What is the tax treatment of embezzled funds?

Embezzled funds are treated as taxable income to the person who embezzled them. The reason for this is that the IRS considers any money received—regardless of the circumstances—as income, unless there is a specific exception. In the case of embezzlement, the funds do not qualify as a loan, because a loan implies the expectation of repayment, which is not the case with embezzlement. Therefore, the funds must be reported as income in the year they are embezzled. This treatment aligns with the principles of income taxation, where all gains or benefits received generally count as income.

Other options suggest that embezzled funds could be excluded from income, deemed a gift, or taxed at higher rates, none of which accurately reflect the IRS guidelines on the taxation of illegally obtained funds. Therefore, the assertion that embezzled funds are considered income unless proven otherwise is the accurate approach.