Suppose you go on vacation with your lovely wife to Costa Rica. While there, you take surfing lessons. You get up on the board, and you are such a natural (naturally), the instructor asks if you wouldn't mind helping teach some more of his advanced students. You have a few hours to spare, so you say "sure, why not?" He pays you handsomely, and your American students also tip you extravagantly. For the two hours work you pocket the equivalent of $500 U.S.
The question is, do you have to tell the IRS anything?
The answer is yes. The courts have interpreted the Constitution and the 16th Amendment as giving the IRS the power to tax you on any income you receive anywhere. No other country in the world does this.
Anyway, the law is the law. Sure, I guess one could argue that this over-broad interpretation of the 16th Amendment is illogical because it completely undermines the specific intent that James Madison and the rest of the founders had in only granting the Federal government limited, specific powers.
Thanks to Dan Mitchell at the Center for Freedom and Prosperity