As the United States grapples with the fallout from COVID-19, IRS Criminal Investigation (IRS-CI) continues to prioritize cryptocurrency tax fraud investigations. As reported in October 2018, the Internal Revenue Service (IRS or Service) estimates that potentially unreported cryptocurrency tax liabilities represent about 2.5 percent of the more than $450 billion tax gap (or more than $11 billion). See Internal Revenue Serv., Information Reporting Advisory Committee Public Report (Oct. 2018).
Almost three years ago, the U.S. District Court for 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). Coinbase complied with this order and provided the IRS with valuable information for possible civil and criminal investigations.
While initially working in private, the IRS has since been publicizing its efforts. Specifically, more than a year after announcing its Virtual Currency Compliance Campaign, the IRS sent over 10,000 letters in summer 2019 to taxpayers whom the Service suspected had not reported and paid taxes resulting from cryptocurrency transactions. The IRS did not stop with these letters. The IRS also issued additional taxpayer guidance and added a question to the Form 1040 individual tax return regarding cryptocurrency/virtual currency. Rather than announce a new voluntary disclosure campaign, the IRS added a category to the IRS’s existing voluntary disclosure program when it issued a new form (Form 14457) this past April. For the remainder of this year and at least into next, both IRS-CI and the IRS’s new Fraud Enforcement Office director should continue to prioritize cryptocurrency investigations as part of the Service’s efforts to deter the use of cryptocurrency to commit tax fraud and evade payment of tax. IRS-CI highlighted some of its efforts in its 2019 annual report (detailing domestic efforts as well as international efforts in connection with the Joint Chiefs of Global Tax Enforcement (J5), further described below) and through numerous public events, including the most recent virtual events held by New York University’s Tax Controversy Forum in June and the ABA Tax Section in July. 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.