No Further Warnings - Prosecutors Bring First Pure Legal Digital Asset Tax Indictment; More Criminal Cases to Come


Key takeaways:

  • Taxpayers should expect an influx of prosecution based purely on digital asset-related tax evasion and the filing of false tax returns.
  • Pursuant to IRS guidance, taxpayers must report all income, gains and losses, including those from cryptocurrency and digital assets.
  • After the IRS has been gearing up enforcement efforts for the past five years, IRS forms now provide prosecutors the upper hand in proving taxpayers’ willfulness in evading taxes in crypto cases.

After years of explicitly warning taxpayers that failing to report or underreporting income from transactions involving digital assets would lead to criminal charges, federal prosecutors are now beginning to follow through on their promises. A first-of-its-kind (and certainly not the last) indictment was made public on February 7, wherein a Texas individual, Frank Ahlgren III, was accused of inflating his cost basis in bitcoin and underreporting capital gains of approximately $4 million. In addition, Ahlgren is accused of structuring earnings deposits by splitting large portions of his bitcoin earnings into smaller deposits to avoid drawing the attention of law enforcement and of failing to report the capital gains from these transactions.

No crystal ball was needed to see this indictment coming, especially after the IRS Criminal Investigation (CI) division stated back in November 2022 that it already had hundreds of crypto-related cases for which it expected to bring charges. Indeed, those who have not come forward to voluntarily disclose past misreporting or to amend their returns, as well as those who continue to fail to accurately report their cryptocurrency transactions, should expect no mercy from the Department of Justice (DOJ) and IRS CI.

Unlike in previous cryptocurrency-related tax cases, the tax evasion allegations here did not stem from other criminal activities, such as money laundering or theft. Instead, Ahlgren engaged in legitimate purchases and sales of digital assets but failed to accurately report those transactions on his tax returns. Algrhren inflated the amount he originally paid for the digital assets, underreported the sale of $3.7 million in bitcoin, and failed to report $650,000 in bitcoin sales on his 2018 and 2019 tax returns. Shortly after the indictment, IRS CI chief Jim Lee stated that now more than half of IRS CI’s crypto-related caseload involves tax evasion cases concerning individuals who engaged in legitimate transactions involving digital assets but committed tax evasion by failing to report or falsely reporting their transactions.

DOJ and IRS CI began their efforts to address this issue in 2019 when the IRS first amended Form 1040 to require front-page disclosure of taxpayers’ virtual currency activity. In 2021, the form was updated again, with its relevant language changing from “virtual currency” to “digital asset.” This was interpreted as a sign that the IRS was beginning to target a broader scope of reported transactions and would be aggressively targeting those who evade or falsely report. These changes also helped turn nearly any prosecutor’s case for willfulness into a tougher case to defend, as taxpayers will be hard pressed to claim they were not aware that they had an obligation to report virtual currency transactions. In addition to amending Form 1040, the IRS has issued John Doe summonses to multiple digital asset platforms to obtain information about U.S. taxpayers who are not reporting their digital asset transactions. The IRS summonses seek information enabling the agency to identify users who are not in compliance with tax reporting and payment obligations. Several have been issued to date, and taxpayers who have failed to report or falsely reported digital asset transactions should assume that the IRS already has their information.

Ahlgren’s case comes as the first direct shot at a taxpayer and shows that DOJ and IRS CI will both continue to aggressively investigate and bring prosecutions. Taxpayers should take care to ensure that their gains and losses are diligently reported, especially for digital asset transactions, where enforcers’ eyes are now laser-focused. And those who have failed to accurately report these transactions in the past should consult competent counsel to determine their best course of action.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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