With tax season coming to a close next month, this means that the season for creative methods of tax evasion for 2017 is soon to start.
Sadly, for the people who are planning to use Bitcoins to evade taxes next year, there`s some bad news.
The IRS is now on the lookout for Bitcoin-based for tax evasion.
Earlier, the IRS sent a request to Coinbase, one of the largest Bitcoin exchanges in the U.S., asking for the records of all customers who purchased the cryptocurrency between 2013 and 2015.
The document, a so-called John-Doe summons, stated that recently an IRS agent found 3 cases in which individuals were evading taxes through Bitcoin —two of the three involved Coinbase customers.
The IRS has said that these findings —and the relatively high anonymity level of Bitcoin— have led the tax agency to think that may be many individuals are using Bitcoin for similar purposes.
The summons comes soon after the Inspector General of the Treasury Department issued a report that chastised the IRS for not taking more aggressive action to put an end to unlawful activities by people who use Bitcoin and other cryptocurrencies.
The report, which was delivered in September, stated that none of the operating divisions have developed any kind of compliance guidelines or initiatives for conducting investigations specific to tax non-compliance that is related to Bitcoin and other cryptocurrencies.
The request would require that Coinbase, a Bitcoin exchange startup based in San Francisco with funding from some of the top venture capital firms, give the Internal Revenue Service the full transaction history and identity of millions of its customers —a total of around 5 million customers as of December 2016.
The dispute started last year when the IRS issued a summon for the company to turn over a large amount of data about their customers, including all their customer account details and their detailed transaction records.
In January, Brian Armstrong, CEO of Coinbase, had complained that the legal fight may cost his company close to one million dollars and that he preferred to spend the cash hiring more employees.
At the time, Armstrong offered an olive-branch to the Internal Revenue Service, saying that Coinbase was ready to give its customers 1099B forms for their Bitcoin gains and losses, which are used by brokerage firms to help their clients report their taxes.
Coinbase has claimed that the demands of the Internal Revenue Service are illegally broad and said that they will not comply.
This has, in turn, led the IRS to file a federal lawsuit so that they can enforce the summons.
Although the lawsuit didn`t come as a surprise, a new affidavit from IRS agent David Utzke has revealed more information about how the IRS is conducting their investigations.
Specifically, Utzke explains that he ran a computer analysis against the Internal Revenue Service repository of over a hundred million tax records, and discovered that only around 800 individuals filed a Form 8949 to account for a property description that is likely related to virtual currencies, including Bitcoin.
According to Utzke’s affidavit in 2013, 807 individuals filed a Form- 8949 to account for a property description that is likely related to Bitcoin; in 2014, 893 people reported a Bitcoin related transaction on Form-8949; and in 2015, 802 people reported a Bitcoin related transaction on the Form-8949.
Form-8949 is used to report capital gains and capital losses, and under the current IRS rules, would require owners of bitcoin to declare all their earnings.
In some cases, the earnings could be substantial given that bitcoin currency soared from $13 to more than $1,100 during the 3 year period (2013 to 2015) for which the Internal Revenue Service is seeking information.
It is not possible to know the percentage of customers of Coinbase the above numbers represent, but it is likely just a small fraction.
Although some of the Coinbase accounts belong to non-US citizens, and many other accounts didn`t have any transactions, hence they didn`t trigger any earnings, it is possible an IRS review of the Coinbase customer accounts could identify over a hundred thousand people who did not declare their Bitcoin gains.