Why do you have to prove to the goverment where your money comes from? Do you get taxed for money on hand?

Question

For example lets say I have a million dollars in cash, do I have to prove where it came from.

Suppose I buy a house or a fancy car. Do I have to prove how I payed for it? How does this work?

Answer 1

The IRS may want you to prove where your money comes from because you are subject to income tax. And the Internal Revenue Code imposes tax on "income from whatever source derived." That's why Al Capone went to jail. He didn't declare the income that he made from bootlegging. Notice the code says "whatever source," even if it's an illegal source.

Suppose you buy a house or a car, you may have to prove how you paid for it, and how much you paid for it because the IRS has something called "capital gains tax." This becomes important when you go to sell something as an investment. Let's say you buy a building or house in 2007 for $500,000.00. Then in 2017 you sell the same house or building for $2,500,000.00. So you have $2.5M in your pocket, but do you really? No,of course not, because it cost you half a million to buy the investment in 2007. If you got screwed over by the IRS they would tax you on the full $2.5M in 2017. That would be a mistake because they would not be taking into consideration you "cost" or in tax talk, your "Base." That gets sutracted when calculating how much you "made" on this investment. You are taxed on how much you "made" because again, this is "income from whatever source derived." In tax talk, this is called "Capital Gains Tax." You have probably heard of that. This type of tax gets sub categorized into "short term" or "long term" capital gains tax, depending on how long you wait between the time you bought the investment and the time when you went and sold the investment. Hope this helps!!

Answer 2

Constitutionally you have no legal obligation to supply the government ANY information against your will. They are now calling our unconstitutional tax system "voluntary" to get around that (see "The Law The Never Was"). The fiction "from whatever source derived" was struck down by the U.S. Supreme court in 1916.... (shhhh). Hey Mosha is that really you…. Fred? (Fred works for IRS Compliance Div.)