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IRS, FinCEN and Other Federal Agencies Are Targeting Cryptocurrency-Related Crimes

October 17, 2023


While the FTX trial has recently been making national headlines, the Internal Revenue Service (IRS), Financial Crimes Enforcement Network (FinCEN), and other federal agencies have been targeting cryptocurrency-related crimes for years. Along with FTX, other exchanges and mixers like Tornado Cash have faced intensive scrutiny as well, and federal authorities are also targeting traders and businesses that use cryptocurrency for tax fraud and other federal offenses.

Although anonymity is often listed as one of the main benefits of using cryptocurrency (and although mixers like Tornado Cash are designed to further obfuscate parties’ identities), cryptocurrency is not completely anonymous. Exchanges and other platforms can generally identify their customers, and federal authorities have leveraged this to pursue investigations and criminal charges. The IRS, in particular, has been active in using “John Doe” subpoenas to obtain individuals’ and businesses’ identities from cryptocurrency exchanges—and federal courts have authorized its efforts on multiple occasions.

Facing a Cryptocurrency-Related Investigation When the IRS Knows Your (or Your Company’s) Transaction History

Over the past several years, the IRS and other federal agencies have prioritized cryptocurrency-related fraud enforcement. This includes pursuing tax fraud charges against individuals and businesses accused of underreporting their gains from cryptocurrency transactions. While cryptocurrency’s legal stature remains unresolved in certain respects, the IRS has long taken the position that profits from cryptocurrency transactions are no different from any other ordinary income or capital gains for federal income tax purposes.

The IRS’s ability to obtain taxpayers’ transaction histories from exchanges and other platforms presents substantial risks for those targeted in IRS audits and criminal tax fraud investigations. If a taxpayer’s returns omit information about cryptocurrency transactions reported by an exchange, this may appear to present a clear case for tax fraud. If the taxpayer’s returns are, in fact, inaccurate, then resolving the matter favorably may involve working with the IRS to find a solution that avoids criminal charges.

But, in severe cases, the IRS may be unwilling to settle for civil penalties. As cryptocurrency continues its mainstream growth, the IRS and other federal authorities are intent on sending the message that compliance is mandatory. They will—and have—used individual cases to set examples, and there have been several instances of the IRS pursuing criminal charges for cryptocurrency-related tax evasion in 2023 alone.

With this in mind, what should you do if you are facing cryptocurrency-related scrutiny from the IRS? As with all high-stakes tax controversies, an informed, strategic, and proactive approach is critical. Targeted taxpayers—both individuals and businesses—must be prepared to defend themselves by all means available, as the IRS will be using its vast resources to work toward substantiating criminal charges. In this scenario, there are a variety of ways to deal with IRS scrutiny, and avoiding unnecessary consequences is a matter of understanding how to deal with the IRS effectively.

Potential Consequences of Failing to Disclose Cryptocurrency Holdings or Transactions to the IRS

But let’s say you don’t deal with the IRS effectively. Let’s say you let an IRS audit or investigation run its course, and the IRS determines that you willfully withheld information about your cryptocurrency holdings or transactions on your federal returns. In this scenario, what is at stake?

Several provisions of the Internal Revenue Code (IRC) allow for criminal prosecution of tax-related offenses. For example, 26 U.S.C. Section 7201 imposes up to five years of federal imprisonment and a $100,000 fine ($500,000 for corporations) for any person “who willfully attempts in any manner to evade or defeat any tax imposed by [the IRC].” Other potential charges and penalties include (but are not limited to):

  • Willful Failure to File Return, Supply Information or Pay Tax (26 U.S.C. Section 7203) – Up to a year of federal imprisonment and a $25,000 fine ($100,000 for corporations).
  • Fraud and False Statements (26 U.S.C. Section 7206) – Up to three years of federal imprisonment and a $100,000 fine ($500,000 for corporations).
  • Fraudulent Returns, Statements or Other Documents (26 U.S.C. Section 7207) – Up to a year of federal imprisonment and a $10,000 fine ($50,000 for corporations).

Again, these are just examples. Taxpayers prosecuted for cryptocurrency-related tax offenses can potentially face charges for wire fraud, money laundering, conspiracy and other federal crimes as well. Many of these crimes carry penalties well in excess of the penalties imposed under the IRS—including seven-figure fines and decades of federal imprisonment in some cases.

Holding Cryptocurrency Offshore: Disclosure (and Payment) Obligations Still Apply

Along with misconceptions about the anonymity of cryptocurrency, many people also have misconceptions about the tax benefits of holding cryptocurrency (and other assets) offshore. While holding assets and generating income offshore can provide lawful tax benefits in certain circumstances, as a general rule, U.S. taxpayers still have an obligation to report their offshore assets and income to the IRS and FinCEN.

This is true even if no tax is owed. Additionally, regardless of an individual’s or business’s tax liability, failure to timely disclose offshore assets to the IRS or FinCEN can also trigger criminal penalties. Obligations to disclose offshore assets exist under both the Bank Secrecy Act (BSA) and the Foreign Account Tax Compliance Act (FATCA), and both of these federal statutes include provisions for criminal prosecution in appropriate circumstances.

If you have concerns about facing an audit or investigation related to your (or your business’s) cryptocurrency holdings or trading activity, you should not ignore them. In most cases, addressing significant tax controversies proactively will facilitate the best possible outcome. Once the IRS or another federal agency initiates an audit or investigation, the options for achieving a favorable resolution are more limited.

Speak with a Federal Tax Defense Lawyer at Brown Tax, P.C.

The federal tax defense lawyers at Brown Tax, P.C. represent high-net-worth individuals and businesses in significant federal tax controversies. If you need guidance on how to resolve a cryptocurrency-related issue with the IRS, FinCEN or any other federal agency, we invite you to contact us for more information. Please call 888-870-0025 or contact us confidentially online to request an initial consultation.