> the IRS even says he legally won it and want to tax him for it
The job of the IRS isn't to pass judgement on the legality of income, just to collect taxes. If you earn money, it's taxable; that's true wether you're a computer consultant, a video poker gambler, a hitman for hire, a drug lord, or Al Capone.
"Bribes. If you receive a bribe, include it in your income."
"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."
And of course they want to have it both ways. For example, income from illegal prostitution is taxable, but associated expenses can not be claimed as a business expense.
>And of course they want to have it both ways. For example, income from illegal prostitution is taxable, but associated expenses can not be claimed as a business expense.
It's complicated and I'm not a lawyer (and certainly not trained in reading court judgements), but this appears to be not true in all cases. Commissioner v. Tellier [1] seems to say that with some well-defined exceptions (although it doesn't appear to go into what those exceptions are), expenses incurred in the development of an illegal business are deductible just like they would be for a legal business. Examples given are paying legal defense fees, and rent and wages paid for a then-illegal gambling operation. So it may well be the case that expenses incurred while developing a career as a prostitute (e.g. phone bills, condoms, advertising, hotel rooms, and travel) could be deductible.
edit: Ah, I read a bit deeper and found the exceptions.
Only where the allowance of a deduction would "frustrate sharply defined national or state policies proscribing particular types of conduct" have we upheld its disallowance [...] Further, the "policies frustrated must be national or state policies evidenced by some governmental declaration of them." [...] Finally, the "test of nondeductibility always is the severity and immediacy of the frustration resulting from allowance of the deduction." [...] In that case, as in Hoover Motor Express Co. v. United States,356 U. S. 38, we upheld the disallowance of deductions claimed by taxpayers for fines and penalties imposed upon them for violating state penal statutes; to allow a deduction in those circumstances would have directly and substantially diluted the actual punishment imposed.
So based on that reading (and again, I'm not a lawyer), it seems like expenses a prostitute incurs would be absolutely deductible, because disallowing them doesn't frustrate the criminalization of the activity.
The belief of the IRS is entirely separate from the issue of theft and bringing it up in this context is just confusing the issue. It's like asking "If they believe he earned it, and the sun is rising, is it before noon?"
Not necessarily. Taking somebody else's property is only theft if you didn't have a legal right to do it. For example, if the IRS levied his property to satisfy the tax debt, that would not legally be theft because the IRS is legally entitled to impose levies for that purpose. It also would not mean that they didn't think he earned the levied property. It just means that they wanted the property and had a legal right to take it.
The job of the IRS isn't to pass judgement on the legality of income, just to collect taxes. If you earn money, it's taxable; that's true wether you're a computer consultant, a video poker gambler, a hitman for hire, a drug lord, or Al Capone.