Many of the people who commit the crime of tax evasion do so to conceal income that was obtained illegally. However, regardless of the source of the income, tax evasion penalties are applied to the income once a person, or business, have been investigated by the Internal Revenue Service (IRS). Those penalties for tax evasion depend on the circumstances of the crime and the investigation, but they must comply with the federal tax evasion lawThe difference between legal and illegal income is clear for the most part.
Legal income is defined as being funds that are obtained through legal employment which are reported to the Internal Revenue Service as a part of an employee's net income during the fiscal year. Illegal income is money that is obtained through illegal means, to include theft or embezzlement, or money that is not reported as a part of an income tax return as part of a person's net income during the fiscal year.
As such, illegal income may be investigated and confiscated should the Internal Revenue Service find that the funds were not listed in the person's net income in addition to other tax evasion penalties. However, the act in which the illegal income was obtained is not prosecuted.
The penalties for tax evasion are noted under Article 26 USC Subtitle F, Chapter 75. This federal law dictates the fines and jail time that can be imposed on persons and businesses that commit tax evasion. The tax evasion penalties include a potential maximum of $100,000 in fines, a potential maximum of five years in jail, or both depending on a judge's ruling on the case. These tax evasion penalties may also be imposed on the state level should a state have it's own tax evasion law or statute.
Aside from the penalties for tax evasion, the illegal income that is associated with the investigation of the Internal Revenue Service can be taxed under the Internal Revenue Code. The reason for this is that the law applies to the net income of a person regardless of its source. Which means the same deductions and strictures apply to the funds as the law does not fall under the title of criminal law.
In one case, Commissioner v. Tellier, it was ruled that an embezzler can receive tax deductions for the legal fees incurred in the investigation of tax evasion. The embezzler was still subject to the penalties for tax evasion, but did receive the deduction as the illegal income was listed as a part of the net income of the defendant.
Other law enforcement agencies may become involved in the investigation of tax evasion, especially if the investigation discovers that there is income obtained illegally involved. The full extent of tax evasion penalties can be imposed in conjunction with the criminal investigation for the method in which the funds were received. For example, Al Capone, an infamous gangster during the 1930s, was convicted of income tax evasion and received the full extent of the penalties for tax evasion along with other criminal charges.