The IRS has recently announced that it is ramping up its focus on digital currency as part of its priority areas for tax enforcement. To support this effort, the agency has hired two former crypto executives to strengthen its digital currency service, reporting, compliance, and enforcement programs.
According to tax professionals, this increased scrutiny may lead to a wave of enforcement activity. James Creech, an attorney and senior manager at accounting firm Baker Tilly, stated that “everybody’s been waiting for the tidal wave of this enforcement activity.”
The IRS has been focusing on reversing historically low audit rates of higher earners, corporations, and complex partnerships, with billions of funding enacted via the Inflation Reduction Act. Additionally, the agency’s crime unit has seen an increase in digital currency tax investigations, including unreported capital gains, mining, and other income.
Eric Hylton, national director of compliance for Alliantgroup, also predicts a rise in civil cases triggered by a “John Doe summons,” which requires companies to turn over crypto transaction data over a certain threshold.
In 2019, the IRS added a question about digital assets on the front page of individual tax returns. Taxpayers are required to answer this yes-or-no question, and providing false information could lead to IRS scrutiny, according to Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik.
To further close the tax gap, the U.S. Department of the Treasury and the IRS have proposed tax reporting regulations for cryptocurrency, nonfungible tokens, and other digital assets. These regulations would apply to 2025 transactions and were originally enacted in 2021 via President Joe Biden’s bipartisan infrastructure deal. It is estimated that these regulations could raise nearly $28 billion over a decade.
However, with the rules still in flux, crypto tax reporting has been inconsistent and challenging for taxpayers. Currently, exchanges send different forms, often without accurate basis information, making it difficult for taxpayers to accurately report their gains. As a result, tax professionals warn that taxpayers may be on their own when it comes to reporting their digital currency transactions.
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