Colleen Matthews had just turned 22 when her hard work finally started to pay off. Six months earlier Colleen graduated from a state university with a master’s degree in accounting. Colleen graduated with honors and was one of the youngest in her class. Unlike most of the intellectuals she had studied with throughout her career, Colleen was extremely social and had great communication skills. After graduation she took a job with a welI-known regional accounting firm. The firm specialized in assisting companies with their technology problems. Colleen knew that the connections and knowledge she would gain working for the firm would be beneficial throughout her career. Now, six months after graduation, she has a full-time job offer with one of the firm’s strongest clients.
Within a few days on her new job, Colleen adapted to her new environment. Colleen and two other recent graduates were running the entire accounting department. However, it wasn’t long until Colleen began to notice that something wasn’t right. After a few weeks, Colleen realized that the firm’s executives were participating in illegal transactions. The company executives were importing expensive technological products from China and selling them under the table to contacts unknown to Colleen. Once the firm received the products at the shipping dock, the executives’ “personal employees” marked the products and took them to a separate location. The entire operation was done with little paperwork. The money received from the special products received special attention. Colleen was told to report this inflow of cash in an account called “Personal Executive Consulting Services.” This categorization allowed the executives to personally use the money at their convenience.
Even though the money is from illegal sources, are the executives required to report the income on their annual tax returns?