If Only Al Capone Had Gone by the IRS Rules

In 20 years of doing my federal income tax returns, I've almost always had to file a Form 1040, the long form, although my income rarely has exceeded $25,000.

For instance, one year I was working in a foreign country and had to flee due to civil unrest. I only earned $3,700, but I was required to file a 1040 and explain why my stay was cut short: "The tanks were scaring me." Happily, I got a refund.

I recently had to file a 1040 because I'd earned "other income" as a University of Iowa research subject. I was paid a handsome $25 for participating in a psych department personality study (they never did tell me if I had a personality).

You're supposed to list the amount of your "other income" in a little space on line 21 of the 1040. I wasn't sure how to exactly describe my other income, so I consulted IRS publication 525, "Taxable and Nontaxable Income."

The section on "Miscellaneous Income" mentioned all sorts of other income - lottery winnings, jury-duty pay, illegal income. That's where I got distracted. "Illegal income, such as stolen or embezzled funds, must be included in your gross income on line 21." Clear enough. But does anyone voluntarily report illegal income?

I started my investigation locally. Gerry Kuhl, an accountant for 30 years at All Tax & Accounting Service in Coralville, Iowa, said no client of his has ever voluntarily reported illegal income.

"I can't imagine anyone being that honest," he said. "But if I were aware of illegal income and the person hadn't reported it, then I couldn't sign the return."

He said he'd heard of a convicted embezzler who was being audited by the IRS. This got him thinking about types of illegal income. "Say you were involved in drug trafficking," he suggested, "or murder for hire." Like any illegal income, murder-for-hire fees must be reported because they're "not specifically exempted by code." I said I'd keep that in mind.

Dan Malaney, district manager of H&R Block in Des Moines, was next to grapple with my question. Dan's been in the business for more than 25 years and has "never personally done a return" that included voluntarily reported illegal income. Like Gerry, Dan took time to reflect. He recalled the case of an embezzler who had to report illegal income after getting caught: "He had to add it on line 21 - and he couldn't take any deductions."

"People who don't have their illegal income laundered and then live high off the hog tend to get investigated by the IRS," Dan cautioned. "But ordinary people who embezzle from the company usually have something draining their money, like college tuition."

It took me weeks, but I finally got ahold of Mike Kochmanski, chief of the Criminal Investigation Division for the IRS Midwest district.

"The illegal income clause has been on the books a long, long time," he said. "It evolved from case law during the Prohibition era might have been the Al Capone case." But he didn't have details, and he'd never heard of anyone who willingly disclosed illegal income. He sounded disappointed.

So if there's anyone out there ready to report your illegal income voluntarily, please list it on line 21 of your 1040 and make my and Gerry's and Dan's and Mike's day. (Don't forget you're supposed to report kickbacks, too.)

* Becky Soglin is a communications writer at the University of Iowa Foundation in Iowa City, Iowa.