Why IRS is Redirecting Their Focus Towards Cryptocurrency Tax Evasion

In mid-May, the U.S Treasury Department announced that they would require any transfer of $10,000 or more to be reported to the Internal Revenue Service (IRS). This update comes in response to growing concerns with regard to cryptocurrency compliance. 

While many forms of crypto trading were designed to be hidden or virtually invisible, IRS is far from blind to these transactions. It is suspected that a significant amount of money is laundered through crypto transactions and tax evasion occurs through illegal crypto investing and trading. 

IRS’s initial response to the rise in the use of cryptocurrencies includes training and developing their internal investigative teams to utilize data analytics to trace, identify, and audit suspicious crypto transactions. 

This recent shift in focus towards cryptocurrency violations brings up questions of, “why now?” given that IRS has been defunded and has experienced years of employment shortages, and is currently in a stage of increased recruitment efforts.  Data analytics is hardly a new venture for IRS, it has long been a staple in tracing and audits.  While the blockchain is opaque and there will be elevated challenges around information-gathering, the use of data analytics is the IRS’ best path forward in combating crypto-fraud. 

IRS’s decision to increase its utilization of data analytics tactics comes as an approach to sift through billions of transactions with greater efficiency and ease than they have in the past. This is an ideal response given the previously mentioned employment shortages currently being experienced by IRS. 

Cryptocurrency Growth 

Cryptocurrency continues to grow at an exponential rate. IRS has experienced challenges in keeping up with how quickly the unique industry has grown and evolved over recent years. The implementation of data analytics is a step towards being able to keep up with digital currency, in a way that they have not been able to previously. 

As IRS adjusts to these new processes for tracing and auditing cryptocurrency exchanges, it is predicted that they will be able to increase their success in regulating and addressing the potential of tax evasion. 

Jeffrey Cooper, former executive director of international operations at IRS Criminal Investigation told Accounting Today that it’s a process of ‘follow the money.’ He explained that once money goes into the exchange, they’re able to trace it through data analytics. 

The American Family Plan, put in place by the Biden administration, also helps deal with potential tax compliance issues with cryptocurrency by implementing a new reporting threshold of $10,000. The new reporting requirements will ensure that whatever crypto traders are doing, there will be a clear trail of traceable data to accompany it. 

According to IRS estimates, in 2019 there was a discrepancy of over $600 billion between taxes owed and taxes collected by the agency. 

Changes in the process of implementation are likely to induce upset among crypto investors. That being said, politicians across the board have prioritized crypto regulation among concerns of market manipulation and uninformed retail investments.

For business owners who have thought that crypto is a way to avoid (or evade) tax liability, to move money undetected, or otherwise skirt regulations, the recent rise in interest by IRS and other government entities in regulating the industry should come as a warning.  There are two things that we all can’t avoid…. And one of them is taxes.