Are you required to report “illegal income” on your tax return?

Dear Cecil:

In looking over the instructions that were so thoughtfully included along with Form 1040, I see that "embezzled or other illegal income" is specifically mentioned as a type of income one must report. How long has this been in there? If someone were to report illegal income, would the IRS notify other authorities, or would they be happy just to get their cut?

Cecil replies:

IRS has been listing “embezzled or other illegal income” for years, but they don’t really expect the nation’s criminals to comply. It’s just that income-tax evasion is often the only thing prosecutors can pin on big-time crooks. The notice prevents the bad guys from arguing that nobody told them they were required to report their ill-gotten gains. If anybody was actually dumb enough to send in a list of his swag for the year, the folks at the IRS say they’d promptly alert the appropriate authorities.

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