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Thawing the Ice: Landmark Indictment Signals New Era in Crypto Tax Enforcement by SANDRA R. BROWN and PHILIPP BEHRENDT

What It’s About

On February 7, the Justice Department announced a seven-count indictment against Frank Richard Ahlgren III, charging him with filing false tax returns and structuring transactions based on his cryptocurrency dealings between 2017 and 2019. Ahlgren faces three counts of filing false tax returns under 26 U.S.C. section 7206(1), related to underreporting or not reporting the sale of $4 million worth of bitcoin. In 2017, he allegedly inflated the basis of bitcoin sold and failed to report several bitcoin sales in subsequent years. Additionally, he is charged with four structuring charges for attempting to evade currency reporting requirements during cash deposits of sale proceeds.

Significance of the Case

This indictment represents a departure from previous cases primarily focused on money laundering or fraud, instead centering squarely on tax charges stemming from cryptocurrency transactions. This shift marks a significant move towards criminal enforcement for tax non-compliance in the crypto space.

What sets this case apart is its temporal context. Many tax professionals anticipated that the first instance of solely tax-related charges would occur for tax periods starting with tax year 2020 or later, given the prominent placement of the crypto question on the first page of the tax returns during those periods, making it more conspicuous. However, these charges span the years 2017 through 2019. Notably, while the 2019 tax return included a crypto-related question, albeit not on the front page, the 2017 and 2018 returns lacked any crypto-related question.

As an aside, what may have contributed to DOJ’s reach back to 2017 is the very public civil litigation between the defendant and the trustees of the Ahlgren Management Trust, Case no. D-1-GN-20-001472 261st Judicial District, Travis County, Texas, which was filed in 2020. A June 15, 2023 Memorandum Opinion by the Texas Court of Appeals spent a fair amount of time discussing the 2017 Bitcoin traceable transactions. 

Lessons for Taxpayers

The Ahlgren case serves as a sobering reminder for taxpayers involved in cryptocurrency transactions. Despite ongoing debates surrounding reporting thresholds and requirements, the obligation to report capital gains and ordinary income remains non-negotiable.

While the outcome of the case in court remains uncertain, it signifies the commencement of a heightened level of tax enforcement within this domain. The Department of Justice is sending a clear message – tax charges are a real possibility for failure to report cryptocurrency transactions, thus elevating the stakes of tax compliance in the cryptocurrency realm.

The DOJ press release highlighted that the IRS is investigating the case, underscoring the collective commitment to lift its structural enforcement deficits in the crypto space. Tax compliance is key to staying out of trouble, both civilly and criminally.

Historically, taxpayers holding crypto were often left with very little guidance when it came to filing their taxes, leading to non-compliance with rules that are now becoming more clear. By taking proactive steps with knowledgeable counsel, you can rectify past discrepancies and avoid potential legal ramifications. Investing in experienced tax counsel today can safeguard your financial future tomorrow, ensuring compliance and peace of mind as you navigate the complex landscape of tax regulations.

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., licensed in California as well as in Germany and assists in advising clients in civil and criminal tax controversies as well as international money laundering investigations stemming from tax avoidance structures. He also focuses on the technical aspects involved in advising voluntary disclosures in connection with DeFis, NFTs, and other crypto assets.

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