Presentation Suggests IRS Plan to Investigate Bitcoin Activity
Earlier this month, a slide deck given by the US Internal Revenue Service (“IRS”) Criminal Investigation division became widely available via a taxation professional’s Twitter. Comprised of nearly 180 slides, the document claims to lay the framework for an IRS crackdown on bitcoin tax evasion by acquiring access to an array of individual taxpayer data through means such as surveillance and personal interviews. The IRS’ criminal investigation unit communication and education director, Justin Cole,¹ recently confirmed that the document was shown to agency staff at an event in Washington, D.C. in early June, adding further anxiety over the document’s implied privacy concerns.
The deck, which appears to have been presented by James Daniels, IRS Cyber Crimes Program Manager, initially focuses primarily on explaining key concepts in blockchain and cryptocurrency transactions, detailing the history and operating principles behind systems that support digital token exchanges, in addition to summarizing general concepts such as initial coin offerings (“ ICO “s) and smart contracts. However, roughly midway through, IRS agents are advised, in order to determine whether or not a taxpayer uses bitcoin transactions or maintains a bitcoin balance, to obtain the subject’s personal information through several means. One of the listed methods includes interviewing those close to the taxpayer, or “those who know the financial habits of the Subject, including, but not limited to, bank tellers, family and friends of the Subject (if feasible), and establishments the Subject frequents that may accept bitcoins.”
Further disclosed data retrieval techniques include the use of social media and Grand Jury Subpoenas. Using Facebook and Twitter, among others, the document advises IRS agents to look through social media outlets for posts with details relating to taxpayer bitcoin accounts. Additionally, Grand Jury Subpoenas are listed for consideration to obtain taxpayer financial data from bank, credit card, and/or PayPal records. Beyond financial institutions, several large companies are also indicated as potential subpoena targets; “Issuance of a Grand Jury Subpoena should be considered for Apple, Google, and Microsoft for the Subject’s complete application download history.” From there, each application would be investigated to determine if it can transmit and support bitcoin transactions.
Should a taxpayer be found to maintain a bitcoin balance, the document then suggests identifying their bitcoin Wallet and related bitcoin Addresses. With the bitcoin address known, agents are then encouraged to use that information to retrieve evidence on transaction values, times, and locations to possibly locate additional addresses or even assist in locating the subject. According to the presentation’s notes, the agency stresses the importance of a discrete investigation, stating “Notification of the Subject about the obtainment of information regarding their use of bitcoin may be detrimental to the seizure of any bitcoin balance.”
In an email claiming the presentation, Cole wrote, “The training material has been used around the world to various law enforcement partner audiences and was again given at this forum in a room that included partners from dozens of countries around the world as well as various press members.” Reluctant to confirm if the IRS was intending to implement the proposed surveillance tactics, he stated, “I can’t discuss specific investigative actions that the agency may or may not take in the future.”²
While updated cryptocurrency guidelines have been expected for some time, the IRS has yet to indicate what their new regulations would entail. In mid-June, some IRS officials warned of impeding efforts to combat digital token tax evasion, as tax investigator Gary Alford explained to CCN Markets;
“We’re usually behind the curve. But in this case, we are ahead of the curve. We already are aware that there were cases to be made. We just didn’t know if we were at the point where we can bring it for criminal prosecution. We believe we are at that point now. If we had 12 jurors and told them someone made all their money in bitcoin, we believe that they would understand.”³
The few enforcement actions taken by the agency have mostly been directed towards crypto exchanges, however, a January 2019 survey reported that only 53% of bitcoin investors in the U.S. planned to report their gains or losses on digital tokens.⁴ Last month, commissioner of the IRS Small Business/Self-Employed Division Mary Beth Murphy stated that the agency would begin auditing taxpayer’s crypto-assets to process said cases at a New York University forum on tax controversies.⁵
With that said, the IRS presentation outlines severe intrusions into taxpayer privacy through questionable surveillance tactics. User wallets can create private addresses, however, bitcoin addresses can be traced by their transaction histories once used, removing a degree of user anonymity. Additionally, the permanency of data stored within bitcoin’s blockchain means that items that are not currently traceable may be available to track in the future. Multiple addresses and certain specialty wallets may provide an additional layer of privacy to some users; however, token exchanges may be required to report their information to federal organizations.⁶
As the industry awaits an official announcement of the new IRS cryptocurrency regulations, interested parties should be aware of the potential scope of the coming investigations.
- Baydakova, Anna. “IRS Confirms It Trained Staff to Find Crypto Wallets.” CoinDesk. July 15, 2019. Accessed July 19, 2019. https://www.coindesk.com/irs-confirms-it-trained-staff-on-finding-crypto-wallets
- Baydakova, Anna. “IRS Confirms It Trained Staff to Find Crypto Wallets.”
- Chang, Samantha. “Bitcoin Tax Evaders Will Be Criminally Prosecuted, Warns IRS Agent.” CCN. June 23, 2019. Accessed July 12, 2019. https://www.ccn.com/news/bitcoin-tax-evaders-will-be-criminally-prosecuted-irs-agent/2019/06/14/
- Moos, Mitchell. “IRS Conducting Electronic Surveillance in Attempt to Clampdown on Bitcoin Tax Crime.” CryptoSlate. July 08, 2019. Accessed July 12, 2019. https://cryptoslate.com/irs-conducting-electronic-surveillance-in-attempt-to-clampdown-on-bitcoin-tax-crime/
- Versprille, Allyson. “IRS Exam Teams Beginning to Work Cryptocurrency Tax Cases.” Bloomberg BNA News. June 20, 2019. Accessed July 12, 2019. https://news.bloombergtax.com/daily-tax-report/irs-exam-teams-beginning-to-work-cryptocurrency-tax-cases
- Moos, Mitchell. “IRS Conducting Electronic Surveillance in Attempt to Clampdown on Bitcoin Tax Crime.”
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Originally published at https://therodmanlawgroup.com on July 22, 2019.