IRS Looking for “Hidden Treasure” (Unreported Cryptocurrency Income)

The IRS’s Director of the Office of Fraud Enforcement, Damon Rowe, announced at a conference that the IRS has started “Operation Hidden Treasure.”  The IRS is looking for individuals (and businesses) which had cryptocurrency income but didn’t report it on their tax returns.  The IRS is investing in technology to look through the blockchain and find those sales.  What does this mean for the individual who hasn’t reported his cryptocurrency sales?

First, it’s clear that the IRS thinks there’s gold in ‘dem ‘dar hills.  And based on what I’ve seen over the last few years, they’re correct: There are plenty of taxpayers who thought (and think) that if there’s no tax form, there’s no reason to report income.  This is absolutely the case for some traders in cryptocurrency.  Some of the individuals who traded are young and simply didn’t (or don’t) know that the US tax system is based on self-reporting income and that all income is taxable unless Congress exempts it.

Let’s say you didn’t report a few hundred dollars in sales.  Simply amend your return, report the additional sales, and pay the tax (and interest).  Don’t forget to amend your state return, too, if applicable.  You are not the target of Operation Hidden Treasure.

Let’s say you have $500,000 or more of unreported capital gains from cryptocurrency.  You should contact a tax attorney–you are the target of the IRS.  It’s almost always better for you to come forward rather than the IRS to come after you.  But at this level of unreported income you likely need formal representation from an attorney, and a tax attorney can give you specific advice for your situation.  Criminal tax fraud includes possible jail time; civil tax fraud carries a whopping 75% penalty.  It’s better to be compliant than to be facing those penalties.

Another option–one I strongly recommend against–is playing “audit roulette.”  The IRS won’t find me; my transactions are too hidden or (whatever).  There is no statute of limitations on civil tax fraud.  (Yes, the burden of proof is on the IRS but if you have $1 million of unreported cryptocurrency sales and the IRS can prove it, that’s a pretty good ‘badge of fraud.’)

Will the IRS find some hidden treasure of unreported cryptocurrency sales?  Absolutely.  If this is you, it’s time to come clean.

 

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