Taxable Income. Should money got by stealing be taxed?

[Technosoul]

Loan Default Warning. "the unpaid balance of your loan plus the interest due will be reported to the IRS as taxable income".

Apparently we have a law that if you pay back a loan on time it will not be taxed as income but if you are late making the loan payment it can be concidered as income (because you kept the money instead or repaying it). And a loan company is mandated under law to report such income so that it can be taxed (interest included). Once the report is made you will be taxed for that income even if you make good on the loan later on.
You would be taxed only on what is past due, not the amount of the whole loan. News to me.

This seems odd to me because if a person does not repay a loan that is like stealing money. It is basically unlawful for a person to violate such a contract. So now the IRS is collecting money for unlawful income? What's up with that? Is stealing now a business that can be lawfully taxed like any other buisness or "worker income"? It seems that this makes the occupation of stealing money for an income an "acceptable" kind of work in the eyes of the Federal Government. Or am I just imagining something here that is not true?

Any comments?

[Jack]

The person receiving the loan didn't steal the money. It was willingly loaned with the understanding it would be repaid. If it isn't, then as you said, it can be considered income and they'd have to pay the taxes on it. And they'd still be expected to repay the loan.

[Technosoul]

Quote by: Isherwood The person receiving the loan didn't steal the money. It was willingly loaned with the understanding it would be repaid. If it isn't, then as you said, it can be considered income and they'd have to pay the taxes on it. And they'd still be expected to repay the loan.

Interesting, and I guess that makes sense. And loan companies can use "fear of the IRS" to aid them in collecting those payments. I knew this was the case for student loans but know that the IRS could collect extra taxes for amounts people get behind on, when paying back a business loan. As it works out when you pay the loan "double taxes" on the same money unless you can later deduct the taxes collected before the they paid off the loan when they do pay back the money. And how is "interest not paid" seen as income is a little preplexing?

Here is the situation.

1. - a company offers a pension fund so when people retire they get a check from the fomer employer for so much each month for so many years (until they reach age 65). This was done to encourge people to take early retirement instead of getting laid off, due to downsizing.

It is possible to get a loan on the total amount still due to the person which would be deducted from the total later if not paid back. (in other words you would get more money back if you did not take out such a loan and did not repay it). So in theory the amount of the loan is already covered assuming the person lived long enough to collect all the money due them by that "retirement perk option". But the person gets two months behind and owes $130.00on the loan on monies that were set aside in their name and which they would have recieved anyway later on, while still getting normal monthy check from that retirement fund. So they would pay income tax now because of late repayments into their fund plus taxes later when the money comes via a monthy check (if loan is paid back). Kind of confusing unless one is a fast thinker.

[tivodan1116]

Quote by: Technosoul Apparently we have a law that if you pay back a loan on time it will not be taxed as income but if you are late making the loan payment it can be concidered as income (because you kept the money instead or repaying it).

No, that is a loan DEFAULT warning. You don't report the amount as income until you are never going to pay it back. It's not merely for a late payment.

And a loan company is mandated under law to report such income so that it can be taxed (interest included). Once the report is made you will be taxed for that income even if you make good on the loan later on.

If you make good later on you can deduct the amount of taxes paid on that money, and it's a wash.

The reason why this is the case is because our tax code taxes "all gains not specifically excluded" and when you have a debt canceled you have a net increase in your position in life - a gain.

This seems odd to me because if a person does not repay a loan that is like stealing money.

Not really.

So now the IRS is collecting money for unlawful income? What's up with that? Is stealing now a business that can be lawfully taxed like any other buisness or "worker income"? It seems that this makes the occupation of stealing money for an income an "acceptable" kind of work in the eyes of the Federal Government. Or am I just imagining something here that is not true?

The IRS requires that ALL income be reported, regardless of whether it is from legitimate sources. There have been court cases on this (mostly during Prohibition) and the Courts have determined that illegal income is income nonetheless.

Interesting historical note - you know how they finally got Al Capone put away for a long time? It wasn't the bootlegging, racketeering, murder, robbery, fencing, or any of the other illegal things. It was tax evasion. Even if your money comes in from criminal activities, you gotta pay the taxes on it.

[Mr. Jaggers]

It is income from forgiveness of indebtedness. See article at:
Debt Forgiveness Outside the B Word

By the bye, the IRS assesses tax liability on income from illegal activity. The the fact that the income was obtained illegally does not make it exempt from taxation.

[rmnunez]

Just right, income is taxable regardless of its provenance.

I'd suggest characterizing unlawful income as donations, contributions, charity, or product of a not-for-profit activity, to exempt it from taxation.

[tivodan1116]

Quote by: rmnunez I'd suggest characterizing unlawful income as donations, contributions, charity, or product of a not-for-profit activity, to exempt it from taxation.

I'd suggest not listening to this advice, because it is in fact illegal to do this.

[rmnunez]

Though it may be illegal to mischaracterize income to evade taxes, the suggestion is for a hypothetical where the income is from illicit activity. If one honestly characterized income produced through theft they'd likely be in more trouble than if they concealed the theft by describing the income as a donation or something non-taxable.

[tivodan1116]

Quote by: rmnunez Though it may be illegal to mischaracterize income to evade taxes, the suggestion is for a hypothetical where the income is from illicit activity. If one honestly characterized income produced through theft they'd likely be in more trouble than if they concealed the theft by describing the income as a donation or something non-taxable.

False. They could merely calculate the income as wages, which it would be, without saying it was theft.

That is legal. It is illegal to characterize taxable income as non-taxable money.

[Mr. Jaggers]

Contrary to popular belief, it is not baseball but "tax avoidance" that is the national pastime. There are hardly any of us that are not constantly worried that we are paying more taxes than our neighbors (it is sort of the reverse psychology of “keeping up with the Jones”); and willing to go to extraordinary lengths, and engage in schemes and fictions, all the more to make ourselves ridiculous, in an effort to avoid paying our fair share. The game cannot be carried too far, however, for there is a critical difference between tax avoidance and “tax evasion” which is punishable as a felony. See 26 U.S.C. § 7201.

[Marilyn Monroe]

Quote by: Technosoul Loan Default Warning. "the unpaid balance of your loan plus the interest due will be reported to the IRS as taxable income". Apparently we have a law that if you pay back a loan on time it will not be taxed as income but if you are late making the loan payment it can be concidered as income (because you kept the money instead or repaying it). And a loan company is mandated under law to report such income so that it can be taxed (interest included). Once the report is made you will be taxed for that income even if you make good on the loan later on. You would be taxed only on what is past due, not the amount of the whole loan. News to me. This seems odd to me because if a person does not repay a loan that is like stealing money. It is basically unlawful for a person to violate such a contract. So now the IRS is collecting money for unlawful income? What's up with that? Is stealing now a business that can be lawfully taxed like any other buisness or "worker income"? It seems that this makes the occupation of stealing money for an income an "acceptable" kind of work in the eyes of the Federal Government. Or am I just imagining something here that is not true? Any comments?

The IRS can estimate income also because a lot of people get paid under the table and put their assetts in other people's names which the IRS can disallow. Drugs dealers that are living in fancy homes, have fancy cars etc. can be taxed because they are getting "income" from somewhere. Income is income and it's taxable. Martha Stewart, those Enron guys, were probably doing some hiding of assets, so they get tagged. The government has to operate, so legal or illegal you have to pay up. This doesn't make it acceptable to the government, but people are people and they're dishonest. Just a fact of life.

[Mr. Jaggers]

Taxpayer: "Can I claim my dog as a dependent on my tax return?"

Tax Accountant: "You'd have to be able to prove kinship under the IRS Code."

Taxpayer: "Damn! Well, I'll be a son of a bitch!"