Friday, November 25, 2016
Rising Use of Virtual Currencies Requires IRS to Take Additional Actions to Ensure Taxpayer Compliance
Alternative payment methods, such as convertible virtual currencies, have grown in popularity in recent years and have emerged for some people as a potential alternative to using traditional currencies like U.S. dollars. Virtual currencies offer potential benefits over traditional currencies, including lower transaction fees and faster transfer of funds for services provided. However, some virtual currencies are also popular because the identity of the parties involved is generally anonymous, leading to a greater possibility of their use in illegal transactions. Recently, many types of virtual currencies have been created for use in lieu of currency issued by a government to purchase goods and services in the real economy. The overall objective of this review was to evaluate the IRS’s strategy for addressing income produced through virtual currencies.
Although the IRS issued Notice 2014-21, Virtual Currency Guidance, and established the Virtual Currency Issue Team, there has been little evidence of coordination between the responsible functions to identify and address, on a program level, potential taxpayer noncompliance issues for transactions involving virtual currencies. None of the IRS operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies.
The IRS has not used an important enforcement tool at its disposal to address unlawful activities by those who use virtual currencies. Under authority of the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), the IRS has Bank Secrecy Act enforcement responsibilities for financial institutions not regulated by a Federal bank agency or another Federal regulator such as money service businesses. Although FinCEN has designated administrators or exchanges that accept and transmit a virtual currency, or buy or sell virtual currency as money service businesses and subject to IRS enforcement, the IRS has not taken enforcement action in this area. In addition, it does not appear that any of the actions already taken by the IRS to address virtual currency tax noncompliance were coordinated to ensure that the IRS maintains a strategic approach to the tax implications of virtual currencies.
Although the IRS requested comments to Notice 2014-21 from the public, no actions were taken to address the comments received. TIGTA reviewed all the comments and found several examples of information requested by the public that would be helpful in understanding how to comply with the tax reporting requirements when using or receiving virtual currencies.
In addition, third-party methods of reporting taxable transactions to the IRS do not separately identify transactions related to virtual currencies. While employers and businesses are required to report taxable virtual currency transactions, current third-party information reporting documents do not provide the IRS with any means to identify that the taxable transaction amounts being reported were specifically related to virtual currencies.
“It is imperative that the IRS ensures that those who engage in activities using virtual currencies comply with all of their tax obligations,” said J. Russell George, Treasury Inspector General for Tax Administration.
TIGTA made three recommendations. The IRS agreed with TIGTA’s recommendations and plans to develop a virtual currency strategy, including an assessment of whether changes to information reporting documents are warranted. The IRS also agreed that additional guidance would be helpful and plans to share the recommendation with the IRS’s Office of Chief Counsel for coordination with the Department of the Treasury’s Office of Tax Policy.