IRS Says Crypto Investors Underpaying Taxes
The IRS is increasing crypto audits and enforcement.
IRS Commissioner Chuck Rettig said the total tax gap is more significant than in previous IRS studies. Rettig told the Senate Finance Committee the shortfall might be as much as $1 trillion a year, which is several times larger than previous estimates. He credits part of the increase to cryptocurrency.
The IRS has already started to crack down on tax evasion from crypto investors. The Justice Department announced that it had seized bitcoin worth $3.6 billion in February. It was the largest recovery of alleged crime proceeds in United States history.
When cryptocurrency first came out, the IRS didn’t know what to do about investigating crypto investors for tax fraud. The IRS is employing experts to find crypto tax evaders. Investigators have begun using new sophisticated software that links transactions to people.
Initially, crypto was a useful tool for criminals trying to avoid scrutiny of their transactions. Crypto transactions were recorded, but the identity of the people making the transactions could be obscured. However, law enforcement has improved at piercing the veil of anonymity.
The cryptocurrency was once considered attractive to criminals due to its shield from anonymity. However, with cryptocurrencies, every transaction is included in a public ledger. The ledger is public, and it’s there forever.
The IRS will begin requiring brokers to report transactions. Brokers will be required to report transactions worth at least $10,000 to the IRS beginning in 2023. Additionally, the IRS has increased its enforcement activity and is involved with authorities in Australia, England, Canada, Netherlands, and England to investigate tax evasion.
Beginning in 2023, you will be asked for more personal information than you had in the past. The crypto platforms will be required to verify your identity.
The IRS hasn’t recently reported an estimate on the amount of underpaid taxes from crypto. However, Abate, an analyst of money markets and Treasury Department funding, extrapolated from a 2017 calculation and estimated the current tax gap to be about $50 billion a year.
It is currently difficult for the IRS to determine who owes taxes because counterparties are anonymous. A counterparty is a digital currency used for financial trading based on the bitcoin blockchain.
The IRS is becoming more effective in catching crypto income tax evaders and plans to bring in substantial taxes from crypto tax evaders.
Tax fraud and tax evasion are both federal offenses. Depending on the severity of the evasion, you can face up to $100,000 in fines or up to 5 years in prison.
A voluntary disclosure, if you have previously evaded assessment or payment, can help you avoid criminal proceedings if the IRS hasn’t initiated proceedings already.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org