[Rewritten August 2020] America has a bunch of new millionaires and even a few billionaires. These aren’t the titans of the Industrial Revolution in America. No oil barons or railroad magnates. Instead they are people who invested early in Bitcoin and other cryptocurrency offerings. And their meteoric rise in wealth hasn’t escaped the watchful eye of the IRS.
When we first wrote this post in 2018, Bitcoin was on its way to almost $20,000 to one Bitcoin. Shortly thereafter the price of Bitcoin dropped like a rock to just $3183. While we wont say that the IRS lost interest, the number of Bitcoin millionaires dried up overnight. Fast forward to 2020 and cryptocurrencies are back and so is the IRS.
For the record, cryptocurrencies aren’t our cup of tea. We don’t have a problem with those who made their millions or billions that way. Hats off to them. As long as you pay your taxes like everyone else, everyone is happy.
We work in the cryptocurrency space already. To date, it has been helping folks who were ripped off in ICO scams and other crypto schemes. Unfortunately, the cryptocurrency world has brought out the fraudsters.
A few of the people we talked to said they were told that cryptocurrencies would help them hide assets or income from Uncle Sam. For the first few years, cryptos probably were a safe place to hide money from Uncle Sam. The noose is tightening now.
We get the concept, no one likes to pay taxes. But as long as everyone has to pay them we as a society dislike even more those few who choose to deliberately not pay or report taxes. And that leads to today’s post.
The IRS has set its sights on Bitcoin and the cryptocurrency world. That’s right. Uncle Sam is asking the cryptocurrency exchanges for the names, addresses, social security numbers and account information of their clients. This may sound like old news given the 10,000 warning letters sent out in 2019 but now the IRS has upped the ante.
We know that the cryptocurrency world is still in its “Wild West” phase. Back in the 1980’s it was numbered Swiss accounts. If you wanted to hide money from the IRS, you simply opened a “secret” numbered account in Switzerland. Today, Switzerland wants nothing to do with American accounts.
What happened with unreported Swiss accounts is a lesson for those using Bitcoin to evade the IRS.
IRS Whistleblower Program and Cryptocurrency
IRS John Doe Subpoenas
The IRS has a wide variety of tools to go after records. One of those tools is the “John Doe” subpoena. There is a process that lets the IRS seek a court order to get records from banks. In a normal subpoena, the IRS would go to a bank and ask for records of a specific account holder. So if your name is Bernie Madoff, the IRS would issue a subpoena to your bank seeking records of Bernie Madoff.
In the case of unreported cryptocurrency or bank accounts, the IRS doesn’t know who the account holders are. Through a special process authorized by Congress, they can simply go the bank and ask for all accounts. They need a basis (“cause”) to believe that accounts are being used to evade taxes but don’t need to have probable cause to believe that you specifically are evading taxes. You can argue that the process isn’t fair, but the courts think otherwise.
The John Doe subpoenas were highly effective in the offshore banking cases because Uncle Sam carries a big stick in the banking world. Even of you are a foreign bank, the federal government can pretty much shut you down or make operations so unprofitable that you can’t compete in the world financial sector.
How does that work in the crypto world? It doesn’t work well.
The exchanges have servers scattered everywhere and the “currencies” they exchange aren’t pieces of paper in a physical bank vault. And the initial coin offerings (ICO) are worse, often they are simply a website. No one knows for sure where they are located.
Don’t think you are safe in using cryptocurrencies to evade taxes, however.
IRS Whistleblower Program
The IRS, Treasury, DEA, FinCEN and every other alphabet soup law enforcement agency knows that cryptocurrencies are easily abused by drug traffickers, organized crime, terrorists and tax evaders. That means they are investing a tremendous amount of time and effort to catch up.
It also means an increasing reliance on whistleblowers.
My friend Bradley Birkenfeld was one of the early Swiss bank whistleblowers. Bradley was a director at Swiss bank UBS He knew that the bank was knowingly helping US taxpayers evade taxes through secret Swiss accounts. We say “secret” because UBS didn’t send 1099s to the IRS. You once could hide billions of dollars there and unless you were honest and told Uncle Sam, no one knew about your accounts.
Bradley did the right thing and blew the whistle. He had to do slightly less than 3 years in jail for his participation in the scheme but in 2009, the IRS awarded him a $104,000,000.00 whistleblower award. By our calculations, he “earned” $18,895 for every work hour spent in prison. And his time was served in a camp.
Since then other bank whistleblowers have come forward and sold client lists at other major banks. While the United States won’t buy a stolen client list, it will pay huge whistleblower awards and other countries that buy these lists will give them to Uncle Sam.
That is another aspect to this fascinating world of whistleblowing. Although the United States is the only one with an IRS Whistleblower type program, the US and all the other major countries share information on tax cheats.
As a former tax prosecutor, I know firsthand that no government likes tax cheats or pedophiles. We may be enemies with Russia or Cuba or … but if you are doing bad things with kids or not paying the government, Uncle Sam will share that information. And so will our enemies.
Birkenfeld went to jail in 2009. Today, he probably wouldn’t do any time. In just a few short years, the Justice Department’s thinking has evolved. Our government now encourages people with inside information to report that information to the IRS Whistleblower Office.
What does this mean to the cryptocurrency world? Plenty.
We are actively working with the IRS and searching for currency exchange and other cryptocurrency insiders. If you have inside (Uncle Sam calls it “original source”) information of tax cheats using offshore accounts or cryptocurrencies to evade taxes, you may be eligible for an award.
In September 2019, the IRS announced at a conference that it was training its revenue agents (auditors), revenue officers (collections) and special agents (criminal enforcement) to be on the look out for taxpayers hiding assets in cryptocurrency or engaging in crypto scams.
In August 2020, IFC Review, an international finance publication, reported that IRS sent “another batch of its infamous “crypto letter” to individuals suspected of owning digital currency, urging them to correctly report the details of their transactions.” That intel was apparently confirmed by Bloomberg and CoinTracker.io. A copy of the letter being sent is reprinted at the end of this post.
Darren Guillot, the new IRS deputy commissioner for collection and operations support in the Small Business / Self Employed Division said, “[W]we have spent a considerable amount of time and effort over the past year making sure that the revenue officers throughout the country have training on how to detect, evaluate and determine the value of virtual currencies, and also where taxpayers are not in compliance. Enforcement’s our last resort. It’s never our first resort. But where taxpayers are not working to resolve their tax balances with us amenably, or are in possession of virtual currency, we have trained our employees on how to value those assets and seize them.”
In July 2019, the IRS sent out over 10,000 warning letters to people who may not be properly reporting cryptocurrency transactions. It says that criminal indictments are likely to follow.
The current round of letters, IRS Form 6173, are more serious than prior forms (^174 and 6174-A). The latter were more educational while the latest round of letters suggests that examinations (IRS parlance for audits) are imminent for taxpayers who ignore the warnings.
Previously in June, there was a meeting of the Joint Chiefs of Global Tax Enforcement (J5). The IRS Criminal Chief, Don Fort discussed money laundering and tax evasion schemes involving virtual currencies. He told criminals, “It’s not a good time to be a tax criminal on the run. Your days are numbered.”
Obviously, if you have inside information of these illegal schemes you may be eligible for a cash IRS whistleblower reward.
For more information about the IRS Whistleblower Program and how you may be able to qualify for an award, visit our IRS whistleblower page. (If you bought an ICO through a stock broker or investment advisor and were ripped off, visit or cryptocurrency fraud page.)
Ready to see if you qualify for an award? We would love to speak with you. Under American law, all consultations are protected by the attorney – client privilege. Even if you don’t hire us. And we never charge for our services unless you recover an award.
Want more good news? You don’t have to be a U.S. citizen or resident to qualify for a reward. And in most cases you can remain anonymous.
America needs more heroes. Whistleblowers help level the playing field and keep greed in check. For every dollar a tax cheat avoids in taxes, you and I have to work that much harder to make it up. There is a better way. Report tax cheats, make them pay their fair share and earn an award for doing the right thing.
For more information, contact us online, by email or by phone (414)-704-6731 (direct).
Copy of IRS 6173 letter
Reporting Virtual Currency Transactions
Why we’re writing to you
We have information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.
Virtual currency is considered property for federal income tax purposes. Generally, U.S. taxpayers must report all sales, exchanges, and other dispositions of virtual currency. An exchange of a virtual currency (such as Bitcoin, Ether, etc.) includes the use of the virtual currency to pay for goods, services, or other property, including another virtual currency such as exchanging Bitcoin for Ether. This obligation applies regardless of whether the account is held in the U.S. or abroad. More information can be found on www.irs.gov and in Notice 2014-21, found at www.irs.gov/pub/irs-drop/n-14-21.pdf, which describes how general tax principles for property transactions apply to transactions using virtual currency.
For one or more of tax years 2013 through 2017, we haven’t received either a federal income tax return or an applicable form or schedule reporting your virtual currency transactions.
What you need to do by the “respond by” date above
Take one of the following actions:
• If you failed to file one or more income tax returns, file the delinquent returns and report your virtual currency transactions as soon as possible. For more information see www.irs.gov/filing
• If you made a mistake on your income tax return, such as not reporting your virtual currency transactions or incorrectly calculating your income, gain, or loss; you can file an amended return. For more information, visit www.irs.gov/forms-pubs/about-form-1040x
• If you believe you followed all tax and information reporting requirements relating to your virtual currency accounts, mail or eFax the following to the address or eFax number shown at the top of this letter.
– A statement of facts explaining your position. Include a complete history of previously reported income from your virtual currency transactions. Explain the actions you took to become compliant with U.S. reporting requirements and provide copies of previously filed documents that confirm your compliance.
– Your contact information, including your telephone number, complete address, and the address where you receive mail (if different). Letter 6173 (6-2019) Catalog Number 72154R
– The following statements with your signature and date: I,_______________, declare under penalties of perjury that I have examined this entire document, including all attachments and accompanying statements, and that the enclosed is true, correct, and complete.
I also understand with respect to any submission that the IRS reserves the right to make further contacts with me and my representatives to clarify any written explanation or any other documents. Statements and documents sent under this option will be checked against information received from banks, financial advisors, and other sources for accuracy.
If we don’t hear from you by the “respond by” date
We may refer your tax account for examination. Please be aware that underpayments of tax are subject to interest and penalties.
Someone may represent you If you want someone to represent you in this matter, send a completed Form 2848, Power of Attorney and Declaration of Representative, with your response to the address above.
If you have questions, you can call the hotline telephone number shown at the top of this letter and leave a message. We’ll respond to all messages within three business days. Thank you for your cooperation. Sincerely, [Name] Program Manager