The Criminal Investigation Unit of the Internal Revenue Service (IRS:CI) has released its annual report, which reveals an increase in crypto-related tax crime investigations and prosecutions in 2023. The report also highlights the challenges and risks posed by cryptocurrencies for cybercrime, money laundering, and terrorism financing.
The IRS:CI, the law enforcement arm of the Internal Revenue Service, has published its annual report for 2023, which showcases its achievements and challenges in combating tax crimes and other financial crimes.
The report, which was released on Monday, December 6, 2023, shows that the IRS:CI has seen a surge in crypto-related tax crime investigations as cryptocurrencies become more mainstream and accessible.
Crypto Tax Crime Investigations on the Rise
According to the report, the IRS:CI initiated over 1400 tax crime investigations in 2023, of which more than 10% involved digital assets.
The report states that these digital asset investigations “consist of unreported income resulting from failure to report capital gains from the sale of cryptocurrency, income earned from mining cryptocurrency, or income received in the form of cryptocurrency, such as wages, rental income, and gambling winnings.”
It also notes an increase in evasion of payment violations, where “the taxpayer fails to disclose ownership of cryptocurrency in an attempt to shield holdings.” The IRS:CI warns that taxpayers who do not comply with their tax obligations related to cryptocurrencies may face civil penalties, criminal prosecution, and imprisonment.
The report cites several examples of successful crypto tax crime prosecutions in 2023, such as:
- A California man pleaded guilty to tax evasion and money laundering charges, after operating a dark web marketplace that accepted Bitcoin and other cryptocurrencies for illicit goods and services. He admitted to failing to report over $1.2 million in income from his online business and laundering over $2.8 million in cryptocurrency through various exchanges and wallets.
- A New York woman who pleaded guilty to tax fraud and identity theft charges after using stolen identities and personal information to file fraudulent tax returns and claim refunds. She also admitted to converting some of the refunds into Bitcoin and other cryptocurrencies and transferring them to offshore accounts.
The report also states that the IRS:CI recommended 665 prosecutions in 2023, which resulted in 655 of those being sentenced. It claims that the IRS:CI achieved a conviction rate of 90.4%, which is one of the highest among federal law enforcement agencies.
Cryptocurrencies: A Double-Edged Sword
The report goes on to acknowledge that cryptocurrencies “provide opportunities for responsible financial innovation,” but they also continue to “fuel cybercrime.”
“Cybercriminals continue to create more sophisticated hacks and schemes in an attempt to outsmart the law to steal and launder massive amounts of cryptocurrency,” the report reads in part.
In particular, the IRS:CI points out an increase in “pig butchering” scams targeting U.S. taxpayers, where scammers deceptively gain trust with a victim to exploit and gain control of their digital assets.
The IRS:CI alleges the “highest identified loss” in one of these schemes was nearly $2 million, with average losses in “the hundreds of thousands of dollars.”
The report also warns that cryptocurrencies pose a “risk of facilitating money laundering, cybercrime and ransomware, narcotics and human trafficking, terrorism, and proliferation financing.”
This IRS report cites the example of Hamas, a terrorist group that launched an attack on Israel on October 7, 2023, which claimed the lives of 1200 Israelis. Israel has since launched counter-military measures in an attempt to combat Hamas, resulting in over 15,000 Palestinians killed.
According to BitOK, a financial audit company based out of Tel Aviv, Hamas received an estimated $41 million in crypto wallets between August 2021 and June 2023.
Regulatory Issues Surrounding Cryptocurrencies
The findings presented by the IRS:CI follow the recent U.S. Senate and House hearings to address regulatory issues surrounding the cryptocurrency industry.
“We know that bad actors prey on vulnerabilities wherever they can find them,” said House Financial Services Committee Chairman Patrick McHenry. “There’s a bipartisan agreement, though, that we must hold these bad actors to account in every way possible and, specifically, when it comes to digital assets and the digital asset ecosystem.”
The hearings focused on topics such as consumer protection, financial inclusion, innovation, and national security.
The lawmakers and witnesses also discussed the need for clear and consistent rules and regulations for the crypto space, as well as the challenges and opportunities posed by stablecoins, central bank digital currencies, and decentralized finance.
