TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, July 2, 2018

 Cryptocurrency And The Shifting IRS Enforcement Model

Dashiell C. Shapiro (Wood LLP, San Francisco), Cryptocurrency and the Shifting IRS Enforcement Model, 1 Stan. Blockchain L. & Pol'y ___ (2018):

This Article reviews the IRS’s previous enforcement models, and considers how these have shifted in recent decades. The IRS has increasingly moved away from a purely punitive system towards one that focuses on customer service, the theory being that a procedurally fair system will increase taxpayer satisfaction and voluntary compliance. Given the IRS’s steady shift to a more holistic tax enforcement approach, the Author believes that the IRS is likely to take a broad-based approach to cryptocurrency tax enforcement.

Rather than a world of increasingly aggressive tax law enforcement, as Davidson and Rees-Mogg suggest [James Davidson & William Rees-Mogg, The Sovereign Individual: Mastering the Transition to the Information Age (1997)], we may instead witness a continued strategic shift in resources deployment by the IRS away from criminal prosecutions as the IRS ramps up its cryptocurrency enforcement efforts.

The recent experience of the IRS’s Swiss Bank efforts can give some helpful clues as to how the IRS intends to approach cryptocurrency evasion. Indeed, IRS criminal tax prosecutions have actually been in steady decline over the past decade. Yet the IRS successfully convinced tens of thousands of offshore account holders to come forward, file back tax returns and Foreign Bank Account Reports, and even pay substantial fines. To accomplish this, the IRS has used large-scale “John Doe” summons efforts coupled with general threats of prosecution, to steer people to enter these offshore voluntary disclosure regimes. Using the recent example of this IRS Swiss Bank enforcement effort, we ask how a similar enforcement model might, and might not, work to close the tax gap with respect to cryptocurrency tax collection.

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