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As the IRS bolsters its cryptocurrency expertise, tax professionals are bracing for increased scrutiny of digital currency.
Digital assets are one of the agency’s “priority areas,” according to a press release sent last week. The IRS announced it hired two former crypto executives to beef up its digital currency service, reporting, compliance and enforcement programs.
“Everybody’s been waiting for the tidal wave of this enforcement activity,” said James Creech, an attorney and senior manager at accounting firm Baker Tilly.
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With billions of funding enacted via the Inflation Reduction Act, the IRS has focused on reversing historically low audit rates of higher earners, corporations and complex partnerships.
There has also been a rise in digital currency tax investigations from the agency’s crime unit, including unreported capital gains, mining and other income, according to the division’s 2023 annual report.
Eric Hylton, national director of compliance for Alliantgroup, also expects a rise in civil cases prompted by a “John Doe summons,” where the IRS requires companies to turn over crypto transaction data over a certain threshold.
These actions will trigger a “significant amount” of crypto enforcement, said Hylton, who is a former IRS commissioner for the agency’s small business and self-employed division.
‘Where the hammer comes down’
Another way the IRS has been collecting crypto data is via a question about digital assets on the front page of individual tax returns.
Since 2019, taxpayers have had to answer Form 1040’s yes-or-no question, which could invite IRS scrutiny if you haven’t answered truthfully, according to Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik.
“If you’ve consistently shown a pattern of deceitfulness, and it starts to look like willfulness, that’s where the hammer comes down,” he said.
Increased reporting to ‘close the tax gap’
As part of a broader effort to “close the tax gap,” the U.S. Department of the Treasury and the IRS in August rolled out proposed tax reporting regulations for cryptocurrency, non-fungible tokens and other digital assets, which would apply to 2025 transactions.
Mandatory yearly tax reporting from digital currency brokers was originally enacted in 2021 via President Joe Biden’s bipartisan infrastructure deal. According to the Joint Committee on Taxation, the measure was estimated to raise nearly $28 billion over a decade.
But with the rules in flux, crypto tax reporting has been “very hodgepodge,” Baker Tilly’s Creech said.
Currently, exchanges send different forms, often without an accurate “basis” — or your original purchase price — which is used to calculate gains. “You’re very much on your own when it comes to reporting,” he added.