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According to a paper by the IRS you should declare illegal income from dealing drugs or stolen property. What's the motivation behind this? And are there examples of people who reported such activities and how they got away with it?

Declaration of other income

CuriousIndeed
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    The answer is a very trivial "They want money". But what is the notable claim? Why's are very likely off topic. –  Aug 04 '17 at 15:54
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    Tax evasion can also be used to hammer criminals when you can't hang a specific crime on them. Famously, Al Capone got done for tax evasion. https://www.fbi.gov/history/famous-cases/al-capone – Paul Johnson Aug 04 '17 at 16:10
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    You just have to tell the IRS that you had income. You don't have to say where that income came from. (They do ask a question about occupation, but the possible answers are quite vague.) – jamesqf Aug 04 '17 at 18:27
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    If I work hard to earn $100,000, and a criminal robs a bank and gets away with $100,000, can you give a logical reason why I should pay tax and the bank robber shouldn't? – gnasher729 Aug 05 '17 at 07:27
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    @gnasher729 Makes me wonder: Can the bank robber deduct professional expenses for the getaway car? – Hagen von Eitzen Aug 05 '17 at 10:26
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    @HagenvonEitzen: I'm in the UK, and I can't deduct transport from my income tax. I suppose 99% of the cost of the getaway car would be someone's income which would have to be declared by that person... – gnasher729 Aug 05 '17 at 13:02
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    @gnasher729: Forget bank robbers. There are still places in the US where being a sex worker or selling marijuana is illegal. So why should people hereabouts (where those things are legal) have to pay tax, while people in more backwards states don't? – jamesqf Aug 05 '17 at 17:45

2 Answers2

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The reasoning behind this is simple, everyone is expected to pay tax on all earned income. Actions that may have been illegal such as drug dealing do not exempt someone from paying their fair share. The US Supreme Court ruled that this was NOT a violation of the 5th amendment because they are only asking about income, not the source of that income. You can read about the finer points of this decision in GARNER v. UNITED STATES

As for examples of people reporting illegal income and then getting caught, I can't find any. The people who do illegal things and report their income to the IRS are career criminals. They have a tendency to stay quiet about these types of things and I don't expect many to speak up lest it draw the attention of the authorities. If you know of any, please let me know.

A Bailey
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    Reading Garner v. United States, would Garner have been safe if he filled out a tax return, claiming say $200,000 income (whatever the correct number) and then refusing to give the source for the income? Or refusing to give the source of his income, claiming his right to not incriminate himself? (He did in fact claim $x income from gambling, which led to his conviction. ) – gnasher729 Aug 05 '17 at 16:43
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    Well, refusing to give the source of his income might fall under the fifth amendment, but "he got 200K from somewhere and doesn't want to talk about why" sounds like a very promising lead for investigation... – Shadur Aug 05 '17 at 20:03
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    @Shadur: But it's not likely that filing an income tax return would start an unrelated investigation into the source of income, as it can't really be shared with law enforcement without a court order: https://www.irs.gov/government-entities/federal-state-local-governments/disclosure-laws – jamesqf Aug 06 '17 at 04:32
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They don't believe you will declare your illegal income. It's a way to stack more potential crimes and charges on those who are criminals. Sometimes you'll get the weird result of the criminal being found not guilty on major criminal charges, but then getting found guilty of not paying taxes on criminal income, despite being cleared on the other charges.

Al Capone, one of the most notorious and violent criminal mob bosses of the Prohibition Era was never convicted of the many murders or other violent crimes he ordered or participated in. He went to jail for income tax evasion.

Capone’s successful conviction set a precedent for future law enforcement officials. Tax evasion would become a popular way to convict participants in organized crime if more substantial evidence was not available.

On This Day: Al Capone Convicted of Income Tax Evasion

It's also a way for law enforcement to "put the screws" to those they deem criminals, since they are usually able to confiscate assets deemed to be from illegal activities, again, even if those illegal activity charges, themselves, don't bear fruit in the form of convictions. Getting a conviction on a charge like this, or even getting an indictment makes it easier for them to fight attempts to reclaim assets. The courts have been pretty open to the idea of "we didn't convict them, but we don't think they can legitimately account for this money, so we're taking it away."

NPR:Police Can Seize And Sell Assets Even When The Owner Broke No Law

PoloHoleSet
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    In Germany, the tax office can look at your life style and conclude that you must have income to pay for it. They will know when you bought an expensive car, for example. If you win the lottery, or win in a casino, you will get a receipt that demonstrates your tax free income. If you can't explain how you pay for your life style, they can conclude that there is undeclared income with lots of negative consequences. Telling them "I have a million Euros one-time income and I don't tell you where it comes from" avoids this. – gnasher729 Aug 05 '17 at 13:08