Published on: April 22, 2021

Operation Hidden Treasure: The IRS’s Fight Against Cryptocurrency Tax Evasion

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    The Internal Revenue Service (IRS)’s new program, Operation Hidden Treasure, is aggressively targeting cryptocurrency tax fraud, and it’s clearly taking the issue seriously. A team of experts is being trained to spot taxpayers who are failing to include crypto-related income in their tax returns, and they can seize your funds.

    The IRS cryptocurrency tax rules are anything but clear, which has a lot of U.S. taxpayers wondering if Operation Hidden Treasure has them in its sites. This guide takes you through the important details of this initiative and how it might affect you.

    irs operation hidden treasure

    Operation Hidden Treasure, Explained

    Operation Hidden Treasure is a joint effort by two areas of the IRS. The criminal investigations unit and the civil office of fraud enforcement are developing the program to fight cryptocurrency tax evasion, both civilly and criminally.

    Federal agents dedicated solely to this venture are trained to track cryptocurrency transactions. IRS National Fraud Counsel Carolyn Schenck said the IRS is working on “how to get ahead of the game” and is watching for various “tax evasion signatures” that could alert them to fraudulent activity.

    learning information about open tax year

    What Operation Hidden Treasure Is Looking For

    Operation Hidden Treasure is tasked with finding any suspicious signals, which the IRS calls “signatures.” Signatures are indicators that almost always happen in cases of fraud but could also be perfectly normal occurrences. A signature could be:

    Structuring

    Structuring is when someone invests just below $10,000 in a variety of stocks to avoid the IRS reporting requirement that kicks in at that level. It’s a way of structuring transactions to avoid reporting the income.

    Using a Shell Corporation

    A shell corporation isn’t a real business. It doesn’t make money or get traded on exchanges. Its only job is to hold the assets of another company and make its financial transactions. This can be a legitimate approach, but it can also be a sign of a company trying to hide something.

    Unusual Deductions

    A bunch of oddball deductions is enough to catch the eye of Operation Hidden Treasure. They will want to know why you made a charitable donation of $10,000 if you’ve never done so in the past. Claiming deductions that are clearly personal as a business deduction is another suspicious sign to the IRS.

    Account Switching

    The IRS doesn’t like it when business income is deposited into a personal account. Business-related income should always be deposited in a business account first. It can be transferred to a personal account later.

    Income Discrepancies

    Your declared income must match the deposits into your account. If there are deposits from non-employment origins, the IRS will probably require an explanation. If you have a side gig, make sure to document all income and pay estimated taxes each quarter. 

    Operation Hidden Treasure’s investigators may find something they consider suspicious in your return and want to ask questions. This doesn’t mean it’s time to panic, it just means you need to submit any relevant financial documents. You don’t have anything to worry about if you have proper documentation for everything. Those who don’t might be wise to try to secure the necessary paperwork or seek professional help.

    cryptocurrency audit reporting

    When to Be Worried?

    Even the most fastidious bookkeeper can be nervous when it comes to IRS matters. The agency and lawmakers regularly develop new laws and programs such as Operation Hidden Treasure to address shifts in the country’s financial landscape. It isn’t easy to keep up with all the changes. 

    Being aware of the changes is only half the battle. You also have to be fluent in IRS jargon and legalese – especially when it comes to the murky instructions on reporting cryptocurrency purchases.  Here are a few things to keep in mind if you are unsure:

    1. It Can Be Criminal Not to Report to the IRS

    There is a difference between making a mistake and criminal tax fraud, although you get punished for both. The difference is making a mistake willfully: If you were fully aware that what you were doing was against IRS laws, your actions were criminal. Making a mistake, even a bad one, is viewed as a civil tax issue. Willful noncompliance of tax laws can land you in jail. 

    2. What to Do About Unreported Cryptocurrency

    Telling your accountant about any unreported cryptocurrency or past compliance mistakes is inadvisable, because they can be forced to reveal information about you and testify against you. The IRS has a system set up for taxpayers to voluntarily disclose information about their foreign bank accounts, but so far nothing has been developed for cryptocurrency disclosure. Your best bet until then is to consult with an experienced tax lawyer. 

    3. Be Prepared to Pay Your Debt

    There are penalties for tax fraud, whether it is intentional or accidental, and they are no joke. The penalty for a civil tax issue is 75% of the original amount. Criminal cases can cost millions, depending on the severity of the fraud. 

    4. Don’t Avoid Addressing Your Tax Issues

    There’s one thing you don’t want to do regarding unreported cryptocurrency income: Ignore it. IRS problems have a way of piling up and getting worse when you choose not to act. 

    Tax mistakes are expensive. Trying to fix them alone usually makes it worse. The IRS has experienced agents on their side – you should too. Anyone unsure of what to do about these evolving tax issues should get the help of a tax expert immediately. 

    avoid cryptocurrency taxes

    Protect Yourself From Potential Cryptocurrency Audits

    A tax attorney is your best option for knowledgeable advice if you have any confusion about tax regulations. They are bound by attorney-client privilege and are thus not compelled by law to disclose anything you tell them. 

    New tax laws and entities such as Operation Hidden Treasure require a tax law professional to navigate. If you have questions about Operation Hidden Treasure, cryptocurrency income, audit defense, or your tax liability, contact Silver Tax Group today to speak to an expert. 

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