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Between economic chaos, recent IRS letters, and Elon Musk’s hosting of Saturday Night Live on May 8, it certainly seems like the fervor over cryptocurrency has reached a fever pitch over the last few months. Those who filed tax returns this year noticed that a question about cryptocurrency was placed on Page 1 of Form 1040—the most prominent placement of crypto matters by the IRS.
We recently published a blog covering the reporting of your cryptocurrency transactions. If you did not correctly report these transactions, you should be aware of a unique IRS undertaking that aims to surface those who did not satisfy their federal tax obligations.
Operation Hidden Treasure
The IRS has had to innovate in order to catch alleged cryptocurrency tax cheats. A civil division and criminal division of the agency has teamed up to create Operation Hidden Treasure, which is tasked with rooting out a specific cohort of crypto traders. A few months ago, the IRS put out a call for contractors and vendors to join its crypto enforcement efforts, and it appears the companies are getting put to work. Recent reporting by Forbes indicates that blockchain analytic companies will be doing the lion’s share of the work for Operation Hidden Treasure.
John Doe Summons
A central component of the recent IRS activity surrounding cryptocurrency is the issuance of at least two John Doe summonses. Federal judges in Massachusetts and Northern California have authorized this type of summons to be served on Circle, Poloniex, Kraken, and Payment Ventures Inc. A John Doe summons is a unique tool available to the IRS to be used when the agency isn’t sure about the identity of a specific taxpayer or group of taxpayers.
The IRS has indicated that it will be going after owners who engaged in transactions totaling more than $20,000 between 2016 and 2020. A few red flags the IRS is looking for are holders carefully structuring transactions to avoid reporting requirements, using shell corporations or LLCs, and frequent pit stops along particular chains. Worth noting here is that the IRS is only interested in crypto holders who used these exchanges; the companies themselves are not alleged to have engaged in illegal activity.
These John Doe summonses affirm a long-held truth: no one on the internet can be truly anonymous.
Conclusion
The IRS has decided that holders of cryptocurrency have received enough warnings about reporting rules. Now, it seems like the agency is taking a large, aggressive step forward in enforcement. Coming to a tax professional is the best way to make sure you won’t be caught flat-footed by an IRS audit or investigation. Let Weisberg Kainen Mark help you resolve any outstanding tax issues; contact us today to set up a consultation.
Weisberg Kainen Mark, PL
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