Operation Hidden Treasure is here. If you have undeclared crypto, get legal advice


Damon Rowe, director of the Office of Fraud Enforcement at the Internal Revenue Service, announced yesterday during a Federal Bar Association presentation on fraud enforcement priorities that the office had “added some gems of the Crown ”, including a dedicated team of IRS criminal investigation professionals who are working on“ Operation Hidden Treasure ”. Operation Hidden Treasure is made up of agents trained in tracking cryptocurrencies and virtual currencies, and who focus on taxpayers who omit cryptocurrency income from their tax returns. Operation Hidden Treasure is a partnership between the Civilian Anti-Fraud Office and the Criminal Investigation Unit to eliminate tax evasion by cryptocurrency owners.

Carolyn Schenck, who is the National Fraud Advice and Assistance Division attorney for the IRS Chief Legal Counsel’s office, explained that the IRS was working on “how to take a length ‘advance’ and searched for various ‘tax evasion signatures’. Signatures can include “structuring,” which literally means structuring transactions in increments of less than $ 10,000 to avoid certain reporting requirements, “the use of candidates, fictitious bodies” or “getting in and out of the chain. “. The IRS works with sophisticated vendors to identify and investigate these tax evasion signatures. Schenck described Operation Hidden Treasure as “all about finding, tracing and allocating crypto to US taxpayers.” The IRS, through its trained agents working in collaboration with specialized suppliers, “analyzes the blockchain and de-anonymizes [crypto] transactions “to be” able to track, find and work to seize crypto in “both a civilian and a criminal setting.”

Schenck had a message for crypto traders who are potential tax evaders: “We see you”.

I wrote on the IRS efforts to crack down on cryptocurrency incumbents and increase compliance in this area before. I’ve also recently written on how the IRS instructions on how crypto account holders should report shopping are anything but a model of clarity.

What makes it criminal not to report anything on a tax return, including crypto?

Criminal tax evasion is defined by IRC Article 7201 as:

Any person who will deliberately attempt in any way whatsoever to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to the other penalties provided for by law.

LII / Institute of Legal Information26 US Code § 7201 – Attempted tax evasion or defeat

But what is this average? Tax evasion must be deliberate, and intentionality is defined as an intentional breach of a known legal obligation. During the same FBA presentation, James Lee, the head of the IRS Criminal Investigations Division, explained, “People need to know that there is a consequence in being willfully non-compliant. [with tax obligations], and this consequence goes to jail. Basically, if the government can prove that you knew what you did (or didn’t do) was wrong and did it anyway, the case may be criminal. If you simply made a mistake, it’s civil. The adage that error of law is no excuse does not apply to criminal tax.

Even if the IRS decides not to pursue criminal prosecution, the civil consequences of fraud aren’t exactly a walk in the park – a penalty of 75% of the tax understatement applies.

The private tax defense attorneys on the Federal Bar Association’s panel both agree that this increased enforcement effort by the IRS will undoubtedly produce results.

Steve Toscher, partner at Hochman Salkin Toscher Perez, PC, put it this way; “The new Anti-Fraud Office appears to be a game-changer in tax law enforcement. We expect to see more referrals for criminal prosecution and assertions of the 75% penalty for civil fraud. When the current IRS leadership took office a few years ago, they decided that stronger enforcement of tax laws, including the use of criminal investigations and civil penalties for fraud, was essential to the fairness for all taxpayers. The Enforcement Bureau is the product of this increased concentration. “

Sara neill, shareholder of Capes Sokol, agrees and notes that “things will change” and says that tax professionals will have to improve their skills in criminal defense.

If you have unreported crypto, what should you do?

The Tax Defense Bar has asked the IRS to announce some type of voluntary disclosure program, similar to the Foreign Bank Disclosure Program, designed to keep virtual currency holders “on their own” for years to come. vain. It seems unlikely that the IRS will deploy such a program. So what should those with undeclared crypto do?

Don’t talk to your accountant about past compliance errors.

Yes, you read that right. Don’t talk to your accountant about past compliance errors. You do not share the attorney-client privilege with your accountant. Your accountant may be asked to testify against you, may be compelled to testify against you in court, or may be compelled to share information about you with investigators. Only a lawyer may have confidential communications with you that will be protected from disclosure by solicitor-client privilege. I have encountered several situations in my career as a criminal and civil tax defense lawyer where the accountant found himself in an extremely difficult position because the client then “confessed” to something he did wrong, or – even worse – told the accountant half the truth about the problem, and half a lie. Taxpayers cannot confess crimes to their accountant and keep it a secret because the accountant is unable to prevent the government from obtaining documents or testimony on these communications.

Hire an experienced tax lawyer who can help you.

While the IRS has not launched a formal voluntary disclosure program that allows taxpayers with virtual currency to disclose their past mistakes, an experienced tax lawyer who is familiar with cryptocurrency will be able to guide you through the best. way to move forward. The lawyer may be able to prevent your case from becoming criminal by guiding you through a civil disclosure or discussing other options.

One thing you should never do when it comes to the IRS: bury your head in the sand.

Other great articles on the FBA panel and discussion of Operation Hidden Treasure can be found behind the paywalls, here (Kristen Parillo at Tax Notes) and here (Allyson Versprille at Bloomberg Tax).