You could, and sometimes people do actually do this. But that means admitting to the cocaine. You would need to find a rare situation where the statute of limitations for the illegal goods issues has run, but you are still wanting the deduction. A few generations ago people did sometimes pay taxes on totally illegal income, albeit without itemizing where it came from. They did this so they couldn't be charged for tax evasion. They had paid, just with some paperwork errors not listing where it came from.
It's still possible (and advisable) to declare lump sums, but you lose the ability to take any deductions on non-itemized income. There is no obligation to admit to or report the source of said income.
The IRS cannot share information with law enforcement agencies without warrant. So it’s not like they would tell the DEA or FBI about your $1M cocaine cost of goods sold.
Of course when you get busted for drugs, it’s pretty likely that your tax records will be gone through.
I saw a documentary where sex workers had accountants and such and declared all their illegal income. It was pretty interesting. But prostitution isn’t as severely prosecuted as drugs.
Well, they should not. They are perfectly capable of doing so. Try telling them that your business building and selling pipebombs is paying well. Law enforcement will get wind.
