Tax agencies are working towards tougher virtual-asset enforcement policies

At a recent webinar, Gary Alford, a leading Internal Revenue Service (IRS) agent in crypto-enforcement, and Perry Carbone, of the New York State US Attorney's Office, briefed experts on latest government enforcement efforts related to cryptocurrency.

The key message they emphasised was that the time for individuals and companies to act is now. The IRS and the US Department of Justice (DOJ) are rapidly collecting virtual currency data with a view to simultaneously moving forward with tax enforcement cases. As announced in April 2021, the IRS has joined its civil and criminal cryptocurrency units through Operation Hidden Treasure, and is also working with outside experts in the field to pursue tax enforcement and asset seizure from taxpayers who omit income from these transactions on their tax returns.

The IRS Fraud Enforcement Office and Criminal Investigation Unit are continuing to work with international law enforcement and crypto-industry experts to root out tax evasion. The operation includes using John Doe summonses and other tools to find perpetrators and businesses that may have facilitated tax evasion. Thousands of letters are expected to be issued as a result of the recent summonses to Kraken and Poliniex, as well as potential visits by IRS agents to cryptocurrency businesses.

'Companies and individuals should prepare for increased scrutiny of virtual currency transactions', says law firm McDermott Will & Emery. 'This is a key agenda item for the US Department of the Treasury and is not going away any time soon.'

However, despite being expected to comply voluntarily with all tax obligations, US taxpayers have had limited guidance from the IRS, says the law firm. They face particular difficulties in addressing the tax consequences of past virtual currency transactions, including potential voluntary disclosure considerations.

IRS policy has now made criminal prosecutions easier by putting a question on virtual currency income at the top of the tax Form 1040. The prominent location of this question means the knowledge and wilfulness element needed for criminal cases will be much easier to prove, and the DOJ expects to bring independent cryptocurrency criminal tax cases, including prosecutions of more routine tax matters without any associated criminal conduct.

McDermott Will & Emery says companies in the cryptocurrency industry are at high risk of facilitating tax evasion and need to ensure that they have compliance programs in place. 'Companies need to affirmatively and continuously evaluate their business risks and ensure their compliance programs address each of these areas', it warns.

• The risks are not specific to the US. Another speaker at the webinar, HM Revenue & Customs' former Director of Specialist Investigations, Andy Cole, noted that the UK's Criminal Finances Act 2017 includes a corporate criminal offence of failing to prevent 'associated persons' from facilitating tax evasion. The law applies to UK and non-UK companies and taxes. The only defence is for a company to prove that it had implemented reasonable prevention procedures.

Sources

• McDermott Will & Emery
• DOJ (Kraken summons)
• DOJ (Circle summons)
• US Treasury Department (compliance strategy, PDF)