Tax lawyer David W. Klasing warns the IRS anticipates a surge in cryptocurrency-related tax evasion cases. That is driven by anonymity and decentralization, which complicate the ability to track income and enforce laws.
“The IRS expects a rise in crypto tax evasion cases as taxpayers file their returns, with a focus on ‘pure crypto tax crimes’ involving unreported income and concealed crypto assets,” Klasing said. “To address these issues, the agency is collaborating with blockchain companies to enhance their ability to trace and investigate complex crypto transactions. Significant crypto asset seizures and increased civil and criminal tax enforcement efforts are on the horizon.”
Klasing identified some traits that could attract Uncle Sam:
- Failure to file a return in one or more years;
- History of not reporting taxable crypto transactions; and
- History of reporting a position unsubstantiated by audits.
If a taxpayer who has willfully committed tax crimes self-reports through a voluntary disclosure before the IRS has started an audit, investigation or prosecution, they can often be brought into compliance. Klasing suggests they can “receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.”
“Only an attorney has the attorney-client privilege and work product privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution,” he added. “Moreover, only an attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself).”
Klasing said the IRS began anticipating an increase in crypto tax evasion cases at least as far back as April. Their head of criminal investigations, Guy Ficco, expects more Title 26 crypto cases in 2024 and beyond. The agency has made those links before but is now prepared to act more extensively.
This includes “pure crypto tax crimes,” which directly violate federal income tax laws related to cryptocurrency. They include failing to report income from crypto sales or hiding the true origin of crypto assets.
The IRS has partnered with Chainalysis and other blockchain companies to better track complex crypto transactions. Klasing said this has improved the agency’s ability to pursue crypto scofflaws.
The list of common cryptocurrency-related tax evasion schemes begins with using multiple wallets, as folks attempt to conceal their total assets. Off-shore accounts are another tactic, though Klasing advises that increased international cooperation between tax authorities increases the risk.
Some investors falsely report transactions by underreporting gains and overreporting losses in an attempt to reduce overall taxable income. The IRS is catching up here, too.
“Privacy coins, like Monero or Zcash, offer enhanced anonymity features, making transactions harder to trace,” Klasing said. “Some people use these coins to hide their crypto activities from the IRS. While privacy coins can provide legitimate privacy for users, they can also be misused for tax evasion purposes. The IRS has developed tools to investigate transactions involving privacy coins, making this method less secure.”
Other strategies include unreported peer-to-peer transactions, which occur outside of exchanges. Klasing advised that P2P transactions are subject to tax law. Other dodgy moves include using unregistered exchanges and bartering with cryptocurrency.