Reporting Embezzled Funds
How should we report embezzled funds to the IRS?

Q: We learned recently that a staff member at our church has embezzled church funds. We suspect that as much as $50,000 was stolen, but we have been unable to determine the exact amount with certainty. Are we required to report this to the IRS?

A: Here are several factors to consider in answering your question.

  1. Embezzled funds constitute taxable income to the embezzler. The embezzler has a legal duty to report the full amount of the embezzled funds as taxable income on his or tax return, whether or not the employer reports the embezzled funds as taxable income on the employee's W-2 or 1099. If funds were embezzled in prior years, then the employee will need to file amended tax returns for each of those years to report the illegal income since embezzlement occurs in the year the funds are misappropriated.

    IRS Publication 525 states: "Illegal income, such as stolen or embezzled funds, must be included in your income on line 21 of Form 1040, or on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if from your self-employment activity."

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Posted: April 1, 2009
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