Virtual currency, such as Bitcoin, continues to be a topic of interest for the IRS. Indeed, for the 2019 tax year, the IRS added for the first time a unique question to Schedule 1, Additional Income and Adjustments to Income, which asks: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.” After the question, the taxpayer is required to check either “yes” or “no.” Predictably, there is no “maybe” box.
Continuing with this theme, the IRS now intends to ask even more Americans the same question for the 2020 tax year. That is, the same question above will now be asked on Page 1 of the Form 1040, U.S. Individual Income Tax Return. Because more Americans file Form 1040 than Schedule 1, the IRS’ intentions are clear—it intends to continue to seek more information regarding taxpayers’ holdings and dealings in cryptocurrency.
Notably, taxpayers who seek to offer collection alternatives to the IRS are also not immune. On the Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, it specifically requests the taxpayer to “[l]ist all virtual currency you own or in which you have a financial interest (e.g., Bitcoin, Ethereum, Litecoin, Ripple, etc.) If applicable, attach a statement with each virtual currency’s public key.”
In light of all these developments, a common question I receive from clients is whether someone can actually go to jail for checking the box “no” where, in fact, he or she should have checked the box “yes.” The answer is: YES.
Criminal Tax Laws.
There are a host of criminal tax provisions enacted and designed to keep taxpayers honest with their tax filings. For example, Section 7201 makes it a felony for any person to willfully attempt in any manner to evade or defeat tax imposed under the Internal Revenue Code (e.g., Title 26) or any payment thereof. Thus, to maintain a successful conviction under Section 7201, the government must show: (1) willfulness; (2) the existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of tax. See, e.g., U.S. v. Bolton, 908 F.3d 75, 89 (5th Cir. 2018).
Generally, the statute’s terminology of “in any manner” has been construed broadly by the federal courts. See U.S. v. Daniels, 699 Fed. Appx. 469, 473 (6th Cir. 2017 (citing Spies v. U.S., 317 U.S. 492, 499 (1943)). Accordingly, false statements or the concealing of assets from the IRS can constitute criminal conduct under Section 7201. See U.S. v. Shoppert, 362 F.3d 451 (8thCir. 2004); U.S. v. McGill, 964 F.2d 222 (3d Cir. 1992). In line with these cases, the government could conceivably choose to go after a taxpayer under Section 7201 for the failure to properly check the box “yes” with respect to the cryptocurrency question now listed on the federal tax return.
In addition, there is another criminal statute the government could use. Specifically, Section 7206(1) makes it a felony for any person to willfully make and subscribe any return, statement, or other document, which contains or is verified by a written declaration that is made under penalties of perjury, and which such person does not believe to be true and correct as to every material matter. Unlike a Section 7201 conviction, however, the government is not required to show the existence or proof a tax deficiency under Section 7206(1). U.S. v. Wilson, 887 F.2d 69 (5th Cir. 1989). But any measure of tax harm would of course remain significant for purposes of determining potential sentencing of the taxpayer under the Sentencing Guidelines.
The government has utilized Section 7206(1) successfully in the past to obtain convictions against taxpayers who falsified answers to certain parts of a tax return. For example, federal courts have held that providing false answers to the questions at the bottom of Schedule B, Interest and Ordinary Dividends, concerning interests in foreign financial accounts or foreign trusts violates Section 7206(1). U.S. v. Clines, 985 F.2d 578 (4th Cir. 1992); U.S. v. Franks, 723 F.2d 1482 (10th Cir. 1983).
Moreover, because Section 7206(1) applies to not only tax returns but also any “statement . . . or other document,” the government has successfully used Section 7206(1) to prosecute taxpayers who provide false answers to questions on IRS Form 433-A or IRS Form 656, Offer in Compromise. See U.S. v. Holroyd, 732 F.2d 1122, 1127-28 (2d Cir. 1984); U.S. v. Cohen, 544 F.2d 781 (5th Cir. 1975). Finally, the government can also use Section 7206(5) to prosecute taxpayers who provide false answers specifically to offers in compromise. See Gentsil v. U.S., 326 F.2d 243 (1st Cir. 1962) (charging Section 7206(5) for false OIC).
With the IRS’ increased focus on cryptocurrency, taxpayers should be aware that statements made on a tax return and/or collection-type forms may be used against them in a criminal prosecution. Accordingly, taxpayers should be careful in answering any and all virtual cryptocurrency questions on these forms.