IRS Warns Crypto Tax Enforcement Will Rise

The IRS released its 2022 Criminal Investigation Annual Report. In it, the Criminal Investigation division announced the implementation of their Advanced Collaboration and Data Center (“ACDC”). This will act as the central data center for the IRS, with access to data scientists, cybercrime special agents, computer scientists, and experts from other federal agencies.

While the ACDC will help identify many sources of fraudulent activity, it is primarily focused on digital asset tax enforcement. This new data center will work in tandem with the Office of Cyber and Forensic services that was created in 2021.

What does this mean for taxpayers?

It is clear that the IRS has had cryptocurrency high on its priority list for some time. While the ACDC and additional internal IRS teams will be mainly focused on identifying criminal wrongdoing, the IRS could use such resources to identify any level of digital asset noncompliance. Since 2019, taxpayers have been required to answer a “yes/no'' question regarding their crypto tax activity (it is since been updated to include all digital assets). As a result, it will be much easier for the IRS to identify willful noncompliance. Similar to FBARs, willful noncompliance carries heftier penalties.

With the creation of new entities and reporting requirements, the IRS has made it clear that digital asset enforcement will exponentially increase in the near future. It’s hard to determine if a majority of the enforcement will surface through audits or criminal investigations. However, as the IRS increases the frequency of such enforcement, auditors and agents will become more effective in their assessment of digital assets. 

What can you do to make sure you are in compliance?

If you have not reported all digital asset transactions correctly, it is critical to take steps to ensure you are in compliance with current guidance and regulations:

• Review prior returns to confirm the “yes/no” question was answered accurately

• Compare the purchase/sale information reported on your tax returns to those in your records to confirm there were no unreported transactions

• Review your records to confirm the cost basis of digital assets is accurate

• Review your records to confirm all mining or staking activity was reported correctly

• Amend prior returns to reflect any unreported transactions, incorrect cost basis or omitted income

Once you can confirm that all activity is properly reflected on prior returns, it is important to:

• Review and organize any substantiation for your digital asset transactions

• Maintain accurate records using personal ledgers or online software

• Stay informed of any changes to digital asset reporting requirements

I can imagine there are countless individuals who are currently not in compliance with digital asset reporting requirements. It is important to remember, while the “normal” IRS statute of limitations for audits is three years, it can be increased at the discretion of the IRS if a substantial error is found. The statute can also be extended indefinitely if the IRS can prove a fraudulent tax return was filed.

Bottom line. The IRS is looking to set a precedent in the crypto tax space. If you stay in compliance they cannot make an example of you.