[Oimie]

I am studying REG and I was just wondering if an individual reports income from selling illegal drugs on their tax return, will they be arrested? Cause if so, I wonder who will be stupid enough to report it. I tried Googling it but couldn’t find an answer.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Anonymous]

Generally people that are going to do something like sell illegal drugs aren't going to be too concerned about ensuring that they paid tax on it. I would guess that the few who do likely describe it in such a way as to be more concealed – something like instead of saying they sell marijuana, say they're in the herbal sales industry; instead of saying they make meth, maybe something like chemical experimentation. I can't imagine anyone being a) willing to break the law enough to sell illegal drugs, b) conscientious enough of the law to still want to pay taxes on their profits, and c) stupid enough to list their work as “Illegal drug sales”.

[Anonymous]

Agree with Lilla. Filing a tax return is not even on their mind. It's funny because if you did file a tax return you can put down your drug cost as COGS lol. I think when they get caught the tax evasion penalty is worse than actually selling the drugs. See Al Capone

[spikesrd]

Lilla answered the shit out of that question. lol

“The reward for work well-done is more work.”

BEC - 05/26/2015 77
AUD - 07/27/2015 88
FAR - 08/31/2015 80
REG - 11/30/2015 73, 04/18/2016 80 Done!!!

[Hammer]

Technically, yes they should report it and can even deduct the “cost of merchandise” but obviously they are criminals and don't. So, they are breaking the law by selling drugs and breaking the law by evading their taxes.

FAR - 70, 81
AUD - 83
BEC - 77
REG - 70, 78

Licensed in Ohio.

Now what the hell do I do?

[tcheney3]

This is huge in the marijuana industry where it is legal by state law, but not federal law. DunkinDonuts is partially right. The COGS can be deducted because purchasing the materials for a medical or non-medical dispensary is not illegal, but the costs of distribution are, and therefore, nondeductible. Like illegal online gambling, virtually all the income in the U.S. goes unreported. Just ask us in Colorado how much a state can make from taxing and legalizing marijuana :). Tax revenue up, crime down.

BEC - 82
REG - 86
FAR - 85
AUD - 84 and I'm out!!!!!
Ethics - 95
In Skynet's Honor:
Act I: Shutdown Skynet and prevent Judgment Day.
Act II: Add a comma and three letters to my title.
Act III: Time Travel and marry a young Denise Richards (and prevent subsequent plastic surgery),return to present.
Act IV: Serve as Successor to Elon Musk as CEO of Tesla.
Act V: Ensure Judgment Day has been stopped. Utopia achieved.

[Missy]

Prob not arrested, the IRS isn't going to drop a dime on someone stupid enough to pay taxes on illegal activity 😉 They want the revenue more than they care about dealing with law abiding citizens.

Nobody will report it but as a student of the CPA its your job to know what is supposed to happen rather than what does. I live in MA and if someone goes to NH to buy a television, they're supposed to report it and pay taxes to the state of MA. If I were a paid preparer I would ask if my client made any out of state purchases. My client would without a doubt insist they hadn't.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Rivens]

A typical drug dealer would not be paying taxes on proceeds from sales of illegal drugs. I doubt they even would know how to file a 1040 or understand who needs to pay taxes. (Actually, a lot of the general public probably don't understand taxes and that's why it's good that employers withhold taxes for them).

Smart drug dealers or at least one who is trying to live a normal life would still not report it as drug income, but if they have a lot of money, they would launder the money in a cash heavy business or use other methods to make illegal cash look like legitimate income, which would be on their tax return and would be taxed.

I have heard prostitutes in Silicon Valley take credit cards, which seems like a bad idea because of the paper trail it creates, but they try to make it look legitimate by having the charges show up as “consulting fees.”

Brah u srs
FAR - 85
BEC - 77
AUD - 71 -> 61 -> 71 -> 67
REG - 75

[Oimie]

Hahaha! Of course I know there's practically no chance a drug dealer would put that down on their tax return. I was just curious as to what the IRS would do if someone were to actually put it down; both income and COGs for the deduction. Would the IRS just ignore it because it isn't part of their job? Or would they notify the police or something?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Anonymous]

What tcheney said. I remember that from REG because I applied it to the (state-legalized) marijuana industry in my mind. I find I can remember concepts much better if I can apply them to real-world examples.

[Anonymous]

They won't report it, but after they are caught it is a good way for the government to make some cash from taxes on their previously unreported income.

[taxgeek83]

Oddly enough, even if the IRS wanted to report it, due to confidentiality and disclosure laws, technically they can't without a court order.

Semi-recent article on the subject:

https://money.cnn.com/2013/02/28/news/economy/illegal-income-tax/

[Anonymous]

It's the Al Capone rule. Nobody really expects illegal activities to be reported on their taxes. So by not reporting them it's a way for the Feds to go after that person. A lot of times they will simply throw every charge they can think of at the person just to see what sticks.

It's also worth noting that there are two variations to these rules:

1. Income from illegal operations must be reported. You may take all LEGAL deductions and expenses. So if you run an illegal casino you can deduct the salary expense but you can't deduct the bribe you paid to city officials as an expense.

2. Rule 1 gets thrown out the window with the sale of illegal drugs. In this case the only deduction you can take is the cost of goods sold. There are some strange laws around that deduction which is why it's allowed.

I think the CPA exam focuses on number 2 only. I remember Becker and NINJA had a question or two relating to the subject. But I remember from my Tax class that all illegal activities except for those dealing with the sale of illegal drugs actually can take normal business expenses but cannot take illegal expenses as deductions.

[Liss, Master of Coin]

I just started watching Boardwalk Empire.

Last night I looked up the real Nucky. They got him on tax evasion too.

OT, @tcheney3, I just saw your signature. If your going to build a time machine, I would love to make a suggestion. Make a pit stop in 2010. Buy 10,000 shares of TSLA, for about $200,000. When you come back to 2015, it'll be worth about $2.4m.

Oh, and if your time machine is originally Terminator style, you may want to wait until 2016. Then you can turn your Model X into a Back to the Future type of time machine. It'd make jumping to different times much easier.

And if you feel like thanking me, I wouldn't say no to a Model S 🙂

CPA (MA, Non-Reporting)

The difference in winning & losing is most often, not quitting - Walt Disney

B - 33, 71, 79!
A - 32, 61, 70, 83!
R - 33, 58, 73, 69, 81!
F - 47, 78! 🙂
After 3 long years, I'm finally DONE!
I could not have done it without NINJA MCQs.

Used: Roger for his Videos, WTB, and NINJA Audio, Notes and Test Bank.

[Skynet]

Oimie, peddling Adderal to CPA candidates at the Prometric Test Center is consider income. You can deduct cost of goods sold though : )

[Tncincy]

SMH….we go from cpa candidates to drug dealers (nothing to do)….lol Technically report any income it is taxable……otherwise keep your big mouth shut and don't live lavish there is no current tax break for illegal activity income. Don't give the presidential candidates a reason to read this site. Reg will be really complicated for those of us still taking this test.

It begins with a 75
Been here too long as a cheerleader....ready to pass

[Author]

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