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 Cryptocurrencyholders 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.