Cryptocurrency Tax Investigations

Cryptocurrency Tax Investigations

Cryptocurrency Tax Investigations: As the US government had referenced several years back, they foresaw that cryptocurrency would go the way of the Swiss Bank Numbered Accounts — and to some degree they were right. While has become a more common and legitimate from of payment (although not technically currency), there are still users to rely on Crypto solely for anonymity. Fast-forward to 2021 in which the value of cryptocurrency has surged. Despite its more commonplace usage throughout the marketplace, the US government — and specifically the IRS — does not particularly like cryptocurrency for two main reasons:

• Anonymity; and
• It is not treated as currency by the US Government

Since cryptocurrency aims to be anonymous, it makes it very difficult for the US government to investigate and enforce tax rules involving cryptocurrency and US Tax. In addition, since cryptocurrency is not considered currency per se and is not treated as currency by the Internal Revenue Service — the tax rules and regulations involving cryptocurrency are very complicated.

This is compounded by the fact that cryptocurrency is oftentimes used as currency — noting that each time cryptocurrency is exchanged it is a taxable event.

This has led to the IRS taking serious issue with cryptocurrency and significantly increasing enforcement.

Crypto Soft Letters

The IRS has sent various soft letters to taxpayers using IRS letter 6173, 6174, and 6174-A.

All of these letters essentially say the same thing, which is that if you have cryptocurrency or have engaged in crypto transactions and have not properly reported to the US government — you should do so.

While these letters are technically not audit letters, if you received one then it would reflect that the IRS may have you in their crosshairs and you may consider getting into compliance.

Crypto Tax Audits

Cryptocurrency tax audits are also on the rise.

Unlike a soft letter which is essentially a warning or reminder that you should get into compliance if you have not already done so — an audit/examination notice means the IRS wants to investigate you.

It doesn’t necessarily mean anything major is at issue — or that you may be subject to a more scrutinized special agent investigation. Rather, it just means that for one reason or another, your number came up and the IRS is going to assess your cryptocurrency transactions to determine whether or not you have been tax compliant.

Operation Hidden Treasure

Recently, the IRS let it be known that they had developed a new faction of the fraud investigation unit designed to enforce crypto currency related matters.

As reported by Coindesk:

• • • The U.S. Internal Revenue Service (IRS) appears to be stepping up its enforcement capabilities with a new program dedicated to cryptocurrency tax compliance. 

    • With “Operation Hidden Treasure,” the IRS will search for unreported crypto-related income, according to Director of the Office of Fraud Enforcement Damon Rowe. 

      • Speaking at a Federal Bar Association virtual tax conference, Rowe said cryptocurrency fraud will be a priority. Forbes first reported the news. 
      • Operation Hidden Treasure, a joint effort between the IRS’ civil office of fraud enforcement and its criminal investigation unit, will train agents to look at blockchains to root out tax evasion among cryptocurrency users. It will exist as part of the office’s emerging threats mitigation team, Forbes said.
      • IRS employees are also reportedly training alongside the European Union Agency for Law Enforcement Cooperation (Europol) as part of the initiative. 

Carolyn Schenck, national fraud counsel in the IRS Office of Chief Counsel, told conference-goers the agency is working with private contractors and vendors, presumably blockchain analytics firms, to develop “signatures,” or telltale signs of fraudulent activity. 

• • • • These indicators include looking at those who structure transactions just below reporting requirements (like sending a series of $10,000 transactions), using shell corporations to hide funds as well as “getting on and off the chain,” Schenck reportedly said. 
      • The IRS has sent conflicting messages to U.S. crypto holders several times in the past. Most recently, an updated FAQ page indicated that investors who simply bought “virtual currency with real currency” would not have to report that transaction on this year’s tax returns. 
      • Still, cashing out crypto or making every-day purchases is typically seen as a taxable event. Operation Hidden Treasure is designed to find, trace, and attribute such transactions to taxpayers, Schenck said. 

“These transactions are not anonymous,” she said. “We see you.”

Crypto Enforcement is on the Rise

In conclusion, the Internal Revenue Service and U.S. government are working to uncover anonymous transactions involving cryptocurrency to ensure the transactions are properly taxed and reported by US taxpayers. In general, enforcement has increased significantly.

If you are out of compliance you may consider getting it to compliance.

Golding & Golding: About Our Tax Law Firm

Golding & Golding specializes exclusively in IRS offshore disclosure. 

Contact our firm today for assistance.