The increasing popularity of cryptocurrencies like Bitcoin and Ethereum has prompted the IRS, Department of Justice (DOJ), and other government agencies to aggressively investigate and prosecute people who use digital assets to commit crypto tax fraud. However, because of complex and changing reporting requirements and the fact that cryptocurrencies were designed to be invisible, taxpayers may find themselves under investigation for unintentionally committing tax evasion.
Because of a significant tax gap, the difference between taxes that are paid versus taxes that are owed, the IRS is increasingly using data analytics and artificial intelligence to analyze and assess taxpayers’ activities. These investigations could trigger an audit by the IRS or prosecution for crypto tax evasion by the IRS.
If you are under investigation or have been charged with tax evasion or tax fraud relating to the use of Bitcoin or other cryptocurrency, an experienced federal criminal defense attorney can help you understand the nature of the charges against you and defend you in court.
For more than 30 years, Philadelphia federal criminal defense attorney Hope Lefeber has been defending people who are under investigation for tax fraud and other white-collar crimes. Ms. Lefeber began her career as an enforcement attorney with the Securities and Exchange Commission. Today, she uses that experience to defend people who face federal criminal charges for allegedly committing financial crimes.
Historically, because of the lack of reporting requirements, some investors used cryptocurrencies to shield income from the IRS or engage in money laundering. In response, the Biden administration has increased its efforts to investigate and prosecute cases of tax fraud.
While Bitcoin, Ethereum, and other cryptocurrencies were designed to be invisible, the IRS has made changes to crypto reporting requirements and changed their investigation techniques to be able to track the number of taxpayers who are using cryptocurrencies, to trace the path of the money and to realize gains on profits from the sale of cryptocurrencies.
In fact, for the first time in 2020, the IRS included this question about cryptocurrency transactions on tax returns: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
By asking about cryptocurrency on tax returns, the IRS is gaining insight into the frequency and extent to which crypto is being adopted and used.
In addition, the IRS has added new technologies to assist with asset tracing, data analytics, artificial intelligence, and digital asset auditing. Because of the way cryptocurrencies are exchanged, federal tax investigators no longer “follow the money” but are instead “following the data.” While crypto investors initially thought blockchain technology provided protection from federal investigation, the IRS has recognized that by following the data they could more easily investigate potential tax evasion.
Cryptocurrency is quickly becoming an alternative to cash as merchants are increasingly accepting Bitcoin and other cryptocurrencies as a method of payment.
But cryptocurrency is taxed as a capital asset, not a currency. Taxpayers who use cryptocurrency are required to pay capital gains tax if they sell their crypto for a profit or use it for a purchase. But many taxpayers are unaware of these requirements or simply avoid paying the tax.
The Biden administration recognized that these transactions are contributing to the tax gap. According to White House estimates, over the next 10 years, the tax gap will grow to approximately $7 trillion. Experts estimate that 80% of the gap is due to unreported income, some of which is due to the increasing use of crypto. To close the tax gap, the Treasury Department is investigating wealthy Americans and has passed laws intended to close the tax gap.
The DOJ’s Cyber Digital Task Force issued a comprehensive report that outlines its enforcement framework against cryptocurrency crimes. The increased scrutiny of digital assets marks a notable departure from previous years, as the government steps up its investigation and prosecution of tax evasion using cryptocurrency.
According to the IRS Tax Crimes Handbook, there are two kinds of tax evasion: evasion of assessment and evasion of payment. Evasion of assessment is the more common of the two and occurs when someone willfully attempts to omit income from taxes, significantly underreports income, or overstates deductions. Evasion of payment occurs after an assessment has been made and a taxpayer conceals funds or assets that could be used to satisfy the tax liability.
The Cyber Digital Task Force notes that “not reporting capital gains from the sale or other disposition of the cryptocurrency, not reporting business income received in cryptocurrency, not reporting wages paid in cryptocurrency, or using cryptocurrency to facilitate false invoice schemes designed to fraudulently reduce business income are examples of evasion of assessments.”
Allegations of tax fraud and crypto tax fraud are serious and are often accompanied by other charges, such as conspiracy to commit a crime. The penalties for conviction can be severe and may include hefty fines and jail time. The government often casts a wide net that may include accountants, administrative staff, and others.
If you are under investigation or have been charged with a tax crime relating to your use of cryptocurrency, you need an aggressive and experienced criminal defense attorney on your side.
Philadelphia federal criminal defense attorney Hope Lefeber has been defending people accused of crimes in federal court for more than 30 years. She has earned a reputation among her colleagues in the federal bar, federal court judges, and her clients as a fierce defender of her clients’ rights. She is meticulously prepared and thoroughly analyzes any case she takes on.
If you are under investigation or have been charged with tax fraud, Hope Lefeber should be your first call. She has defended numerous high-profile clients, including executives at Fortune 500 Companies, businessmen and women, professors, doctors, accountants, healthcare professionals, and lawyers who have been facing federal criminal charges. She has lectured on federal criminal law topics and has appeared on TV as a legal expert.
If you are facing criminal charges, contact Ms. Lefeber today to schedule a confidential consultation to discuss your case.