You read that right - whether you're running a Walter White meth empire or you've pulled off a large bank heist, the IRS says that you're required to declare it on your tax return and pay tax on it.
It's in black and white on the IRS tax instructions:
“Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.”
It's logical to assume that most criminals won't be declaring their income - at least not honestly. However, there are indeed some who do; usually those who have been caught with undeclared income or think they are about to be caught.
It's understandable too - most are trying to avoid getting charged not only for their illegal gains, but also for evading tax. Having noticeable income and tax discrepancies could make them more of a target for investigation, so it makes sense really!
That'd lead any logical person to think that revealing illegal activity to a government agency would grab the attention of law enforcement, but surprisingly, that's not the case.
Legally, the IRS cannot pass on the information to the appropriate law enforcement agencies. The one catch, however, is that if law enforcement obtained a court order to access the tax return, they'd be able to use it against the tax-paying criminal.