Biden Administration Proposals Will Greatly Enhance IRS’ Ability to Identify Cryptocurrency Transactions

The Biden Administration and the Internal Revenue Service (IRS) continue to focus heavily on cryptocurrency tax enforcement issues. On May 20, 2021, the US Department of the Treasury (Treasury) released the American Families Plan Tax Compliance Agenda, a 22-page report detailing tax compliance measures that are to be included as part of US President Joe Biden’s American Families Plan. The report sets forth a number of initiatives designed to “close the tax gap,” identify the underreporting of tax liabilities and detect tax evasion. These measures, which are part of an $80 billion proposal for the IRS, would significantly enhance the agencies’ ability to address the challenges involved with finding taxes that result from virtual currency transactions.

The Treasury’s report notes that “[c]ryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” To address this issue, the Biden Administration is proposing “additional resources for the IRS to address the growth of cryptoassets.”

Most notably, the Biden Administration is proposing enhanced reporting requirements for domestic and foreign financial accounts that specifically address cryptocurrency. Financial institutions, including “cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies” would be required to submit third-party annual reports of all “gross inflows and outflows” from business and personal accounts to the IRS using a form similar to the IRS 1099-INT. Additionally, “businesses that receive cryptoassets with a fair market value of more than $10,000 would be reported on” in a manner similar to how cash transactions are reported on Currency Transaction Reports. These new reporting requirements would dramatically increase the IRS’ ability to identify and detect unreported cryptocurrency transactions.

The report also reemphasizes the need to devote additional funding to the IRS. The Biden Administration is seeking $80 billion in additional funding so that the Treasury and IRS can, among other things, hire “new specialized enforcement staff” and “revitalize[e] the IRS’s examination of large corporations, partnerships, and global high-wealth and high-income individuals.”

Additionally, the Biden Administration plans to overhaul the IRS’ IT systems and capabilities. These IT enhancements are designed to “help support a staff capable of deploying new analytical techniques” and “developing machine learning capabilities [that] will enable the IRS to leverage the information it collects to better identify tax returns for compliance review.” Given the inherent difficulties in identifying cryptocurrency users who have failed to comply with the internal revenue laws, increased data collection and analytics capabilities would be invaluable for the IRS.

The IRS has already been ramping up its cryptocurrency tax enforcement efforts by issuing John Doe summons to various cryptocurrency exchanges, working with industry experts and foreign law enforcement. If implemented, the American Families Plan Tax Compliance Agenda would provide the IRS with extensive new tools and resources for these ongoing enforcement activities.

Practice Point: If you have engaged in cryptocurrency transactions, now is the time to analyze whether you have any civil or criminal exposure and prepare for a government inquiry by gathering all of your transaction records. For example, you will need to know and be able to prove things such as the dates the crypto was bought and sold, the amount transacted, the exchanges used and whether you had a hard or soft fork. You should also consider whether you need to seek legal advice and analysis to bolster the position you did or did not take on your tax returns, Foreign Bank Account Report (FBAR) filings, etc., and whether you should amend your returns to take a different tax position or seek forgiveness under the IRS’ voluntary disclosure program. Preparation is the key to a successful and efficient resolution of tax issues.

Julian AndréJulian André
Julian L. André focuses his practice on litigation with a particular emphasis on government prosecutions, enforcement actions and investigations, internal investigations, complex civil litigation and appellate matters. He is an experienced trial attorney and former federal prosecutor.


Carlos F. OrtizCarlos F. Ortiz
Carlos F. Ortiz is a member of the Litigation and White Collar Defense teams and his work has a particular emphasis on white collar defense and investigations. He uses his prominent 15-year background as a high-level federal prosecutor to assist clients with matters relating to the Foreign Corrupt Practices Act (FCPA), high-risk tax controversies, offshore tax issues, anti-money laundering, e-commerce fraud, healthcare fraud, as well as allegations of fraud against government agencies and financial institutions. Over his career in private practice he has secured the declination of criminal charges for corporate and individual clients. On several occasions he has prevented the referral of charges for the target of criminal tax investigations.


Kevin SpencerKevin Spencer
Kevin Spencer focuses his practice on tax controversy issues. Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and reasonable compensation, civil and criminal tax penalties, IRS procedures, reportable transactions and tax shelters, renewable energy, state and local tax, and private client matters. After earning his Master of Tax degree, Kevin had the privilege to clerk for the Honorable Robert P. Ruwe on the US Tax Court. Read Kevin Spencer's full bio.


Katharine SuominenKatharine Suominen
Katharine Suominen focuses her practice on litigation matters, including complex commercial litigation for public and private companies, white collar criminal defense and investigations, internal corporate investigations and design and implementation of compliance programs and insurance coverage disputes.

STAY CONNECTED

TOPICS

ARCHIVES