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The IRS Bolsters Its Crypto Expertise and Other Tax Enforcement Agencies May Not Be Far Behind By STEVEN TOSCHER, ROBERT HORWITZ and PHILIPP BEHRENDT

The IRS has taken an important step to strengthen its understanding and oversight of the cryptocurrency space and may signal a bull market of tax enforcement in the crypto realm.

The agency recently announced the hiring of two private sector experts as advisors – Sulolit “Raj” Mukherjee and Seth Wilks. Both individuals have extensive experience working with digital assets and blockchain technology.

Raj Mukherjee most recently served as the Global Head of Tax for ConsenSys, a major blockchain software company. ConsenSys is known for its wallet software MetaMask. He has also held tax leadership roles at prominent exchanges like Coinbase, Binance.US, as well as at the Blockchain Association. His background includes over a decade of experience in tax compliance and reporting for both traditional finance and cryptocurrency businesses.

Seth Wilks was previously the Vice President of Government Relations and Success at TaxBit, a leading crypto tax software provider. Before that, he held a similar position at ProfitStance, another firm focused on crypto tax and accounting services. Wilks has worked extensively on digital asset tax policy issues over the past six years.

The IRS clearly sees a need to bolster its internal expertise on cryptocurrency and other digital assets. Commissioner Danny Werfel noted that it’s an evolving sector with major tax administration implications. By bringing in advisors like Mukherjee and Wilks, the IRS aims to successfully develop systems and programs focused on this emerging area.

Expanded work on digital assets is listed as one of the IRS’ key priority areas. This includes efforts to enhance the data on digital asset transactions, like the John Doe summons to seeking information on taxpayer’s transactions on platforms such as against Coinbase, Kraken, Poloniex, and others, or the proposed broker reporting regulations. The hiring of these two advisors should help the IRS stay on top of industry changes and help taxpayers comply with their crypto tax obligations.

This announcement is not the only event showing that the IRS is intent on making digital assets top priority. The IRS is currently working on new guidance that is expected to come trickling in throughout the year.

Additionally, in early February the Department of Justice announced the indictment of an individual for tax charges related to unreported cryptocurrency sales. So far, we have seen crypto-related tax charges being piled on money laundering or fraud charges, but not as standalone indictment. This signals increased enforcement in this domain and emphasizes the importance of compliance for those dealing with digital assets. Overall, the IRS is clearly gearing up its capabilities to oversee the taxation of cryptocurrencies.

The Financial Crimes Enforcement Network, better known as FinCEN.has also become interested in the crypto sphere. In a 2020 FinCEN Notice (Notice 2020-2), the agency expressed their intent to propose amendments to the FBAR regulations that would classify virtual currency accounts and addresses as financial accounts that must be reported under 31 CFR 1010.350. In other words, while cryptocurrency assets themselves are not reportable at present, FinCEN has announced plans to issue regulations requiring such holdings to be disclosed on FBARs  We are still waiting for FinCen to issue these proposed regulations.

Now that the IRS has stepped up federal tax guidance, enforcement and reporting requirements for digital assets, more states may feel pressure to address this evolving area in order to align with federal rules. Only five states (Illinois, Michigan, New York, New Jersey, and Wisconsin) provide some guidance regarding the treatment of digital assets for income tax purposes. Several states have provided some guidance for sales tax purposes, among them California (see Reference #F22-12-084FU, California Department of Tax and Fee Administration, January 19, 2023). However, many uncertainties exist around state tax obligations and filings related to digital currencies.

Over the next year, we could see more state revenue agencies and legislatures exploring how to apply existing sales/use and income tax frameworks to cryptocurrency transactions. Clarified guidance would help both tax authorities and taxpayers understand the relevant compliance duties.

It’s clear the IRS is ramping up both their guidance and enforcement when it comes to cryptocurrency taxation. Other agency may profit from these efforts. With its latest move of bringing in seasoned experts from the industry, the IRS is signaling an intent to more closely monitor this emerging sector. Between expanded reporting obligations, greater reporting from centralized exchanges, and beefed-up enforcement capabilities, the IRS has made it a top priority to single out those not adhering to crypto tax rules. Additional audit resources allocated under the Inflation Reduction Act will allow the IRS to more vigorously pursue taxpayers failing to properly report cryptocurrency transactions and holdings. As the agency works to close the tax gap, those holding cryptocurrencies and engaging in cryptocurrency transactions should expect even more scrutiny in the coming years.

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