IRS to Target Bitcoin Tax Evaders With “Special Software,” Problem For Investors?
Earlier this week, the Daily Beast reported that the US Internal Revenue Service obtained special software to track tax evaders and cheats using bitcoin to hide their wealth and avoid paying taxes.
“The purpose of this acquisition is… to help us trace the movement of money through the bitcoin economy. This is necessary to identify and obtain evidence on individuals using bitcoin to either launder money or conceal income as part of tax fraud or other Federal crimes,” read the contract of IRSobtained by the Daily Beast.
Since January, many leading bitcoin exchanges and companies including the $1.6 billion bitcoin wallet and digital currency exchange platform Coinbase were targeted by the IRS to reveal investments, personal accounts and sensitive financial information of their users. Coinbase CEO Brian Armstrong noted that the IRS demanded data of millions of user accounts through a John Doe summons. At the time, Armstrong noted that the request of the IRS was not reasonable and that if approved, it would set a negative precedent for the entire cryptocurrency industry.
In July, the IRS released an update on its conflict with Coinbase by announcing that it has officially scaled back its request and stopped requesting sensitive user information such as passwords. Bitcoin experts including Bitcoin Core developer Luke Dashjr expressed their concern towards the details of the request, as it was not previously disclosed that the IRS also demanded the release of user passwords.
Various publications such as Fortune and Reuters reported in July that the IRS decided to scale backits crackdown on bitcoin investors and traders, as the representatives of the IRS claimed to scale back its investigation. However, the recent document obtained and released by the Daily Beast demonstrates that the IRS is still targeting bitcoin tax evaders.
Technical specifications and intricacies of the special software used by the IRS are yet to be disclosed. For bitcoin exchanges and wallet platforms, the software currently being utilized by the IRS could become an issue in terms of security and privacy. If the software is in any way similar to that of the FBI’s which were used to investigate dark web marketplaces, it could impose serious vulnerabilities on bitcoin platforms.
Many experts within the cryptocurrency sector still believe that the efforts of the IRS will likely be unproductive and ineffective as investors or users utilizing bitcoin to evade taxes and conceal their wealth will simply move onto anonymous cryptocurrencies such as Monero or Zcash.
“Those who are actively seeking to avoid tax, especially large amounts of tax, will move onto the next cryptocurrency that is not susceptible to the current tracking tools,” said Alan Woodward, a computer science professor at the University of Surrey.
The more realistic and efficient method for the IRS to collaborate with bitcoin users in tax collection is to conduct joint operations with existing bitcoin exchanges and trading platforms, as suggested by Coinbase in January, instead of enforcing various regulations and using unknown software that have proven to be ineffective.