Will the $80B Budget Hike Help the IRS Track Crypto Cases?

Following the $80 billion budget increase from the Inflation Reduction Act, the Internal Revenue Service (IRS) has been given means to catch tax cheats to the full extent of the law. However, there is more than meets the eye, even amid the recent build-up of crypto cases.

The IRS Doubled Crypto Seizures in 2022

According to yesterday’s Bloomberg Tax report, the IRS-CI, headed by Jim Lee, is in the process of going public on hundreds of crypto cases. In August 2020, Jim Lee moved up from deputy to the chief of the IRS’ Criminal Investigation division, now having a 27-year of experience in the IRS.

Created in 1919, unlike other IRS divisions, the CI division has a special federal prerogative to pursue tax code violations in a way that “fosters confidence in the tax system”. In other words, to preemptively deter tax violations as the sixth largest federal enforcement agency. Hence, the soon-to-be-published crypto cases.

Moving on with the times, IRS-CI founded the Office of Cyber and Forensic Services in 2021 to combine all digital and international cybercrime efforts. According to the 2022 annual FY report, the office was largely dealing with tax evasion offenses, at 71.7%.

Lee stated this trend represents “a shift” in the last three years when it comes to digital asset inquiries. In years prior, the IRS-CI was predominantly dealing with money laundering operations. The most famous such case was when they caught exuberant couple Ilya Lichtenstein and Heather Morgan. They were charged with alleged conspiracy to launder 119,756 bitcoin extracted from the Bitfinex exchange hack in 2016, now worth around $2.5 billion.

“We’ve been doing it for more than 100 years, and we’ve followed criminals into the dark web and now into the metaverse.”

IRS-CI Chief Jim Lee

Overall, the agency seized $7 billion worth of cryptos for FY 2022, doubling the amount from the previous year. Although Lee stated that the agency can now track any crypto transaction, the agency offered a $625,000 cash bounty to crack Monero (XMR) privacy protection in September 2020.

The bounty was later doubled to $1.25 million, contracted to Chainalysis and Integra Fec with $625k each, but the payout wasn’t reported after the deadline expired in mid-2021.

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Does the IRS Really Need Budget Increase to Enforce Crypto Transactions?

After the Inflation Reduction Act gifted the IRS an $80 billion budget increase, the agency reported it would use the money to hire 86,852 personnel by 2031. This would amount to a 12k annual increase during the 10-year hiring period.

However, due to an aging workforce, many of the new hires will replace the existing workforce.  Ashley Schapitl, the spokesperson for Democrats on the Senate Finance Committee, noted that “the IRS has a very old workforce”.

Moreover, the nonpartisan Congressional Budget Office (CBO) delivered a report in August, lowering their forecast for IRS revenue in the next 10 years by as much as $23 billion. CBO attributed the projected downfall to two factors:

• Removal of expedited hiring authority for the newly funded positions. 
• Removal of the ability of the IRS to pay certain employees higher rates than those in the normal government salary structure.

Unless those restrictions are removed by Congress in a bipartisan fashion, the IRS’ seemingly bigger budget doesn’t necessarily translate to heightened retooling to track tax evasion. In the end, tracing transactions on public and transparent blockchains can be automated by a few veteran experts.

Moreover, crypto exchanges themselves report customer transactions to the IRS because they already enforce KYC/AML whenever users register. Case in point, before every tax season, Coinbase users receive a 1099 tax form to report crypto gains over $600. 

In fact, the exchange itself has been working closely with government agencies, supplying them with advanced analytics tools to trace blockchain transactions. 

Do you think central bank digital currency (CBDC) will become a welcome respite, as automated tax-collecting can be programmed-in without any agency involvement? Let us know in the comments below.