Embezzler Forgets Line 21

Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.

So states the IRS in Publication 17 (“Your Income Tax”) and the courts have upheld this. Of course, most people who commit one crime are more than willing to commit a second crime. One Bay Area woman is probably regretting this.

Ann Ray, aka Georgia Engelhart, worked for a family business in San Carlos (in the San Francisco Bay Area). She was their bookkeeper and a trusted employee. She was also an embezzler.

Ms. Ray began liberating funds in the 1980s, and it appears to have started out small. But it kept growing and growing, and by the mid 2000s the take each year was in the hundreds of thousands of dollars. It appears that not only did Ms. Ray have full access to the bank accounts, she also balanced the checkbooks. A standard practice is that the person who balances the bank accounts cannot sign checks in the accounts. But I digress….

Ms. Ray used the funds for personal items, from paying her credit card bills to living the good life on fancy vacations. Somehow, the IRS discovered that something was up, and IRS Criminal Investigations looked into the matter. They discovered the embezzlement, though they apparently could only show that Ms. Ray didn’t pay the taxes on the ill gotten gains. That, though, is a crime, and Ms. Ray pleaded guilty back in July to six counts of tax evasion. Yesterday, Ms. Ray was sentenced to 46 months at ClubFed.

If Ms. Ray had only remembered line 21, she would have been out $1.2 million of the $4.7 million she had embezzled, but would probably still be free. Now, she must also make restitution of the proceeds of her embezzlement and pay the federal government the tax due on the embezzlement.

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