If you’re a regular visitor to our tax law blog, you may have read our recent article detailing the creation of two new agencies within the Internal Revenue Service (IRS), the Nationally Coordinated Investigations Unit (NCIU) and International Tax Enforcement Group (ITEG), whose missions are to focus on increasing taxpayer compliance within the realms of (1) foreign bank account reporting and (2) cryptocurrency reporting. In it, our bitcoin tax attorneys quoted John “Don” Fort, new Chief of the IRS’ Criminal Investigation Division (IRS-CI or IRS-CID), warning taxpayers that anywhere from 10 to 12 agents would be joining the Service in this capacity. Considering recent cuts to the IRS’ budget, the expansion is an unmistakable indicator of just how seriously IRS-CID intends to pursue these initiatives. With Fort recently confirming the addition of 10 investigators, who are receiving support from certain corners of the crypto industry itself, Bitcoin users are urged to discuss matters of tax compliance with an experienced attorney. For those who have not done so already, the time to revisit Bitcoin reporting requirements is now. Tomorrow, it may be too late.
In an interview published in Bloomberg earlier this month, IRS-CID Chief “Don” Fort stated, “It’s possible to use Bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion,” echoing sentiments expressed by such influential political leaders as British Prime Minister Theresa May, Indian Prime Minister Narendra Modi, and domestically, U.S. Treasury Secretary Steve Mnuchin. In an era where offshore tax evasion and Bitcoin tax evasion seem to be quietly flourishing – the IRS claimed that fewer than 900 people reported Bitcoin-related financial activity on their tax forms during the years 2013 through 2015, while the IRS’ long-running Offshore Voluntary Disclosure Program (OVDP) has attracted tens of thousands of previously noncompliant participants, leaving one to wonder how many eligible taxpayers have not come forward – both lawmakers and law enforcers have intensified their efforts to intercept these types of tax offenders, auditing or prosecuting suspected tax evaders (and obtaining a much-needed infusion of cash for the IRS in the process).
Compliance crackdowns are often framed in terms of “us against them”: government tax and law enforcement bodies, like the IRS and Department of Justice (DOJ), against private companies and the taxpayers who use their services. (The contentious legal battle between the IRS and Coinbase, which was successfully subpoenaed for approximately 14,000 user records despite claims of privacy violations and IRS overreach, immediately comes to mind.) However, in furtherance of the IRS’ new crypto-crime initiatives, the government will lean on industry experts for technological support.
One key player, for instance, will be private company Bitfury, a self-described “global team of experts in technology, business, communications, security and civil society” which “develops and delivers both the software and the hardware solutions necessary for businesses, governments, organizations and individuals to securely move an asset across the Blockchain”: the ever-expanding, tamper-resistant digital ledger where Bitcoin transactions are recorded.
Bitfury will help to provide analytical information about Bitcoin transactions to the IRS’ Criminal Investigation Division over the course of the year, with CEO Valery Vavilov stating in January that Bitfury’s “new method [of analyzing transactions on the Bitcoin Blockchain] will help ensure that it lives up to [its] potential by aiding investigations and reducing criminal activity.” He added that his tech business’ “ability to link related addresses, called ‘clustering,’ is an important new tool that helps law enforcement agencies conduct criminal investigations.”
Bitfury advisor Jason Weinstein – previously Deputy Assistant Attorney General for the DOJ, a capacity in which he “oversaw the most significant organized crime, financial crime, cybercrime, and intellectual property theft investigations in America,” according to his law firm’s website – was less reserved in his choice of words.
“Criminals are increasingly learning the Bitcoin Blockchain is not the place for them,” said Weinstein in January. “Having a traceable public ledger of every bitcoin transaction ever conducted allows law enforcement to ‘follow the money’ in a way that would never be possible with cash. Criminals should run, not walk, away from bitcoin. And thanks to Bitfury, today they should be running away even faster.”
Under aggressive new leadership and with outside help from Bitfury and similar companies, IRS-CID is steadily ramping up efforts to identify, intercept, and penalize cryptocurrency tax evaders. If you or your spouse sold, purchased, mined, received, or paid employees using Bitcoin or other digital currencies, including Ripple, Ethereum, Dash, or Litecoin, at any time during the past several years, you may be at elevated risk for a civil tax audit and potentially, a criminal investigation into tax evasion.
If you are worried about your history of compliance with virtual currency reporting requirements with regard to income, capital gains, or foreign accounts, or if you are a Coinbase user who is concerned about the ongoing IRS investigation into company records, it is urgent that you begin to explore your options with an IRS tax lawyer as soon as possible. If you have questions concerning recent transactions made using Bitcoin, Ethereum, or other cryptocurrencies, contact the Tax Law Office of David W. Klasing online right away, or call our tax law firm at (800) 681-1295 to arrange a reduced-rate consultation with an experienced tax attorney. We proudly serve taxpayers and business entities in California and beyond.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
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