The IRS recently announced “Operation Hidden Treasure,” aimed at identifying unreported crypto-related income. This is just the latest effort by the IRS to crack down on unreported income from cryptocurrency activity. However, this operation comes with teeth. This is a joint operation between the civil fraud unit and the criminal investigations unit. If unreported crypto income is found, it could result in jail time. And make no mistake, the IRS will find unreported income. They have recently had several significant wins, forcing crypto exchanges to provide information on the individuals who traded there. Now they are using that information to track down those people that have not reported that income.
We have learned a few items about this new operation and will discuss each in turn below.
Cryptocurrency is No Longer Anonymous
First, the IRS must figure out who is buying and selling cryptocurrency. While most of the major coins are still purported to be pseudonymous, the major exchanges that they are traded on are not. The IRS has started collecting information from the exchanges to determine who has bought and sold cryptocurrency. Some of the major exchanges, including Coinbase, Poloniex, and Circle, have already been forced to turn over their users’ information. Now that the IRS has seen success going after the exchanges, it will continue to target others.
Using that information, the IRS can understand who has accurately reported their income and who has not. Now let’s look at two ways the IRS is using the information to go after tax evaders.
Offers-in-Compromise Disclosures
With a treasure trove of information on people who have traded cryptocurrency, one area that the IRS is focusing its attention on is recently submitted and approved Offers-in-Compromises. The IRS is now matching the new information against what information was included in past offers. If an offer did not include disclosure of cryptocurrency assets or related income, the case gets referred to the criminal investigation unit for prosecution.
It is imperative that you get an attorney now and figure out a plan of action if you submitted an offer and did not disclose your cryptocurrency holdings. This is not a time to talk to your accountant; that communication is not protected and can be used against you. If you wait until the IRS finds out, it will be too late. And the IRS will find out.
If you are currently trying to get an offer approved, make sure you have disclosed any relevant assets and income. If you need to amend the offer, do so before it is approved based on the incorrect information.
Structured Transactions
First, what is a structured transaction? A high-level explanation is any transaction that is structured in such a way as to evade reporting requirements under the Bank Secrecy Act. Anytime a transaction involves $10,000 or more in cash, the parties are supposed to report it to the IRS. Structuring the transaction so that it is just a series of smaller payments does not avoid the reporting requirement and often lands the parties in even more trouble. You can learn more about structured transactions here.
How does this relate to cryptocurrency? Since cryptocurrencies are treated like cash for the Bank Secrecy Act’s purposes, they have the same reporting requirements. Splitting up a transaction or channeling the payments through various entities to hide the source will all be considered structuring in the eyes of the IRS. And the IRS is looking for those transactions. Violators can face civil fines up to $28,000 per instance or criminal charges, including jail time of up to 10 years.
What Should You Do?
If you are new to the cryptocurrency world, make sure that you fully report the associated transactions on your return. The current guidance on what should be reported is anything but straightforward. Having a tax professional help with this will only benefit you. Above all, do not try to hide your trading and use of cryptocurrency from the IRS; it is not as anonymous as many believe.
If you have unreported assets, income, or transactions related to cryptocurrency in your past, you need to talk to an attorney now. There is no voluntary disclosure program currently. Given the IRS’s posturing around this issue, it is unlikely one will be coming. These cases can quickly become a criminal matter, and anything you tell your accountant can be used against you.
If you have past transactions that you need to discuss, contact us today.