IRS Warns: Hundreds Of Crypto Criminal Tax Cases Coming Soon; Hiring Of 300 Special Agents Means More To Follow – Tax Authorities

Takeaways:

• 2022 IRS Criminal Investigation Annual Report highlights
  significant prosecutions and identifies cryptocurrency as an area
  of top priority heading into 2023.




• Criminal Investigation Chief Jim Lee reveals plans to hire 500
  new employees to continue to pursue cases and warns that hundreds
  of crypto-related cases are ready to be publicly charged.




• Taxpayers with a potential issue should consider resolving
  matters now, before IRS agents target them in
  criminal prosecutions.




• Companies in this industry should ensure compliance addresses
  tax-avoidance risks in their business operations.

The 2022 annual report¹ from the IRS Criminal
Investigations (CI) division (the Report) demonstrates an
impressive year for enforcement, particularly with regard to
cryptocurrency. Following the publication, CI Chief Jim Lee made
clear that the division will continue to closely scrutinize crypto
transactions. He warned: “Expect more outward-facing tax
crypto cases here in the near future” –
“outward-facing” referring to publicly brought
charges.² Lee also warned that criminal charges may
result from “off-ramping transactions” (i.e., the process
of converting digital assets into fiat currency). Bolstered by the
prominent placement of reporting language on the front of Form
1040, law enforcement can be expected to bring more criminal tax
cases against those who fail to disclose transactions involving
digital assets. Given the division’s 90.6 percent conviction
rate on cases accepted for prosecution in fiscal year (FY) 2022,
companies and individuals should act now to work with counsel to
ensure they are in compliance with all applicable laws and
regulations.

FY 2022 Report Touts Major Successes

According to the Report, in 2022, the division identified $32.6
billion involved in fraud, $5.7 billion of which was tax fraud
– reportedly three times the amount of fraud identified by
the division in FY 2021. Additionally, the division seized
approximately $7 billion in crypto, reportedly double the amount
seized in the previous year. Further, more than 2,550 criminal
investigations were opened, of which 1,564 resulted in convictions
(resulting in the 90.6 percent conviction rate noted above).
Touting these victories in the Report, Lee cautioned that “if
a CI special agent has you in their [sic] crosshairs, there is a
good chance you are going to jail.” The Report also details
cybercrimes as a major priority and an area of strength for the
division, including the introduction of the Office of Cyber and
Forensic Services, which unites various teams within the division
to investigate crypto-related misconduct. However, the battle is
just beginning, according to Lee, who advised that the division is
simply “laying the groundwork to do more in 2023.”

Hundreds of Crypto Cases and Increased Hiring for IRS Criminal
Investigations Coming Soon

Compounding his earlier warnings, Lee publicly announced on a
recent call with Bloomberg Tax that the division
already has hundreds of crypto-related cases for
which it expects to bring charges, a significant announcement for
all companies or individuals operating in the cryptocurrency space
or who have engaged in digital asset transactions. Lee also noted
that many of these cases will be related to off-ramping
transactions.

To support the division’s aggressive enforcement efforts,
including continued investigations and prosecutions, Lee has
announced plans to hire more than 500 new IRS employees, including
360 new special agents. In light of the ambitious hiring plan,
failure by taxpayers to report digital asset transactions is more
likely to be scrutinized by the division. This is a continuation of
the division’s focus on digital asset enforcement, which began
as early as 2019 when IRS Form 1040 first required front-page
disclosure of taxpayers’ virtual currency activity. In the
updated Form 1040 for 2021, the language referring to “virtual
currency” has been changed to “digital asset”
– likely a sign that the IRS is targeting a broader scope of
reported transactions and will be aggressive against
underreporting.

The IRS has been open about its aggressive stance on
enforcement, willingness to bring cases and the types of cases it
is prioritizing. The IRS’s increased enforcement activities
mirror actions taken by other agencies in 2022 that have also
signaled prioritization of crypto-related enforcement. For example,
the Securities and Exchange Commission nearly doubled the size of
its Crypto Assets and Cyber Unit and the Department of Justice
(DOJ) is making concerted efforts to improve policing with the
Digital Asset Coordinator Network that will be led by the National
Cryptocurrency Enforcement Team.³ Now more than ever, it
is imperative for companies and individuals to take steps to comply
with all applicable laws and regulations and ensure they have
competent counsel in the event they become the target of an
investigation.

The BakerHostetler Tax Practice Group provides clients with
sound and practical advice in federal, international, tax
controversy, employee benefits, private wealth, tax-exempt, and
state and local matters. The group’s experience extends to
structuring transactions and representing clients in the course of
IRS examinations, audits and appeals. The Criminal Tax Defense team
assists individuals and institutions with assessing and identifying
issues of concern and implementing measures to reduce potential
exposure. The team has successfully represented clients at each
stage of the criminal tax process in administrative IRS
investigations, joint IRS-DOJ grand jury investigations, and
indictments and prosecutions by U.S. Attorneys’ Offices. The
BakerHostetler Blockchain Technologies and Digital Assets team has
members across all our core groups, and our attorneys have
extensive experience across all sectors of the blockchain and
cryptocurrency markets, including investigations, securities law,
commodities law, Bank Secrecy Act/anti-money laundering compliance,
tax, privacy, transactions, advertising law, intellectual property
and technology design, as well as government affairs, public policy
and advocacy across federal departments and agencies and in
Congress.

Footnotes

1. 2022 Annual Report, IRS CI Division, available at
https://www.irs.gov/pub/irs-pdf/p3583.pdf.

2. “‘Hundreds’ of Crypto Cases Coming, IRS
Criminal Chief Says,” Bloomberg Tax, Nov. 3, 2022, 4:52 p.m.,
available at:
https://news.bloombergtax.com/daily-tax-report/hundreds-of-crypto-cases-coming-irs-criminal-chief-says.

3. “SEC Signals Ramp-up in Crypto Enforcement by
Nearly Doubling Its Crypto Assets Cyber Staff,”
BakerHostetler, May 5, 2022, available at
https://www.bakerlaw.com/SEC-Signals-Ramp-Up-in-Crypto-Enforcement-by-Nearly-Doubling-Its-Crypto-Assets-Cyber-Unit-Staff;
“DOJ Targets Cryptocurrency Fraud,” BakerHostetler, Oct.
12, 2021, available at
https://www.bakerlaw.com/DOJ-Targets-Cryptocurrency-Fraud.

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