IRS Seized $3.5B In Crypto In Fiscal 2021 and May Seize Billions More In 2022

 According to Law360, The Internal Revenue Service's Criminal Investigation division identified nearly $10.3 billion in financial wrongdoing in the agency's 2021 fiscal year and seized around $3.5 billion in cryptocurrency connected to crime, according to a report released on November 18, 2021.

The Internal Revenue Service's Criminal Investigation division seized around $3.5 billion in cryptocurrency connected to crime for fiscal year 2021. (iStock)

The agency's criminal investigators identified nearly $2.2 billion in tax fraud and almost $8.2 billion in other financial crimes for the 2021 fiscal year, according to the annual report from the IRS Criminal Investigation division. Around 93% of CI's seizures in the fiscal year were cryptocurrency, which some agency officials have said facilitates asset and income concealment, according to the report. 

CI agents "are the only federal law enforcement officers with the authority to investigate criminal violations of the U.S. tax code," IRS Commissioner Chuck Rettig said in prepared remarks. "Their work reinforces the backbone of our voluntary compliance tax system — a system that funds services and benefits for our nation, including defense, infrastructure and education."

The report covered October 2020 through September 2021, during which time the division also continued working cases connected with abuse of various coronavirus relief provisions, such as the Paycheck Protection Program, according to the report. These cases involved a Florida man's admission that he secured around $4 million of those funds — authorized by the Coronavirus Aid, Relief and Economic Security Act  and used some of the cash to purchase a Lamborghini.

Other investigations conducted by CI included tax cases involving public corruption, cyber crimes and corporate fraud, as well as nontax cases involving money laundering, according to the report. It highlighted $1 billion in bitcoin seized that had been stolen from the now-defunct online drug bazaar Silk Road. Its creator, Ross Ulbricht, is serving a life sentence in prison for money laundering, according to the report.

CI has seen a slight uptick in its number of special agents, with 2,046 working in the division in the 2021 fiscal year compared with 2,030 in 2020, according to the report. More funding for the IRS could be on the horizon as legislators continue weighing the reconciliation bill, which has included a proposal for about $80 billion in funding for the agency.

In a conference call Thursday, CI chief Jim Lee said potential reconciliation money would be used to boost those staffing figures, which he called his "No. 1 priority" as the agency loses around 150 agents per year amid a general attrition issue. 

"It would help CI tremendously," Lee said. The funds also would let the IRS continue its focus on cyber, data analytics and technology, he added.

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IRS Criminal Investigation Releases Annual Report Highlighting 2,500+ Investigations and Law Enforcement

Over 2,500 criminal investigations, the identification of more than $10 billion from tax fraud and financial crimes, and a nearly 90% conviction rate are just a few highlights from the IRS-Criminal Investigation (IRS-CI) Fiscal Year 2021 Annual Report. The report, released Thursday, details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began Oct. 1, 2020 and ended Sept. 30, 2021.

“IRS-CI agents are the only federal law enforcement officers with the authority to investigate criminal violations of the U.S. tax code. Their work reinforces the backbone of our voluntary compliance tax system -- a system that funds services and benefits for our nation, including defense, infrastructure and education,” said IRS Commissioner Chuck Rettig.

In fiscal year 2021, IRS-CI built upon its existing network of U.S. field offices and international attachés to combat financial crimes across the globe. The agency’s alliance with the Joint Chiefs of Global Tax Enforcement (J5) helped strengthen public-private partnerships with financial institutions and the Fin-Tech industry to deter and identify criminal activity. Additionally, IRS-CI established its first cyber attaché in The Hague, Netherlands, to proactively support cyber investigative needs in coordination with Europol.

“IRS-CI continues to lead tax and financial investigations here in the U.S. and across the globe,” said IRS-CI Chief Jim Lee. “In fiscal year 2021, as we faced the second year of a global pandemic, our team of agents continued to overcome personal and professional challenges to target criminals who exploited the U.S. tax and financial systems for personal gain.” 

While IRS-CI Agents Spent Most Of Their Investigative
Man-Hours, About 72%, Investigating Tax-related Crimes
Like Tax Evasion And Tax Fraud During Fiscal Year 2021, They Also Made Significant Contributions To Money Laundering, Narcotics Trafficking, Public Corruption, Terrorism
And COVID-19 Fraud Investigations.

Case examples include:

In April 2021, a dual Russian-Swedish national was arrested in Los Angeles on criminal charges related to his alleged operation of the longest-running bitcoin money laundering service on the darknet dubbed Bitcoin Fog. The bulk of cryptocurrency laundered through Bitcoin Fog came from darknet marketplaces and was tied to illegal narcotics, computer fraud and identity theft. This case marked the second U.S. prosecution of a cryptocurrency mixing service; both were investigated by IRS-CI.

The ringleader of a transnational criminal organization, with ties to the Sinaloa Cartel, operating in California and along the East Coast was sentenced to 33 years in prison in July 2021 for narcotics trafficking-related charges. The sentencing followed a multiagency operation dubbed Operation Cookout that netted 65 kilograms of illegal drugs, 24 firearms, more than $700,000 in cash and guilty pleas from 45 defendants.

Numerous IRS-CI investigations resulted in individuals being sentenced for fraudulently obtaining small business relief loans under the CARES Act. One of those cases involved a Texas businessman who was sentenced in September 2021 to 31 months confinement and 36 months of supervised release after he created a scheme to fraudulently obtain more than $3.3 million in Paycheck Protection Program loans for personal use.

The report includes additional case examples for each U.S. field office, an overview of IRS-CI’s international footprint, details about the specialized services provided by IRS-CI and investigative statistics, broken down by discipline, for fiscal year 2021.

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Voluntary Disclosures Can Be Updated For Overlooked Foreign Accounts

According to Law360, the IRS' voluntary disclosure practice for offshore bank accounts will allow participants to supplement their noncompliance narratives, which are required to be complete when applying to the program, if they discover mistakenly omitted information, an agency official said Thursday.

Mistakes may happen during the submission process for the voluntary disclosure practice, or VDP, including in complex cases where certain entities or bank accounts may have been omitted, according to Daniel Price, a senior attorney with the Internal Revenue Service's Office of Chief Counsel. In these cases, participants can write to the IRS' Criminal Investigation division, or CI, and explain the nature of the omission or mistake, he said, speaking during a virtual conference hosted by Freeman Law PLLC.

Specifically, the supplemental disclosure letter must include relevant information from the original disclosure and provide a timeline for when the practitioner discovered the mistake, according to Price. The letter must also include a request for CI to evaluate the supplement to allow the individual to stay in VDP, he said. 

"Benign mistakes have occurred," Price said. "CI will allow the taxpayers in those types of situations to remain in VDP."

For individuals who face possible criminal investigations from the IRS, including for failing to disclose offshore bank accounts, the agency's long-standing VDP provides a process to come into compliance while potentially avoiding prosecution.

Participation in the program requires applicants to tell "the complete story" of their noncompliance with a narrative that includes personal and professional background information, according to the Internal Revenue Manual, which said those with incomplete narratives won't get an opportunity to supplement their submissions.

The inability to update submissions appeared "unduly strict" to members of the American Bar Association's tax section, who raised concerns about the narrative requirement in a September letter to the IRS.

The members said this IRM section struck them as "failing to take into account the common occurrence of innocuous, minor errors ... particularly for voluntary disclosures with conduct that might span decades and factual situations where other actors were involved (e.g., estates)."

The IRS announced updates to its disclosure practice in November 2018 following the termination of the agency's Offshore Voluntary Disclosure Program. First offered in 2009, the OVDP had allowed those who willfully failed to file foreign bank and financial account, or FBAR, forms to get lower penalties and protection from criminal liability if they came forward.

Specialists have noted that although the disclosure practice isn't as lenient as the OVDP, it still offers a way to avoid criminal referral.

The importance of the narrative component on Form 14457, which is needed for entering the disclosure practice, can not be overstated.

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IRS Delays in Processing Amended Tax Returns Are Impacting TAS’s Ability to Assist Taxpayers

In a blog post, the National Taxpayer Advocate (NTA) has discussed the IRS’s backlog of unprocessed amended returns and how that situation is negatively impacting the Taxpayer Advocate Service’s (TAS) ability to help taxpayers get refunds they are waiting for.

According to the NTA, on October 30, 2021, the IRS had a backlog of over 2.7 million unprocessed amended returns. The IRS claims the current processing time for these returns is about 20 weeks. The NTA, however, says that TAS cases indicate it is taking the IRS “considerably longer than 20 weeks” to process these returns. Updated information on IRS operations and backlogs, can be found here

Generally, TAS doesn’t accept cases in which it can’t meaningfully expedite or improve case resolution for taxpayers. And, TAS can’t expedite or improve case resolution for taxpayers whose amended returns haven’t been processed. Therefore: 

• TAS will no longer accept new cases where the only issue is the processing of an individual or business amended return.  

• TAS will accept new cases when the primary issue meets the case acceptance criteria in Internal Revenue Manual 13.1.7, TAS Case Criteria, even if the secondary issue includes processing an individual or business amended return.

The NTA recommends that taxpayers use Where’s My Amended Return to track the status of their amended return. According to the NTA, it takes about three weeks after an amended return is filed for it to appear in the tool.

Where’s My Amended Return can provide the status of amended returns for the current tax year and up to three prior tax years. One caveat, the tool cannot provide the status of amended returns with a foreign address, business tax amended returns, carryback applications, and amended returns processed by a specialized unit. 

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US Expatriations Rise In 3rd Quarter - Should I Stay or Should I Go?

As of the end of September, 980 people had expatriated from the U.S. since July, just over one-third more than the number from the second quarter of the year, the Internal Revenue Service said in a notice released Friday. 

This rise in expatriations in the last quarter builds on a rebound in the number of people losing or renouncing their U.S. citizenship in the second quarter after a series of decreasing expatriations that bottomed out at 228 people from January through March.

Expatriation Is The Term The IRS Employs For Loss Or Renunciation Of U.S. Citizenship Under Internal Revenue Code Section 877(A) And Section 877A, The Notice Said.

Expatriation has increased significantly in 2020. The latest U.S. Department of the Treasury Report reflects that a record 6,047 individuals expatriated during the first three quarters of 2020. In addition, 834,000 "green card" holders became U.S. citizens in FY 2019, which reflects an 11-year high.

Should I Stay or Should I Go?

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IRS Launches New Online Tool To Help U.S. Withholding Agents Validate Their 1042-S Data Prior To Filing

The Internal Revenue Service today. You so much for lunch near Jacoby this Launched a new online tool designed to help U.S. withholding agents comply with their reporting and withholding responsibilities with respect to IRS Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).

The tool performs a quality review of data before submission to the IRS. Use of the tool does not change a withholding agent’s obligations to file Forms 1042-S with the IRS and furnish a copy of the Form 1042-S to the payee.

“U.S. withholding agents play an important role in helping the IRS administer the tax code so we are delighted to be able to provide this tool free of charge to assist agents in meeting their filing requirement,” said Nikole Flax, IRS Large Business and International division commissioner.

In general, withholding agents, such as banks, insurance companies, universities, entertainment venues and resorts, or other financial institutions must file an information return on Form 1042-S to report amounts paid from U.S. sources to foreign persons. The definition of a withholding agent includes any person, U.S. or foreign, that has control, receipt or custody of amounts that are subject to the rules under Internal Revenue Code Chapter 3 (Withholding of Tax on Nonresident Aliens and Foreign Corporations) or Chapter 4 (Taxes to Enforce Reporting on Certain Foreign Accounts, i.e. FATCA or the Foreign Account Tax Compliance Act). 

The tool is designed to accept Form 1042-S data in common file formats that can be generated by most withholding agents’ back office systems. After uploading the data, the user will receive a report indicating errors and potential errors. A tutorial on how to use the tool can be viewed online or downloaded.

Even though the tool identifies data errors, the withholding agent remains responsible for making changes to the data on the agent’s system of record before submission to the IRS.  The list of resources below will help agents understand and correct errors before submitting the Forms 1042-S.

The tool can be used as many times as necessary on new or revised data. The IRS has no access to the users’ data. Use of the tool is voluntary, but the IRS will take into account a withholding agent’s use of the tool when making enforcement and penalty determinations. 

The IRS urges information reporting and withholding industry experts and withholding agents to share this critical information with any withholding agents that may benefit from using this tool.

Non-Resident Alien Withholding Resources

• Form 1042-S, Instructions in PDF or HTML and any recent updates
• Form 1042, Instructions in PDF or HTML and any recent updates
• Publication 1187 (.pdf),Specifications for Electronic Filing of Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding
• Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities

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Commissioner Rettig Pens Op-Ed On The Importance Of Providing The IRS With Vital Funding

In case you missed it: IRS Commissioner Chuck Rettig wrote a column that appeared in Thursday’s issue of The Washington Post. In the piece, Commissioner Rettig discusses the importance of providing the IRS with vital funding during the next decade and encouraged Congress to approve the $80 billion IRS funding proposal included in the Biden administration’s Build Back Better (BBB) plan.

The House Rules Committee on November 3 released the amended text of H.R. 5376, Build Back Better Act. As written, the IRS would receive approximately $80 billion in additional funding over the next decade. Specifically, the proposal would appropriate through September 30, 2031:

• $1,931,500,000 for filing, education, account, and other taxpayer services;

• $44,887,500,000 for enforcement, investigative, litigative, and digital asset monitoring and compliance activities;

• $27,376,300,000 for supporting internal operations and expenses;

• $4,750,700,000 for the agency's business systems modernization program designed to improve communications with customers; and

• $15,000,000 for the development of a free "direct efile" tax return system.

The allocated amounts are on top of the usual IRS funding.

As Rettig writes in the piece, the IRS's workforce "is the same size as in 1970" and has "fewer than 15,000 people to handle" taxpayer phone calls. The shortage of auditors has resulted in a 60% drop in audits of taxpayers with over $1 million in annual income over the past decade.

According to Rettig, the funding boost would increase taxpayers' access to answers surrounding refunds, economic relief, and account-related issues. "We want to be able to answer the phones and respond to questions," Rettig writes. "But to do all this, we need help. We desperately need sufficient resources to be able to appropriately serve and support you and our country."

The IRS Also Lacks The Means To Adequately Hold
Wealthy Individuals And Large Corporations Accountable.
An Estimated 15% Of Taxes "Are Uncollected Each Year," Largely Because Of Personnel And Technological Gaps.

"Every American should agree that it is unacceptable for our nation's tax administrator to be 'outgunned' when appropriately challenging aggressive moves by some of the most sophisticated taxpayers."

The prospect of a well-equipped IRS seeking to close the "tax gap" which is, the difference between taxes owed and collected, by raising revenue collections has drawn the ire of some conservative groups and members of the banking industry.

Earlier this year, a squad of Republican notables, including former Vice President Mike Pence's chief of staff, created the Coalition to Protect American Workers in direct opposition to President Biden's tax agenda. In May, the group - through Building America's Future - released an ad against the IRS funding proposal.

"Biden's massive tax increase plan includes a staggering $80 billion to help recruit an army of IRS agents, agents aggressively coming for every dime they can grab at your house and our small businesses," the ad's narrator says before instructing taxpayers to urge Rep. Matt Cartwright, R-Pa., to reject the president's plan.

More recently, a Twitter campaign using the #KeepMyBankingPrivate hashtag has gained steam on the platform as financial institutions and related groups rally against a Treasury proposal that would require banks to disclose additional data on accounts with total annual transactions over $600.

To many opponents, giving the IRS more money would result in invasions of privacy, government overreach, and lengthy audits.

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