A former senior prosecutor warns that “a high-stakes chicken game” between the Internal Revenue Service (IRS) and cryptocurrency investors who refuse to record their earnings properly will be entering a new process in 2021 when the tax enforcement agency continues to concentrate on pursuing “civil and, potentially, criminal sanctions.”
In an article co-authored by Don Fort today, the former chief of the Internal Revenue Service’s (IRS) criminal investigation division said that while the agency until now has focused its resources on informing the public of proper reporting guidelines, it will now be turning to more stringent “enforcement.”
“The IRS has been not-so-quietly positioning itself for a smooth transition from education to enforcement in 2021 and beyond.”
The article states that the trail begins with Coinbase, which replied to the “John Doe” call in 2018 and turned over account information to almost 13,000 users—information that may quickly lead to crackdowns. For example, the article cites the request made by the IRS to the Luxembourg-based Bitstamp Exchange for information on an American user.
The emphasis on crypto holders is partly due to the widening “tax gap”—the rift between the total tax revenue that should be paid to the treasury verses that it actually receives—a disconnect from which Fort and his co-author Lawrence Sannicandro say that crypto holders could play a major role.
“As of Dec. 10, with bitcoin fresh off new record highs, the market capitalisation of cryptocurrencies was $524 billion,” states the report. “Assuming cryptocurrency-related tax liabilities of $25 billion and a 50 percent enforcement rate, unreported cryptocurrency tax liabilities again account for around 3.2 percent of the $381 billion tax difference. It is also possible that unreported taxable blockchain trades would make a major impact to the tax deficit.”
Ultimately, the article concludes that major trends — such as the addition of a question about cryptocurrency now prominently placed at the top of form 1040 — indicate that the IRS is gearing up for widespread efforts to root out underpayment.
“Even though the IRS has not yet announced many mainstream tax evasion or money laundering cases involving virtual currency, that trend should change in 2021.”
Moreover, crypto holders shouldn’t try to get cute when the tax man comes calling.
“History has shown that underestimating the government is a fool’s game.”
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