Tax Cheat Whistleblower Who Got Millions from IRS Will Owe Millions ... to the IRS

Bradley Birkenfeld
Bradley Birkenfeld just got some good news and some bad news.

The good news was that he got a $104 million payment from the IRS for his role in catching tax evaders using Swiss banks to hide money. Under the IRS whistleblower program, which was designed to give private individuals incentives to catch major tax cheats, the whistleblower gets a cut of whatever the IRS recovers in unpaid taxes. In Birkenfeld's case, his work in helping the government collect a $780 million fine entitled him to the nine-figure payday.

The bad news: He could have to pay more than $35 million of that right back to the IRS when he files his taxes.

No Good Deed Goes Untaxed

A couple of years ago, the Tax Court looked at a case involving a similar payout under the False Claims Act. The court found that the award was entirely taxable, and although expenses that the whistleblower paid were eligible to be treated as miscellaneous itemized deductions, the whistleblower couldn't just exclude those expenses from income.

If the same rules apply to Birkenfeld's award, his payment easily pushes him into the top 35% tax bracket. And if Birkenfeld is subject to state taxes, he could have another big chunk of money taken away.

Taxing Lotteries, Garage Sales, Panhandling, and Lemonade Stands

Of course, Birkenfeld isn't the only big winner -- or small windfall recipient -- to owe big bucks to the IRS.

The Feds happily tax lottery winners on their multimillion-dollar payouts, leaving them with far less of an after-tax award than the headline numbers you hear about. Fortunately, many states make lottery proceeds exempt from state income tax, letting you keep at least a little more of your winnings.

Holding a garage sale? Be careful. Many people rely on garage sales for some extra cash, and as long as you don't receive more than you paid for an item, then you won't need to report sales. But if you hit the jackpot with an undiscovered antique that brings you some extra money, you can expect the IRS to claim its share of your good fortune.

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The same holds true for selling things through online auctions. Potentially more problematic is that if you do garage sales or online sales regularly enough that they look like an ongoing business, you could end up treated as a self-employed person and have to pay employment-related taxes on top of regular income tax.

Panhandlers are also subject to tax for the money they receive. Although gifts ordinarily don't count as taxable income, the IRS apparently sees begging as an occupation. With minimum income guidelines for having to file a return, though, most panhandlers probably wouldn't need to file a return in any event.

Believe it or not, even your kid's lemonade stand may get attention from tax officials. A surprising number of incidents involving lemonade stands getting shut down have come up in recent years, with the stands facing allegations of not obtaining required licenses or meeting health regulations.

Crime pays ... the IRS

Perhaps the funniest tax, though, has to do with proceeds from criminal activities. Earlier this year, one tax preparation company said that a person came in asking if she had to pay taxes on $2,000 in proceeds she had earned selling cocaine. After consulting with the IRS, the preparer told the client that she would indeed have to declare the drug proceeds as income. According to a report, the taxpayer ended up putting the words "dealing cocaine" on the tax return as the explanation for the income.

As silly as that may sound, not declaring illegal income has gotten plenty of people in trouble. Al Capone is probably the most notorious, but numerous criminals have found themselves targeted not for their primary crimes but instead for not giving the IRS its fair share.

So the next time you're filing your taxes, be sure to think twice before you leave something out. You might owe more than you think.

You can follow Motley Fool contributor Dan Caplinger on Twitter at @DanCaplinger.


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