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TIGTA: IRS Needs to Strengthen Its Digital Asset Enforcement Efforts

By:
Ruth Singleton
Published Date:
Jul 16, 2024

In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) found that while the IRS’s Criminal Investigation (CI) unit investigated 390 cases involving virtual currency between 2018 and 2023, the agency’s “civil examination enforcement efforts focused on digital assets are mostly indirect and negligible.”

The IRS established “Operation Hidden Treasure” as a partnership between its criminal and civil functions “to identify taxpayers who omit digital assets from their tax returns,” the report states. “However, its primary purpose has been limited to the acquisition of tools and training, rather than pursuing taxpayers.”

TIGTA reported that the Infrastructure Investment and Jobs Act, passed in November 2021, requires brokers to file an information return for digital assets transactions in a calendar year. That led the IRS to create a new form to report the information needed to calculate gains (or losses) on transactions. While the legislation was effective for transactions after Jan. 1, 2023, proposed regulations are effective for transactions after Jan.1, 2025, for gross proceeds reporting and Jan.1, 2026, for basis reporting. TIGTA noted that “the proposed two-year implementation delay will hinder efforts to regulate the digital asset industry and may result in lost revenue and taxpayer burden.”

TIGTA made three recommendations, the first two of which were partially redacted. The third one was that the IRS deputy commissioner "ensure that pertinent divisions and functions … develop a compliance plan that includes the use of Form 1099-DA (Digital Assets) data, case identification, and case selection of digital asset cases.” TIGTA reported that IRS management agreed with all three recommendations, but a part of that section in the report providing an example was redacted as well.

TIGTA explained that it initiated the audit “because the use of virtual currency has grown exponentially in recent years. In addition, the number of types of virtual currency has grown significantly since April 2020, from 5,000 to over 26,000 as of July 2023. The anonymity of virtual currency, complicates the IRS’s enforcement efforts. The tax enforcement of virtual currency transactions is a challenge for the IRS because it does not have a clear window into taxpayers’ virtual currency investments or transactions because their names generally are not directly attached.”

TIGTA also reported that the IRS does not consistently get reports from trading platforms on virtual currency transactions. It noted that the number of taxpayers who use virtual currency as a payment method is increasing. It observed,  “Because the IRS regards virtual currency as property, each time a taxpayer uses virtual currency as a medium of exchange it potentially creates taxable consequences. Making payments with virtual currency has emboldened taxpayers to move money offshore, purchase illegal goods and services, and carry out other nefarious activities. Users may feel there is the possibility of avoiding tax reporting obligations.”

Accounting Today quoted IRS chief tax compliance officer Heather Maloy, who responded to the report, saying, "The IRS agrees that digital asset compliance enforcement can be improved." She added, "IRS compliance efforts are still recovering from years of underfunding. The multi-year funding provided by [the Inflation Reduction Act] enables us to hire more enforcement personnel as well as invest in data analytics and technology solutions to support compliance efforts. We will use enhanced data, analytics and technology tools to select compliance cases based on highest risk of noncompliance."

In late June, Accounting Today interviewed Don Fort, former chief of IRS Criminal Investigation and now chief business officer of IVIX, an artificial intelligence-powered platform that is designed to help tax authorities fight financial crimes and tax noncompliance. He explained how IRS CI is using technology to uncover unreported cryptocurrency transactions.

"With crypto right now, no information report," Fort said. "There's a little bit, but it's not the government-mandated 1099, and that won't take effect until January 2025 if it doesn't get delayed, which means you won't see the 1099s until 2026 filings. The prior commissioner and I think this commissioner, and a lot of IRS officials, have talked about that they believe part of the tax gap is attributed to crypto and unreported crypto and capital gains, and buying and selling goods and services in crypto. But how do you find out who these people are? The blockchain is open and publicly available, but it doesn't tell you the person's name, so how does the IRS know that the person even lives in the United States? How does a state know that the person resides within the confines of their state? That's an area where crypto, because it's very technologically heavy, people do generally leave footprints behind that you can make connections, whether they're buying NFTs or things like that. A lot of these people, even though they may not want a taxing authority to know who they are, leave footprints behind."