While cryptocurrency owners may be fretting the significant plunge in values from their December 2017 highs, this decline has not stopped Internal Revenue Service Criminal Investigation (IRS-CI) from continuing to investigate the use of cryptocurrency to commit tax fraud and other crimes.
More than a year ago, the Northern District of California ordered Coinbase to disclose information pertaining to more than 13,000 of its customers who have engaged in transactions involving Bitcoin (and possibly other cryptocurrency transactions). United States v. Coinbase, Inc., Case No. 17-cv-01431-JSC, 2017 WL 5890052 (N.D. Cal. Nov. 28, 2017) [hereinafter Opinion]. Coinbase did not appeal. Instead, after informing its customers, Coinbase turned over the information in March 2018. While much of the work is in private, the IRS indicated publicly that it has begun using this information in its investigations.
The IRS is also committed to combating the use of cryptocurrency to commit tax fraud. See IRS, Criminal Investigation Annual Report 2018 (2018) (further detailing its cryptocurrency efforts). As reported in October 2018, the IRS estimates that potentially unreported cryptocurrency tax liabilities represent approximately 2.5 percent—or more than $11 billion—of the over $450 billion tax gap. See IRS, Information Reporting Advisory Committee Public Report (Oct. 2018). Thus, individuals who have used or are contemplating using cryptocurrency to shield income, whether legal- or illegal-source income, should be forewarned and consult an attorney regarding how to proceed.