In a report, the Treasury Inspector General for Tax Administration (TIGTA) has highlighted the loopholes in the Internal Revenue Service’s (IRS) strategy for addressing income produced through virtual currencies.
The report said that there is “little evidence of coordination” between the responsible functions and divisions to identify and address potential taxpayer noncompliance issues for transactions involving virtual currencies.
“None of the IRS operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies”, it added. “In addition, it does not appear that any of the actions already taken by the IRS to address virtual currency tax noncompliance were coordinated to ensure that the IRS maintains a strategic approach to the tax implications of virtual currencies.”
TIGTA said that the IRS needs to develop a strategic plan that includes management oversight, along with adequate internal controls for its virtual currency programs.
“Until a comprehensive virtual currency strategy is developed, the IRS is open to the risk that undetected noncompliance of virtual currency taxable transactions will result in an increase to the Tax Gap”, it added.
To that end, TIGTA made three crucial recommendations to the IRS. Firstly, it emphasized to develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation. Secondly, it recommended the IRS to provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies. And lastly, to revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.
“The IRS agreed with TIGTA’s recommendations and plans to develop a virtual currency strategy including an assessment of whether changes to information reporting documents are warranted. The IRS also agreed that additional guidance would be helpful and plans to share the recommendation with the IRS’s Office of Chief Counsel for coordination with the Department of the Treasury’s Office of Tax Policy”, the report said.
