The Internal Revenue Service (IRS) is continuing its cryptocurrency crackdown...
The Internal Revenue Service (IRS) is continuing its cryptocurrency crackdown. Earlier this month, the agency asked Congress for additional funding and greater legal authority to bolster its efforts to regulate cryptocurrencies and increase tax compliance.
IRS Ramping Up Crypto Enforcement
As discussed in prior posts, virtual currency is treated as property for federal tax purposes. Accordingly, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, may have tax consequences that may result in a tax liability. However, the IRS contends that many taxpayers are shirking their tax obligations when it comes to crypto transactions.
The IRS also argues that, given its anonymity, cryptocurrency is particularly attractive to taxpayers who may be looking to hide taxable income. However, the agency has acknowledged that enforcement is challenging because cryptocurrency transactions are difficult to trace, particularly in the absence of third-party reporting to the IRS.
On May 20, 2021, the U.S. Department of Treasury released a report outlining the Biden Administration’s proposed tax compliance measures, which includes requiring that crypto transactions exceeding $10,000 be reported to the IRS. The IRS has also issued a series of John Doe Summons to cryptocurrency platforms seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the certain time periods.
IRS Budget Requests Crypto Funding
In its Fiscal Year 2022 Budget, the IRS is asking for $32 million to support its cryptocurrency initiatives. According to the agency, funding for this investment will allow the IRS’s Criminal Investigation division (IRS-CI) to:
Expand the use of specialized contractor support service provided by a group of cyber/crypto experts;
Build an internal dashboard for cryptocurrency/blockchain analytics;
Establish a One-IRS approach to cryptocurrency non-compliance around both tax and non-tax case development; and
Seek private sector expertise in applied analytics, cybercrime, forensic accounting/discovery support, investigative support, and related consulting services.
As explained in the budget document, an outside contractor is working to build an internal, CI-owned dashboard, called STRIKES, for cryptocurrency/blockchain analytics. This tool harnesses the power of existing vendor products to combine them and take advantage of the strengths each provides. Due to the interoperability with IRS-CI data (Cyber data, Under Cover (UC) information, subpoenas, search warrants, Open-source intelligence (OSINT)), this tool will soon become an agency-wide capability.
The IRS’s FY 2022 budget also discusses establishing a One-IRS approach for cryptocurrency and hiring additional contractors to carry out the initiative. “Partnering with other IRS business units, this contract would bring on investigators to provide illicit activity pattern identification and monitoring,” the IRS states. “Paired with extensive intelligence gathering, these contractors would supply proactive lead generation around tax compliance and illegal activities involving cryptocurrency.”
IRS Asks Congress to Expand Authority
The IRS is also asking for more authority to regulate cryptocurrency. In testimony before the Senate Finance Committee regarding the IRS FY 2022 budget, IRS Commissioner Charles Rettig acknowledged that the IRS may lack the necessary regulatory authority in issues related to information reporting on cryptocurrency.
“I think we need Congressional authority,” Rettig said. “As you’re aware, we get challenged frequently and to have a clear dictate from Congress and the authority of us to collect that information is critical,” he said. Rettig also emphasized that because most crypto virtual currencies are designed to stay off the radar screen, the IRS faces challenges in enforcement. “We’re very active in both the civil and the criminal enforcement world. We do need additional tools, we absolutely need additional resources,” said Rettig.
Key Takeaway
The IRS continues to demonstrate that crypto compliance is a top priority. We encourage entities and individuals with potential legal exposure related to cryptocurrency to closely monitor this rapidly evolving area of law and consult with an experienced attorney regarding how to limit your potential liability.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Jeff Pittard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
This article is a part of an ongoing series covering legal updates relating to cryptocurrency. The last few articles can be found below:
Zoning Laws Explained: What You Need to Know Before Buying Property
Before buying property, it is critical to determine whether local zoning laws may affect your plans. If you plan to redevelop the property, you will want to confirm that local zoning regulations permit development as intended. If acquiring property that is already developed, you must verify that the use is permitted in the underlying zoning […]
Special Needs Trusts in New Jersey: Planning for Your Loved One’s Future
For parents of a child with a disability, estate planning raises concerns that go well beyond deciding who will inherit their assets. Parents may spend years making sure their child has the right care, services, and support. Eventually, they must also confront a difficult question: Who will take over when they can no longer do […]
What Every Real Estate Investor Should Know Before Buying a Rental Property
Before buying a New Jersey rental property, an investor should verify realistic operating numbers, the property’s legal and regulatory status, lead-based paint and flood compliance, the existing leases and tenant protections, and the right ownership structure. A rental property is more than a piece of real estate; it is an operating business subject to legal, […]
Can You Change an Irrevocable Trust in New Jersey?
In New Jersey, an irrevocable trust can sometimes be modified even though its name suggests otherwise, and one of the primary tools for doing so is a process called decanting. Whether decanting is available depends on the specific terms of the trust and the discretion given to the trustee. Key takeaways: New Jersey has no […]
How Intellectual Property Valuation Will Impact Business Transactions
Intellectual property valuation determines the monetary value of a business’s IP assets, and it drives outcomes in licensing deals, joint ventures, mergers and acquisitions, financing, and ownership disputes. The most valuable assets of a business are often the things that cannot be seen or touched: a proprietary process, a copyrighted work, brand recognition, or the […]
Data Center, Dark Fiber, and Lit Services Agreements in New Jersey: Key Terms and Legal Pitfalls
For New Jersey data center owners and operators, a service agreement may look routine when it is signed. The network is functioning, the vendor is meeting its installation schedule, and the parties have agreed on pricing and performance specifications. The provisions that seem most important at that stage are often the technical ones. That changes […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
