The U.S. Internal Revenue Service (IRS) will crack down on digital currency tax evaders in 2021, its former division chief has warned. In a recent op-ed, Dan Fort warned that the agency will shift from education to enforcement this year.
Fort is the former head of the IRS’ criminal investigations division. In his article on Law360, he cautioned that “a high-stakes game of chicken will move to the next level in 2021.” He believes that the IRS has been focusing on educating the public about digital currency taxation procedures. It has yet to turn its attention to enforcing these laws, with just a few cases of digital currency tax-related prosecution. In most of these cases, the tax and money laundering violations “have been egregious.”
This all changes in 2021, Fort believes. The transition from education to enforcement has already started, with the former taxman citing the Coinbase instance. With this he was referring to the court order the IRS obtained in 2018 that forced the exchange to hand over the data for 13,000 of its users. The agency has also reached out to other exchanges for user data, most notably Bitstamp where it inquired about William Zietzke.
The tax agency will use this data to crack down on those who evade paying their taxes, Fort pointed out.
The former taxman believes that the IRS’ fresh focus on digital currencies is necessitated by the widening tax gap. This is the difference between the tax that the Treasury Department expects and what it collects.
“The average net tax gap in the U.S for tax years 2011 through 2013 is estimated to be approximately $381 billion,” he stated
With the digital currency industry now worth over $870 billion, the tax liabilities could be worth over $40 billion. Even with a 50% compliance rate, digital currency taxes could be accounting for close to over 5% of the $381 billion tax gap.
“Thus, it is likely that unreported taxable cryptocurrency transactions are contributing significantly to the tax gap.”
Fort also cited the recent prominent placing of the digital currency ownership question on the Form 1040 as yet another indicator that the IRS is getting serious about digital currencies. The agency also released an update offering clarity on what it considers a virtual currency. The updated guide, which it published on December 31, states:
“The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency. […]Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.”
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