The IRS reminds me of Debo from the movie Friday!

No matter how you receive income, where you receive income, or why you receive income, you can bet that the IRS wants their fair share of it.

Most people know that income from your job or investment is taxable.

But you’d be surprised at the number of things that are considered taxable that you never would have thought of.

And we’ll be talking about that in today’s post – the 10 most outrageous things you are taxed on.

Let’s dive in!

Top 10 Outrageous Things You Are Taxed On

1. Illegal Activities

The first one on our list of outrageous things you are taxed on probably never crossed your mind – illegal activities.

Yup, you read that right!

Even criminals are required to report their income to the IRS.

So if you are involved in say embezzlement, theft, or any other illegal activity, all income derived is considered a part of your “gross income.”

The most well-known case of illegal activities and taxes is the case of Al Capone.

You see in the 1930s Al Capone was the leader of a criminal organization in Chicago.

He didn’t land in jail for bootlegging alcohol during the prohibition. He didn’t even land in jail for murder!

The FBI didn’t have enough evidence.

But in 1931, Capone was found guilty of 22 counts of federal income tax evasion and was convicted to 11 years in federal prison, in addition to $215,000 plus interest due on back taxes.

You see, despite publicly displaying his wealth, Capone never filed a Federal tax return.

A grave mistake.

2. Found Property

In 2020, a man at Diamonds State Park in Arkansas thought he found a piece of glass.

The dark stone about the size of a marble turned out to be a 9-carat diamond worth more than 1 million dollars. It’s the second-largest diamond ever found at the state park.

You bet he was smiling the entire way home.

And do you know who else was smiling? The IRS!

Because if you find and keep lost or abandoned property, the IRS would like you to pay taxes on it.

The new-found property is taxable to you at its fair market value in the first year that it is in your undisputed possession.

The thought behind this so-called “treasure trove” tax dates back to 1964 when a couple found $4,467 inside a used piano they had bought for $15.

The IRS ruled that the couple owed income tax on the found cash and the U.S. District Court agreed with them.

3. Alimony

Before 2019, the payer of alimony was able to deduct the payments from their income, and the receiving spouse didn’t need to include the payments in their income at all.

Well, the Tax Cuts and Jobs Act (TCJA) was the divorce party pooper and removed the deduction from the tax code for all divorces agreements and decrees that start between 2019 and 2025.

In that time period, alimony can not be used as a deduction for the person who pays it, and must be reported as income for the person that receives it.

4. Bribes

Are you a crooked politician or someone who occasionally takes money in exchange for government contracts?

If so, this one is for you.

In 2011, two U.S. Army Corps of Engineers employees pulled off the largest bribery and bid-rigging scheme in the history of federal contracting, according to a US attorney.

They didn’t get to enjoy their inflated income for too long before they were arrested and charged with taking kickbacks worth over 20 million dollars from contractors in exchange for large government contracts and inflating invoices.

Not only was the FBI looking into them, but so was the IRS.

That’s because, on page 74 of Publication 17 from the IRS, it clearly states, “If you receive a bribe, include it in your income.”

5. Canceled Debt

The ability to get a portion of your debt canceled by a creditor is considered a victory. A victory that the IRS would like to celebrate with you.

In general, if you have debt that is canceled, forgiven, or discharged for less than the amount you were originally required to pay…

…the amount of the canceled debt is taxable, and you must report the canceled debt on your tax return for the year the cancellation occurs.

For example, if you have a debt of $5,000 and the creditor states you can just pay $3,000, you have $2,000 of cancellation debt that must be reported as income on your taxes.

This applies to credit cards, mortgages, and almost all other debt.

But there are a few exceptions, like student loans and debt discharged because of bankruptcy.

6. Employee Rewards

Are you a standout employee? Did you get rewarded in the form of extra cash or trips?

If so, you may have to pay taxes on the value of your reward.

That’s because gifts from an employer to employee (outside the context of employment) are generally taxable to the recipient as supplemental wages.

Over 4 decades ago, the supreme court ruled in the Commissioner v. Duberstein case that a transfer only constitutes a tax-free gift if it is made through:

• “detached and disinterested generosity” or
• “out of affection, respect, admiration, charity or like impulses.”

Unfortunately, gifts for doing good at your job do not meet the requirement for a tax-free gift.

7. Unemployment Benefits

In April 2020, the unemployment rate reached 14.7% – the highest rate observed since data collection began in 1948.

Due to the national crisis, there has been an unprecedented surge in unemployment claims in the United States with millions of people receiving unemployment benefits and some still receiving them to this day.

What some don’t know is that unemployment benefits are taxable at the federal level and may be taxable at the state level too.

Be sure to check your Form 1099-G sent by the IRS that will show you if any taxes were removed from your unemployment benefits.

If not, you may owe taxes on the benefits.

8. Gambling Income

Gambling income is considered taxable income at the federal level, and may be taxable at your state level too.

Gambling includes, but is not limited to, casinos, lotteries, fantasy sports, racetracks, game shows, and sweepstakes.

If your winnings are large enough, you will receive form W2-G from the payer, but it is your responsibility to report the income even if you do not.

9. Scholarships

In general, if scholarship funds are used for qualified expenses such as tuition and fees, books, and course-related costs such as supplies or software, the scholarship is tax free.

If a portion of the scholarship goes toward non-qualified expenses such as room, board and travel, then that portion of the scholarship is taxable.

10. Bartering

Last on our list of outrageous things you are taxed on is bartering.

Businesses who barter for services or goods are expected to report the exchange on their tax returns.

According to the IRS, if you barter, you must report on your tax return the fair market value of the products or services you received in the year you received it.

And, both parties must report as income the value of the goods and services received in the exchange.

But don’t get too nervous because there are some exceptions.

The IRS provides some clarity by stating that:

“The term doesn’t include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis (for example, a babysitting cooperative run by neighborhood parents).”

Wrapping Up

Well, there you have it – a list of outrageous things you are taxed on.

If you have more questions about your taxes, then work with our accountants for business taxes today. And, we also offer tax resolution services.

Contact us now to get started!