IRS Asks Congress to Expand Cryptocurrency Enforcement Authority

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:

• Do Cryptocurrency Transactions Above $10K Have to Be Reported to IRS?
• IRS Targeting Cryptocurrency Platforms to Obtain Taxpayer Information