12-06-2022
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “Act”) into law. The Act serves to combat rising levels of inflation and generate revenue for the Federal Government. The Act seeks to achieve these goals through various policies, many of which concern the current operation of the U.S. income tax system.
The most currently discussed change via the Act is the allocation of $80 billion of additional funding for the IRS over the next ten years. For the past ten years, the IRS was operating within a fiscal budget of $150.3 billion, which was split between various departments. The Enforcement Division received $66.0 billion, Operations Support received $47.6 billion, Business System Modernization received $3.1 billion, and Taxpayer Services received $33.6 billion. This additional $80 billion, over the next ten years, will increase each department’s budget. The Enforcement and Operation Support divisions are set to receive the bulk of this new funding and the Enforcement Division’s budget, in particular, is scheduled to increase to $111.64 billion (69% increase).
The general motivation behind this allocation and the Inflation Reduction Act is clear. The Biden administration wants major corporations and high net worth individuals to pay more in taxes and the administration is providing the IRS with more funding for purposes of identifying those who do not pay their fair statutory share. These budget increases will lead to more audits and a wider threshold of those audited, among other things, as the IRS will hire more enforcement agents and invest in new investigative technology.
Many people rightfully assume that these budget increases will enable the IRS to perform an increased level of audits and investigations related to cryptocurrency transactions. The Congress, in fact, made it clear that the budget should be used by the IRS to monitor and enforce taxes on digital assets such as cryptocurrency (P.L. 117-58).
In general, cryptocurrency may not be timely reported for a number of benign reasons. A taxpayer may be overwhelmed by the volume of transactions, may not understand how they were taxed (particularly in prior years) and/or may not be able to locate the proper reporting software to calculate the proper gains or losses. Additionally, a taxpayer may simply not understand the method of calculating gain or loss as stipulated by the IRS.
If you are one of many taxpayers who missed reporting digital asset related transactions on your past tax returns, you may want to quickly, but carefully, address this issue with a competent tax professional as it may not be sufficient to simply file amended tax returns. Filing an amended return, without more, can be viewed as criminally admitting fault.
Accordingly, you will have to carefully assess, with your tax counsel, the level of criminal and civil tax implications present in light of your particular circumstances. Fortunately, the IRS has recently added cryptocurrency transactions to its long standing Voluntary Disclosure Program (I.R. 2022-23) via an update to Form 14457. The Voluntary Disclosure Program has been historically used by taxpayers to report undisclosed income and offshore bank accounts to the IRS in exchange for, among other benefits, a reduction in civil and criminal penalties. If you willfully omitted the reporting of cryptocurrency transactions for any of the past six years, then availing yourself of the Voluntary Disclosure Program option may be significantly more beneficial than plainly filing amended tax returns as you should be able to avoid quite serious civil and criminal penalties.
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