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IRS, 5 international tax heads target cryptocurrency tax evasion

| Feb 16, 2021 | Criminal/Civil Tax Litigation |

The Joint Chiefs of Global Tax Enforcement, or “J5,” represent the U.S., Canada, the United Kingdom, Australia and the Netherlands. They meet annually to work out enforcement plans for common types of tax evasion and other challenges. This year, the J5 met to discuss the role of cryptocurrency and financial technology in tax evasion.

Some cryptocurrencies, such as Bitcoin, are growing rapidly, which could make them a lucrative target for taxation. Additionally, however, cryptocurrencies have been used for illegal activity and money laundering due to the technology that enables transactions to be anonymous. Cryptocurrencies are used as a legal investment vehicle by millions of people around the globe.

With the transactions anonymized, it can be harder for tax authorities to discover the true cost basis of a transaction. (Cryptocurrency gains and losses are taxed as capital gains and losses.) However, the J5 recently made clear that one should not assume the transactions are actually untraceable.

Schemes to commit tax evasion have become increasingly complex and aggressive, according to the director of the Canada Revenue Agency’s Criminal Investigations Directorate. Worse, the coronavirus pandemic has made things more complicated for tax enforcement authorities, as it has brought changes to the way agencies work. The agencies continue to perform searches and do interviews, but some have been delayed.

Nevertheless, the J5 heads believe that the countries’ international cooperation is helping them keep pace with increasingly sophisticated tax evasion efforts.

“We’ve made great progress and we’re now delivering on those ambitions,” said the director and chief investigation officer of HM Revenue and Customs in the U.K. “Not only are we working on some of the most complex tax crime methodologies we’ve ever seen, but we’re working so closely together in sharing our respective knowledge, our capabilities, our intelligence, that we’re spotting much sooner how these MOs are evolving.”

“Many people out there feel that just because they’re dealing with cyber in the blockchain crypto area, they’re anonymous,” added the chief of the IRS’s criminal investigation division. “But I think with some of the results that you’ve seen out of the United States and the J5, it’s not anonymous. We’re out there. We’re watching everybody in this space internationally and domestically as well.”

The upshot for cryptocurrency investors is to be aware that federal and international tax enforcement authorities are focusing on the potential for tax evasion and related offenses involving cryptocurrency. You will want to keep detailed records of each transaction you make.