Damon Rowe, the Director of the Office of Fraud Enforcement at the Internal Revenue Service announced yesterday at a Federal Bar Association presentation on fraud enforcement priorities that the office has “added some crown jewels,” including a dedicated team of IRS Criminal Investigation professionals who are working on “Operation Hidden Treasure.” Operation Hidden Treasure is comprised of agents who are trained in cryptocurrency and virtual currency tracking, and who are focused on taxpayers who omit cryptocurrency income from their tax returns. Operation Hidden Treasure is a partnership between the civil office of fraud enforcement and the criminal investigation unit to root out tax evasion from cryptocurrency owners.
Carolyn Schenck, who is the National Fraud Counsel & Assistance Division Counsel for the Office of Cheif Counsel, IRS, explained that the IRS is working on “how to get ahead of the game,” and looking for various “tax evasion signatures.” Signatures may include “structuring,” which means to literally structure transactions in increments of less than $10,000 to avoid certain reporting requirements, “the use of nominees, shell corps” or “getting on and off the chain.” The IRS is working with sophisticated vendors to identify and investigate these tax evasion signatures. Schenck described Operation Hidden Treasure as “all about finding, tracing, and attributing crypto to U.S. Taxpayers.” The IRS, through its trained agents working together with specialist vendors, is “analyzing blockchain and de-anonymizing [crypto] transactions” to be “able to track, find, and work to seize crypto in “both a civil and a criminal setting.”
Schenck had a message for crypto traders who are would-be tax evaders: “We see you”.
I’ve written about the IRS’s efforts to crack down on Cryptocurrency holders and to increase compliance in this area before. I’ve also recently written about how the IRS instructions on how crypto account holders should report purchases are anything but a model of clarity.
What makes a failure to report anything on a tax return – including Crypto – criminal?
Criminal tax evasion is defined by I.R.C. section 7201 as:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law.
But what does that mean? Tax evasion must be willful, and willfulness is defined as an intentional violation of a known legal duty. During the same FBA presentation, James Lee, the Chief of IRS Criminal Investigation Division, explained, “People have to know there’s a consequence for being willfully noncompliant [with tax obligations], and that consequence is going to jail.” At bottom, if the government can prove that you knew what you did (or didn’t do) was wrong and did it anyway, the case may be criminal. If you simply made a mistake, it is civil. The adage that mistake of the law is no excuse does not apply in criminal tax.
Even if the IRS decides not to pursue criminal charges, the civil consequences for fraud are not exactly a walk in the park – a penalty of 75% of the understatement of tax applies.
The Federal Bar Association panel’s private tax defense lawyers both agree that this increased enforcement effort by the IRS will no doubt yield results.
Steve Toscher, a partner at Hochman Salkin Toscher Perez, PC, put it this way; “The new Office of Fraud Enforcement looks like it will be a game changer in tax enforcement. We expect to see more referrals for criminal prosecution and assertions of the 75% civil fraud penalty. When the current leaders of the IRS took over a few years ago they decided that a more vigorous enforcement of the tax laws, including the use of criminal investigations and civil fraud penalties, was essential to fairness for all taxpayers. The Office of Fraud Enforcement is the product of that increased focus.”
Sara Neill, a shareholder at Capes Sokol, agrees and notes that “things are going to change” and says that tax practitioners will need to brush up on criminal defense skills.
If you have unreported Crypto, what should you do?
The tax defense bar has been asking the IRS to announce some type of voluntary disclosure program, similar to the foreign bank disclosure program, designed for virtual currency holders to “come clean” for years, to no avail. It seems unlikely that the IRS will roll such a program out. So what should those who have unreported crypto do?
Do not talk to your accountant about past compliance mistakes.
Yes, you read that right. Do not talk to your accountant about past compliance mistakes. You do not share the attorney-client privilege with your accountant. Your accountant may be asked to testify against you, may be forced to testify against you in court, or may be forced to share information about you with investigators. Only an attorney can have confidential communications with you that will remain protected from disclosure by the attorney-client privilege. I’ve encountered several situations in my career as a criminal and civil tax defense lawyer where the accountant was put in an extremely difficult position because the client later “confessed” to something that he or she did wrong, or – even worse – told the accountant half the truth about the problem, and half a lie. Taxpayers can’t confess crimes to their accountant and keep that secret, because the accountant isn’t able to prevent the government from compelling documents or testimony about those communications.
Hire an experienced tax lawyer who can help you.
Although the IRS has not launched a formal voluntary disclosure program for virtual currency holding taxpayers to disclose past mistakes, experienced criminal tax counsel who is knowledgeable in cryptocurrency will be able to guide you through the best way to move forward. It may be that the attorney can prevent your case from ever becoming criminal by guiding you through a civil disclosure or discussing other options.
One thing you should never do when it comes to the IRS: bury your head in the sand.
Other excellent articles about the FBA panel and the discussion of Operation Hidden Treasure are behind paywalls, here (Kristen Parillo at Tax Notes) and here (Allyson Versprille at Bloomberg Tax).
I try tax cases in tax court and federal courts, represent taxpayers who are examined by the IRS, and represent tax professionals who get into disciplinary trouble. I’m