On his 2011 tax return, Youssef Youssefzadeh reported interest and dividends on Schedule B of his Form 1040. He did not, however, indicate the source of this income. Instead, he invoked his Fifth Amendment privilege, claiming that provision of this additional information would be self-incriminating.
In response, the IRS issued a penalty for filing a frivolous return under IRC Section 6702. But Youssefzadeh contested the penalty, took his case to Tax Court, and eventually won, claiming that his return while not complete was still substantially correct.
So why would Youssefzadeh not want to reveal the source of his interest and dividend income? It is unlawful to willfully fail to file an FBAR, which discloses ownership of foreign financial accounts. Meanwhile, IRC Section 61 defines gross income as “all income from whatever source derived,” even if it’s illegal.
In other words, he was trying to thread the needle of claiming income to stay out of trouble with the IRS without revealing its source to get in trouble with the Feds. So if Al Capone had claimed his bootlegging income but invoked the Fifth on its source, maybe he would have avoided getting caught for tax evasion.