guns to whack a rival, are out. But if you’re in the protection racket business, you can deduct mileage to visit restaurant owners when you tell them, “Nice business ya got here . . . shame if anything happens to it.”

In practice, of course, few criminals bother reporting their loot. Occasionally, IRS staff will come across filers who list their occupation as “prostitute.” But most who report their illegal income do it to avoid going down for tax evasion if the government can’t convict them of their underlying crimes—that’s how they got Al Capone, after all. And reporting illegal income even offers a planning opportunity: if you’re ordered to pay restitution down the road, your restitution will be deductible!

In the end, then, the real problem with crime is that when you get caught, you don’t just wind up owing the tax. Don’t do the crime if you can’t do the time! Madoff died in prison. Menendez says he’s innocent, but that stash of gold bars sure suggests he’s headed to Club Fed, too. And assuming Bankman-Fried is convicted, he’ll be there long enough to see people harvesting crops on Mars before he gets out.

While there’s not an immediate, practical tip in today’s discussion, the underlying lesson is what’s critical: understanding exactly what income is taxable and what expenses are legitimately deductible, is the heart of effective tax planning. So count on us to guide you through that maze to help you pay less, and rest easy knowing it’s all by the book!