In practice, the IRS might not proactively share information with the FBI. But the IRC does permit such sharing, if required by court order: "... any return or return information with respect to any specified taxable period or periods shall, pursuant to and upon the grant of an ex parte order by a Federal district court judge or magistrate judge under subparagraph (B), be open (but only to the extent necessary as provided in such order) to inspection by, or disclosure to, officers and employees of any Federal agency who are personally and directly engaged in..." (1/2)

"...preparation for any judicial or administrative proceeding pertaining to the enforcement of a specifically designated Federal criminal statute (not involving tax administration) to which the United States or such agency is or may be a party, or pertaining to the case of a missing or exploited child" (2/2)

I worked for a federal financial regulator with someone who previously worked for the IRS as an in-office auditor. This answer is in line with what that co-worker said and how our department worked with tax returns and the IRS.

In order to file the original return claiming the income, you'd have to demonstrate some kind of accounting (the drug dealer sticker-booklets, or something.) If you got audited, all of your financial transactions would come under review for however far back the audit covers. The IRS would have to find some degree of proof of you having somehow attained that as income, and depending on how they classified it, you could easily end up owing 80K as a result (windfall tax.) It could go a lot of ways; personally, I recommend none of them :P

Basically, as far as the IRS is concerned, you'd be self-employed (SB/SE.) They would expect you to file and pay in your own withholding in the form of quarterly estimated income taxes, then when you file your annual return, it would be on a 1099-S (Miscellaneous / self-employed, contractor, etc.) The quarterly filings with whatever accounting you could provide would be referenced if you got audited against whatever financial accounts, assets of value, etc. you own.

""...can deduct bullets, a hitman could too, but I’d expect to get flagged for audit to see how much of what is actually permissible."" -- I would posit that a hitman that uses so much ammo as to require a tax deduction for it is not a very good hitman.

@OpenSorceress Most drug traffickers have a boss, so they could tell the IRS to visit their boss for more details? Not sure how the boss would take that ;)

@zmerch Whether or not the taxpayer is good at their illegal source income thing isn't the question :P and who knows? Maybe that hitman taxpayer is Deadpool :P

@gerrit I hesitate to speculate on cartel industry standards :P but if the job is trafficker, that means they're international and/or at scale, so I'd say they're subcontracting :D

@zmerch I'd imagine that if they need to make a tax deduction on rounds, they're probably using some really hard-to-get bullets, like maybe depleted uranium rounds or such with a little more kick. After all, why charge your client so much money to do the deed, only to use the cheapest bullets you can find? Your clients deserve the best! lol.

@phyrfox If they use depleted uranium rounds, they're probably on the government's payroll ;) (now I wonder how people whose government job is so secret they can't reveal who their employer is report their income…)

@phyrfox Or silver. Maybe our taxpayer hitman only takes contracts on werewolves. XD

It seems that the phrasing "the law affords privacy to all manners of federal income tax matters are more expansively than anything else" may require some revision

@zmerch Either that or they're a seriously good hitman, and get a lot of business as a result :p

@zmerch alternatively, maybe they go to the range and practice shooting like it was their job :D

@user168715 It appears that the carve out you quote applies only to the very specific case of a missing or exploited child, though. So, if trafficking children is your thing, probably best not to file income taxes (well, best for you at least... best for everyone else is if you do file and pay enough income taxes to cover the taxpayer expense of arresting you and rescuing the children.)

@reirab I think that the two type of cases run parallel: to which the United States or such agency is or may be a party, or pertaining to the case of a missing or exploited child (e.g FBI helping a state agency).