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  1. #1
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    Default Do You Have to Declare Stolen Money as Income if Ordered to Pay Restitution

    If someone steals money from a business, does not report it on their taxes, and is later caught and ordered to pay restitution to the business they stole from, do they still have a tax obligation?

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    Default Re: Theft and Restitution

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    If someone steals money from a business, does not report it on their taxes, and is later caught and ordered to pay restitution to the business they stole from, do they still have a tax obligation?
    I'm not sure who "their" and "they" refer to in this sentence (especially the first reference to "they"). Your post seems only to mention two persons/entities: the business and the thief, so I assume you're asking about both of them.

    With respect to the thief, the stolen money is, indeed, income that must be reported on his or her federal income tax return. Whether the thief's state taxing agency also considers it to be income is impossible to know since you didn't identify the relevant state. However, I'd be surprised if any of the states that have personal income taxes would not consider it to be income. That the thief is subsequently ordered to pay restitution doesn't change anything, although actually making restitution payments may allow the thief to lower the amount of theft income (if the theft and restitution payments occur in the same year). If the theft and restitution payments occur during different tax years, then the theft would have to be reported as income for the year during which the theft occurred. The thief should consult with a CPA about how to handle the restitution payments in subsequent tax years.

    As for the business that is the victim of the theft, the money stolen can be taken as a deduction in the year that the theft occurred, and the business would have to report any restitution payments as income.

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    Default Re: Theft and Restitution

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    If someone steals money from a business, does not report it on their taxes, and is later caught and ordered to pay restitution to the business they stole from, do they still have a tax obligation?
    If Amy embezzles $50,000 from Ben, her employer, in 2015 then she has $50,000 of income in 2015. If she is caught in 2018 and pays restitution of $50,000 in that year then she gets a deduction for the restitution paid in that year. She cannot simply say it is a wash and not report the income for 2015.

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    Default Re: Theft and Restitution

    Thank you for your replies. So in this case, since Amy did not report the income in 2015, how does the IRS find out about it?

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    Default Re: Theft and Restitution

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    Thank you for your replies. So in this case, since Amy did not report the income in 2015, how does the IRS find out about it?
    As far as I can tell, this is nothing but a hypothetical, and I don't care to write fiction. If you're asking whether the following is possible, the answer is yes: Amy embezzles from her employer. The employer foolishly fails to claim the loss on its income tax return, and Amy -- whether as a result of having committed tax fraud or lack of knowledge of the tax law -- fails to claim what she stole as income. Amy is criminally prosecuted and convicted and ordered to pay, and does pay, restitution. The employer fails to report the restitution as income and Amy's tax return continues not to mention it. The IRS never finds out about this.

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    Default Re: Theft and Restitution

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    Thank you for your replies. So in this case, since Amy did not report the income in 2015, how does the IRS find out about it?
    There are lots of ways the IRS may find out about it. One of the most common is the police refer the matter to the IRS for possible consideration of tax evasion charges. When I was an officer for the IRS I was contacted by the local police in just such a case. The employer may also report the theft to the IRS criminal investigation division. And of course the employer may take a deduction for the theft loss which may also prompt an inquiry by the IRS as to who got the money. If the theft makes the news, the IRS may pick it up from that, too.

    While the IRS & DOJ ds not charge most embezzlers criminally for tax evasion, it is certainly possible if the amount is significant and not reported. Even if they do not pursue criminal charges, the IRS will assess the additional tax, interest and at least a negligence penalty of 20% or a fraud penalty of 75% of the unreported tax. If Amy reports the income herself before the IRS opens a criminal investigation she will save herself the possibility of criminal prosecution. If she reports the income before the IRS opens an audit she will save herself the possibility of a fraud penalty and might even avoid the negligence penalty. She will, of course, in all events owe the tax and interest. She really ought to consult a tax attorney about this — other kinds of tax pros are not a good choice here because the possibility of potential tax evasion charges means she'll want the benefit of the attorney-client privilege.

    By the way, if the IRS asserts that the delinquency was due to civil or criminal fraud there is no statute of limitation on when the IRS may assess the tax, penalties, and interest due.

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    Default Re: Theft and Restitution

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    If someone steals money from a business, does not report it on their taxes, and is later caught and ordered to pay restitution to the business they stole from, do they still have a tax obligation?
    It's like some States have "Drug Tax Stamps", you sell drugs, (emphasis added), you must buy a tax stamp. In reality who does. If caught without a tax stamp, that is a separate crime, even if you did not sell it for income purposes, again, who reports drug money income.

    Another similar example, you rob a bank of 50 grand, that is taxable income, and also a criminal offense, of course, but you can't be charged with possession of stolen property.

  8. #8
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    Default Re: Theft and Restitution

    You guys are all great. Thank you. This is an actual scenario, not fiction as indicated, and my parents' were the victims. With tax season coming up I was curious about how the IRS view the restitution payments and if the fact that the person was making payments absolved her from having to pay taxes on the amounts stolen in the previous years. I appreciate your time, as always

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