The 2022 IRS Annual Criminal Investigation Report it sent a clear and direct signal that the IRS's cryptocurrency enforcement efforts are just getting started. IRS criminal investigations โseized record amounts of data and cryptocurrencyโ that included $7 billion in digital assets for tax year 2022, according to the report, doubling the previous year's total.
The agency has jumped into digital asset enforcement efforts after publishing guidance on the tax principles that apply to transactions using virtual currency. This guidance requires taxpayers to disclose their cryptocurrency holdings and is fully described in Notice 2014-21.
The IRS also updated its initial definition of virtual currencies to a broader interpretation of digital assets. This broadens the definition of virtual currencies to everything digital, including non-fungible tokens and stablecoins.
Taxpayers should note that the IRS has also updated Form 1040 for tax year 2022 regarding digital asset transactions. Changed the reporting question on the form to read: โAt some point during 2022, did you: (a) receive (as a reward, prize, or compensation); or (b) sell, trade, give away, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?โ
Further updating this language at the front of Form 1040 sends a clear message that digital asset reporting is a high priority. Former IRS Commissioner Charles Rettig has testified on multiple occasions that lightly regulated digital assets have contributed significantly to the growing tax gap, which Rettig estimated could reach $1 trillion a year.
Congress has provided much-needed legislation on infrastructure and tax and climate initiatives to combat non-compliance. The new infrastructure law creates the framework to define a digital asset broker, as well as new information reporting requirements.
The IRS is reportedly developing new information about declaration reports, including the relevant forms 1099-Digital Asset (1099-DA) and 8300-DA (8300-DA); however, an implementation date has not been determined. These forms will certainly increase overall reporting transparency and provide the IRS with additional data to inform compliance efforts.
As part of the new tax and climate law, the IRS received an additional $45 billion for enforcement activities, which specifically references "digital asset tracking and compliance activitiesโ as part of the financing. In an unsurprising move, the new funding has led the agency to build teams that will be ready to act. The Annual Report of Criminal Investigations indicated that in fiscal year 2023, it will create the Advanced Collaboration and Data Center, which will enhance the agency's tools for investigating and analyzing digital assets through tracking, monitoring, and basic calculations.
The IRS has also established a new IRS Digital Assets project manager, who will report directly to the deputy commissioner for services and enforcement. This role will oversee the implementation and execution of the IRS's new enterprise digital asset strategy and work with a team of leaders across all business units to improve compliance and enforcement, improve customer service, and establish data and technology protocols.
The IRS has also contracted with third parties to help it track digital asset transactions using blockchain forensic tracing, as well as software and technology to help it process digital asset exchange data. In short, the IRS has moved incredibly quickly to assemble its enforcement units, establish a digital asset strategy, and improve compliance capabilities since incorporating digital assets into taxpayer tax reporting requirements in recent years.
court activity
Looking back on 2022, the US District Court for the Central District of California granted IRS authorization to issue a John Doe subpoena at SFOX, a Los Angeles digital currency broker. The subpoena requests information about US taxpayers who participated in transactions of $20,000 or more between 2016 and 2021.
In a related move, the IRS obtained a court order require MY Safra Bank to produce information on US taxpayers who might not have reported crypto transactions to the agency. As part of its John Doe subpoena petition, the IRS noted its interest in SFOX clients, who had used the services of MY Safra Bank. These subpoenas are part of several others that the IRS has sought related to digital currencies. from april 2021but they are also what Chief of Criminal Investigations Jim Lee has described as the development of hundreds of cryptocurrency cases.
The IRS already had success with some of its enforcement actions in 2022, including the founders of Bitqyck and "crypto players." Samuel Mendez and Bruce Bise being sentenced to a total of eight years in prison for tax evasion. the arrest of Ilya Lichtenstein and Heather Morgan for conspiracy to launder cryptocurrency also made the IRS's "win list" for 2022.
Taxpayers involved with digital assets will need to be diligent with their reporting. The IRS will only bolster its compliance units further as its Office of Cyber โโand Forensic Services and other teams continue to orient themselves on these new technologies.
Specifically, Lee has stated that the IRS intends to recruit at least 500 new employees, including 360 special agents, to support the agency's enforcement actions. Civilian enforcement efforts are also expected to increase. These efforts will be executed in conjunction with other government agencies and their cryptocurrency enforcement efforts, including duplicating the Securities and Exchange Commission's Crypto Assets and Cyber โโUnit, as well as the Justice Department's Digital Asset Coordinators Network.
IRS Criminal Investigations is also collaborating with international partners through The Joint Chiefs of Global Tax Enforcement (J5), a joint venture with the criminal tax authorities of the Australian Revenue Office, the Canada Revenue Agency, the Netherlands Tax Investigation and Information, Her Majesty's Revenue and UK Customs. The J5 spearheaded a challenge in which digital asset experts from each country join forces to establish new ways to combat tax fraud and money laundering in the wake of new emerging threats inherent in blockchain technology related to NFTs and the decentralization of finance.
Since 2022 is ending with record IRS compliance numbers related to digital currencies, including stablecoins and NFTs, it's a safe bet to assume that 2023 will be another banner year.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author information
eric hylton is the immediate former IRS Commissioner of Small Business/Self-Employment and current chief compliance officer for alliantgroup.
don sniezek is a former IRS inspection executive and is a senior technical advisor at alliantgroup.
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