Stolen Goods Still Subject to Tax

A Philadelphia man was charged with filing a false tax return for his dealings in stolen copper and scrap metal. Michael Garrison raided power plants for any metals he could salvage, then sold them for $117,000 over a 3-year period.

Besides the obvious legal issue of theft, Mr. Garrison did not report any of this income on his tax returns. Although the income was illegally earned, the IRS still requires you to report income from all sources. Even if he did not sell the metals, he would still be required to report the fair market value of the stolen goods on his tax return. The same premise applies to all illegal income (drug trafficking, gambling, etc.).

But what if Mr. Garrison incurred expenses during his thefts? Would those expenses count as allowable deductions? Maybe.

If the income derived from the illegal activity is business-related, the IRS limits the amount of deductible expenses. For example, drug traffickers can only deduct the cost of goods sold and would owe tax on their gross profit, regardless of their other operating expenses. In other instances, let’s say you are operating an illegal gambling facility, the IRS will allow you to deduct the cost to lease the facility and pay workers, even though the activity itself (operating an unlicensed gambling facility)  is illegal.

This keeps with a common theme: always, always, always report all income to the IRS. No matter the source or legality of the income, it needs to be shown on a tax return. And, always track your expenses. They may end up being deductible, after all.