The IRS encouraged Congress to strengthen disclosure rules around the purchase and sale of cryptocurrencies to help prevent cyberattacks, in a letter to Sen. Maggie Hassan, D-N.H., released Thursday.
IRS Commissioner Charles Rettig recommended that money service businesses (MSBs) like cryptocurrency exchanges, kiosks and over-the-counter trading desks be required to collect detailed know-your-customer (KYC) information to discourage anonymity.
The letter dated Dec. 21 comes in response to questions from Hassan, a Homeland Security Committee member, concerning cybercriminals who scammed Peterborough, New Hampshire, out of $2.3 million and converted it to cryptocurrency so as to be untraceable.
“For all MSBs, including virtual currency exchanges, either enhancing due diligence procedures on high-volume customers or implementing KYC requirements regardless of volume and risk is likely to decrease the volume of suspicious transactions, provide a stronger [suspicious activity reports (SAR)] program, and help identify both the business purpose of transactions and the source of funds,” reads Rettig’s letter. “A stronger SAR program should, in turn, enhance recovery of stolen or embezzled funds or even prevent such crimes in the first place.”
IRS-Criminal Investigation investigates the illicit use of cryptocurrency to violate tax, money laundering or Bank Secrecy Act (BSA) laws to the tune of $3.8 billion seized between fiscal 2018 and 2021. The BSA requires MSBs to register with the Treasury Department‘s Financial Crimes Enforcement Network, have anti-money laundering program, file currency transaction reports (CTRs) in addition to the SARs, and maintain certain records — all of which the IRS ensures.
While the IRS collects information on beneficial owners of entities holding accounts with U.S. brokers on some taxpayer forms, it’s currently prohibited from sharing that information with FinCEN. The agency recommended requiring such reporting to allow for automatic information sharing on taxpayers making cryptocurrency transactions directly or passively outside the U.S., in its letter. That information would go into FinCEN’s database for national security, intelligence and law enforcement agencies, as well as regulators like the IRS.
The IRS letter further recommended enhancing civil and criminal penalties for “egregious” negligence or civil fraud cryptocurrency cases to promote voluntary reporting compliance.
The agency further underscored its need for increased funding for examiners and enforcement, included in its fiscal 2022 budget request.
“This $21 million additional funding is specifically designated to support cyber, cryptocurrency and other highly technical investigations and plays an important role increasing IRS-CI’s law enforcement capabilities,” reads the letter.
Requiring the mandatory e-filing of Form 8300 would lead to more accurate information on people engaged in trade or business who receive more than $10,000 in one or multiple, related cryptocurrency transactions, according to the letter.
“Electronic filing facilitates more accurate tax information and supports the broader goals of improving IRS service to taxpayers and modernizing tax administration,” reads the letter. “Electronic filing also ensures valuable information is timely available for law enforcement purposes.”
Additional Title 31 Form 8300 legislation should ensure the form covers digital asset reporting, allowing people to file once with FinCEN — rather than having to file multiple information returns, which leads to evasion. Such legislation would also see the IRS share more information with law enforcement agencies like the FBI and prevent structuring, where transactions are patterned to avoid reporting, according to the letter.
Lastly the IRS recommended that a definition of “established customer” be added to the record-keeping requirement for CTRs. MSBs must verify and record identifying information, like the drivers license or Social Security Number, of a person making a cryptocurrency transfer of $3,000 or more — unless they’re an established customer.
The problem is that cryptocurrency exchanges don’t onboard customers like banks and must therefore report every transaction exceeding $3,000 in CTRs, even though they insist they have established customers.