IRS small biz unit pivots to cryptocurrency enforcement

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Newly appointed officials in the Internal Revenue Service’s Small Business/Self-Employed division plan to make changes in the agency's strategy for dealing with collections and enforcement in the area of cryptocurrencies like Bitcoin and Ethereum.

Eric Hylton, who was recently named commissioner of the SB/SE Division, along with Darren Guillot, the new deputy commissioner for collection and operations support in SB/SE, and De Lon Harris, the deputy commissioner for examination in SB/SE, spoke during a conference call with the media last week about their plans. They began their new roles at the IRS on September 1, but they all previously worked in various parts of the IRS before being promoted to top jobs at SB/SE.

Hylton said cryptocurrency would be one focus, as well as syndicated conservation easements and micro-captive insurance. The IRS announced this week that it has begun sending letters to taxpayers who have been under audit for participating in micro-captive insurance tax schemes (see IRS offers to settle with insurance tax scammers).

“As we’ve been looking at things initially, we are formulating our priorities, but obviously cryptocurrency is an area that we want to look at, and take a strong look from an examination and collection standpoint as well,” he said. “We are also thinking about syndicated conservation easements, and microcap insurance. Those are the areas where I think we will be taking a look at, but we will be solidifying priorities in the coming months. But cryptocurrency is an emerging issue, and we are collaborating with the Large Business & International office on that, as well as to the extent possible [Criminal Investigation].”

Guillot explained that the IRS has been training its revenue officers in how to determine the value of cryptocurrency and to ask taxpayers whether they have any. “From a collection standpoint, 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,” he said. “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.”

The IRS has been taking advantage of data analytics technology to determine whether taxpayers own any cryptocurrency. “We have a number of analytical tools that have given us access to learning about taxpayer cases, where they are potentially the owners of a virtual currency,” said Guillot. “We will routinely ask taxpayers as part of a financial interview whether or not they possess virtual currency. It’s important that they’re forthcoming with us and tell us whether they have that virtual currency. The IRS treats virtual currency like an asset. It doesn’t mean that they’ve done anything wrong. It’s just important when we ask you about whether you have virtual currency to be straightforward with us and let us know that you have that virtual currency.”

Harris has plans for further leveraging data analytics at the IRS. “Data analytics is playing a big role, not only here at the IRS, but out in the world in general,” he said. “I plan on looking at how we can more effectively use data analytics to make sure that we are getting the right work out there to the revenue agents to do examinations. I kind of look at that as also being a taxpayer service initiative. We certainly don’t want people out there knocking on doors doing audits where there’s nothing to find, but we want to make sure that we are looking at the returns with the highest risk for noncompliance. So we’ll be looking at how we’re using data analytics at SB/SE and I’ll be getting briefed on that and how we can strengthen that in the selection of casework.”

Taxpayers should still be careful that they are dealing with genuine IRS agents and revenue officers when they open their doors to a potential examiner. “With the proliferation of impersonation schemes, and concern about whether people are meeting with authentic revenue officers or revenue agents out in the field, the revenue officers almost always make unannounced field visits — that’s really important — and carry sufficient forms of identification with them so that taxpayers can verify that they really are with the Internal Revenue Service,” said Guillot. “And there’s more information at about how to do that.”

The IRS plans to focus on cases where there appears to be genuine evidence of fraud, whether it’s in the cryptocurrency area or another. “Consistently, we’re looking for quality cases, whether it’s audit, collection or different things of that nature,” said Hylton. “If you see that there’s badges of fraud that are associated with a particular audit for a collection case, what we want to do is emphasize that could be potentially a referral to CI. There is no set percentage that we’re striving for. We want to increase that relationship with CI going forward, but as the Commissioner [Charles Rettig] has expressed before, if there are abuses of the tax law, we will pursue them and we will pursue them vigorously. That’s really our emphasis.”

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Cryptocurrencies IRS Digital currencies Small business Tax fraud