Yes, they are. Of course they are. And if they don't, when they don't, then they're guilty of yet another crime, tax fraud. That's how Al Capone got busted.
Incidentally, because of arguments about entrapment, about there actually not being a way to report ill gotten gains on a tax return, the federal government has actually included a line on the 1040 that asks for the amount of income received from illegal activities over the year. That is the line drug dealers are legally required to honestly complete on their tax returns.