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IRS launches Operation Hidden Treasure targeting unreported crypto for criminal, civil prosecution

By John Wandrisco

March 16, 2021

“Operation Hidden Treasure” was unveiled at a recent Federal Bar Association virtual tax conference by Damon Rowe, executive director of the IRS Office of Fraud Enforcement. The longtime veteran of the IRS Criminal Investigation division said the office formed a dedicated team of IRS criminal investigation professionals to lead this operation and the sole focus is focused on taxpayers not reporting cryptocurrency income from their tax returns. 
This operation is the most recent and, by far, the most important for the IRS with their top priority on cryptocurrency tax and nonreporting by taxpayers.
Here’s a look at IRS actions concerning cryptocurrency:
  • 2021: IRS launches Operation Hidden Treasure for criminal and civil prosecution.
  • 2020: Virtual Currency Question to 1040, page 1; IRS sends notices to crypto taxpayers.
  • 2019: IRS sends notices to crypto taxpayers; adds Virtual Currency to Schedule 1.
  • 2017: Courts rule in favor of the IRS and Coinbase provides taxpayer crypto records.
  • 2016: IRS issues “John Doe” summons to Coinbase for 500,000 customers with crypto.
  • 2015: IRS purchases blockchain tools to see all crypto transactions.
To this day, many taxpayers don’t understand they must report crypto to the IRS or suffer the repercussions. Some also believe the IRS cannot find them. They are wrong.
“These transactions are not anonymous, we see you,” Carolyn Schenck, national fraud counsel for the IRS, said.

The time is now

At Ledgible, we’ve providing SOC-audited tax, accounting and confirmation solutions to CPAs since 2016. We are active partners with CCH, Intuit, Thomson Reuters, SurePrep, Boomer Consulting and K2 Enterprises where we help map out how crypto will impact professionals. 
We’ve tracked crypto services by firms and CPAs and saw the early adopters have massive increases in clients and billings by addressing this new market. We’ve also seen other professionals be slow to recognize the opportunity or even say they hope to be retired before it becomes mainstream. 
That time has passed. The IRS General Consul has stated that 18–21 million taxpayers need to report crypto when filing their 2020 tax returns. Other sources show even greater numbers. The IRS knows noncompliance is huge and is aiming to apply enforcement actions directly to taxpayers. No one can plead ignorance about their crypto tax obligations with the new question on the front page of the 1040 form. 
Taxpayers look to their professionals for guidance and assistance; professionals need to be prepared and be sure their clients are compliant.

Lean into compliance

For CPAs, the first step is understanding compliance obligations. It’s critical to stress to clients the IRS is enforcing crypto reporting and has the tools to find them. Clients may try to avoid revealing crypto activities, but utmost diligence must be applied to be sure the client is crystal clear about the obligations and the consequences.
Secondly, from a reporting standpoint, capital gains and losses are the primary compliance for crypto clients and the IRS has detailed what transactions are taxable. 
While most trades of selling crypto for fiat (U.S. dollars) are widely understood, there are several kinds of transactions which are unique to crypto: 
  • Transactions where crypto is exchanged for something of value is a taxable transaction. This can be a purchase or exchanging one cryptocurrency for another. 
  • Income can come from crypto. This includes income from mining, staking and other Decentralized Finance (DeFi) activities. 
Fortunately, the technology driving crypto can also make professionals’ jobs easier. Tools like Ledgible Tax Pro make it easy for your clients to connect their crypto to the system to identify taxable transactions, calculate gain/loss and enable the CPA to import the results into professional tax packages. 
The third step is preparing for the advisory opportunities with crypto. Operation Hidden Treasure will only increase the volume of 6173, 3174 and 6174-A letters and CP2000 notices sent to taxpayers. The IRS has trained and armed its staff with blockchain tools to support audits. It’s vital that CPAs gain access to similar tools to level the playing field. This is where Ledgible’s roots in financial statement audits of blockchain is invaluable. Ledgible Tax Pro reports the full history of all transactions from a client’s exchange accounts and wallets. All transactions are identified and can be categorized as needed. 

This is an opportunity

While IRS audit defense is critical, tax planning opportunities with crypto can also provide tremendous value to your clients. End-of-year tax planning for harvesting crypto gain/losses for crypto in conjunction with traditional investments is a great way to show your value to your client and expand your advisory services.
Given all the ways crypto impacts clients, CPAs have a tremendous opportunity to launch their own version of “Operation Hidden Treasure” to identify, attract and provide needed services to the tens of millions of crypto taxpayers and expand their practices. Visit the MNCPA member benefits today to get your free account
John Wandrisco is the chief commercial officer at Verady, which is the maker of the Legible cryptocurrency tax, accounting and financial reporting platform.