A significant focus on tax compliance and follow-up enforcement actions may be on the horizon. We previously reported that the Internal Revenue Service (IRS) Cyber Crimes Unit had signaled its determination to increase enforcement activity relating to income from cryptocurrencies. Those efforts are continuing. However, if the Biden Administration has its way, cryptocurrency enforcement will just be the tip of the iceberg when it comes to increased tax enforcement.
Additional funding sought by Biden Administration to increase tax enforcement
President Biden has proposed increasing the IRS budget by $80 billion over ten years and to give the IRS new tools to detect tax evasion by high-earners and large corporations. High income taxpayers are more likely to earn income through businesses, capital gains and other non-wage sources and, according to the IRS, are more likely to hold their wealth in opaque structures. Nonetheless, the top one percent of earners have become far less likely to be audited in recent years.
The U.S. Department of the Treasury (Treasury) has published The American Families Plan Tax Compliance Agenda, 1 which explains that “the President’s compliance proposals are designed to ameliorate existing inequities by focusing on high-end evasion.” Specifically, the Administration contends that the new tax compliance agenda will raise audit rates only for individuals earning $400,000 a year or more.2 Administration officials predict that the $80 billion investment in tax enforcement will raise $700 billion over a decade. That new revenue is relied on to fund part of President Biden’s proposed “American Families Plan,” which includes proposals for universal pre-kindergarten, a federal paid family and medical leave plan, programs to make child care more affordable, and free community college for all.
Treasury has explained that the increased IRS funding provided for in the American Families Plan would be used to upgrade technology, improve data analytic approaches, and hire and train IRS agents dedicated to complex enforcement activities. These investments would be paired with a new reporting requirement that would give the IRS an ability to verify income from non-wage sources.
This new reporting requirement aims to address a concern that more than 50 percent of taxes from sources like partnership and proprietorship income go unpaid. Both “the Government Accounting Office (GAO) and IRS agree that strengthening third-party reporting is one of the most effective ways to improve tax compliance.”3 Thus, the Biden Administration proposes requiring that financial institutions include new data on tax reporting forms. Specifically, financial institutions would be required to report gross inflows and outflows on all business and personal accounts including bank, loan and investment accounts.4 Treasury explains that the proposed reporting requirements would extend to payment service providers that are not traditional financial institutions including payment settlement entities, foreign financial institutions, and crypto asset exchanges and custodians.5 With regard to cryptoassets, Treasury explained that under the new regime, “as with cash transactions, business that receive cryptoassets with a fair market value of more than $10,000 would be reported on.” This, Treasury explained, is necessary to minimize any incentive for businesses to shift income out of the new data reporting regime.
Crypto enforcement continues
Simultaneously with the Biden Administration’s announcement of its tax compliance initiative, the DOJ Tax Division and the IRS have continued to ramp up pressure regarding the taxation of cryptocurrencies. In fact, the IRS is employing “John Doe” summonses to require cryptocurrency exchanges to release user information. Such a summons was issued to Kraken on 30 March 2021, and to Circle Internet Financial (which owns cryptocurrency exchange Poloniex) on 1 April 2021. These summonses require the recipient exchanges to identify users who had at least $20,000 in transaction value in any single year from 2016 to 2020. According to the IRS Commissioner Charles Rettig, “The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions. We will enforce the law where we find systemic noncompliance or fraud.”6 Commissioner Rettig also explained that the summonses should encourage all crypto holders to comply with tax laws because such tools send a “clear message to U.S. taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency.”7
What’s next?
Cryptocurrency tax investigations of entities and individuals are likely to be opened as investigators sort through data provided pursuant to the recently-issued subpoenas. The IRS may further scrutinize and potentially open investigations to review tax returns for taxpayers who did not properly file their crypto taxes during 2016-2020, especially for any taxpayers who received notices from the IRS about reporting requirements in 2019.
The impact of the Biden Administration’s intent to fund some of its spending program through additional tax enforcement will reach much further than taxes on cryptocurrencies. The full $80 billion increase in IRS funding sought by the Biden Administration may not be appropriated by Congress. Nonetheless, the proposal to fund new spending programs through increased tax enforcement that would target high income earners and corporate entities is notable, and increased audits and enforcement is likely on the horizon.
A 2019 Congressional Budget Office report found that the IRS’s budget was cut 20% between 2010 and 2018 and that those cuts led to a drop in examinations of both individual tax returns (a 46% drop) and in audits of corporate tax filings (a 37% drop).8 A restoration in funding, even one that fell short of $80 billion, is certain to increase scrutiny of returns filed by high income earners and corporations.
Although it will certainly take time for this increased spending to take effect, the Biden Administration has made its intentions clear that it will seek to fund its policy proposals in part through increased tax enforcement.
1 U.S. Dep’t of Treas., The American Families Plan Tax Compliance Agenda (May 2021).
2 Id.
3 Id. at 1-2.
4 Id. at 19.
5 Id.
6 Press Release, U.S. Dept. of Justice, Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency (Apr. 1, 2021).
7 Id.
8 Congressional Budget Office, Trends in the Internal Revenue Service’s Funding and Enforcement (July 2020).
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