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Tax professionals are preparing for increased scrutiny of digital currencies as the IRS ramps up its expertise in cryptocurrencies.
Digital assets are one of the agency’s “priority areas,” according to a press release sent out last week. The IRS announced it has hired two former crypto executives to strengthen its digital currency services, reporting, compliance, and enforcement programs.
“Everyone has been waiting for this wave of enforcement activity,” said James Creech, an attorney and senior manager at accounting firm Baker Tilly.
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With billions of dollars in funding enacted through the Inflation Control Act, the IRS is focused on reversing historically low audit rates for high-income individuals, corporations, and complex partnerships.
Digital currency tax investigations involving unreported capital gains, mining, and other income by the bureau’s criminal division have also increased, according to the bureau’s 2023 annual report.
Eric Hilton, director of domestic compliance at Alliant Group, also expects civil lawsuits to increase due to John Doe subpoenas, where the IRS requires companies to hand over data on crypto transactions that exceed certain thresholds. .
Hilton, a former head of the IRS’s small business and self-employed division, said these actions would result in a “substantial amount” of cryptocurrency enforcement.
“Where the hammer falls”
Another way the IRS collects cryptographic data is through questions about digital assets on the cover of an individual’s tax return.
Starting in 2019, taxpayers will be required to answer the “yes” or “no” questions on Form 1040 and answer honestly, said Ryan Losi, a certified public accountant and executive vice president at Piasic, a CPA firm. Failure to do so could result in IRS scrutiny.
“When you see a consistent pattern of deception that starts to look intentional, that’s where the hammer comes down,” he said.
Increase reporting to “close the tax gap”
As part of a broader effort to “close the tax gap,” the U.S. Treasury Department and IRS released proposed tax reporting in August. Regulation of cryptocurrencies, non-fungible tokens and other digital assets. Applies to transactions in 2025.
Mandating annual tax reporting by digital currency brokers was originally enacted in 2021 through President Joe Biden’s bipartisan infrastructure deal. The measure is estimated to raise nearly $28 billion over 10 years, according to the Joint Committee on Taxation.
But crypto tax reporting is “very patchy” because the rules are fluid, Baker Tilly’s Creech said.
Currently, exchanges submit various forms, which often do not include the exact “criterion” used to calculate the profit, i.e. the original purchase price. “You’re very selfish when it comes to reporting,” he added.
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