WASHINGTON — The Internal Revenue Service's internal watchdog on Tuesday called on the agency to develop a concerted strategy to address the possible use of virtual currencies in tax evasion or money-laundering schemes.
"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 currency," the IRS inspector general said in a report. "IRS management needs to develop an overall strategy to address taxpayer use of virtual currencies as property and as currency."
The watchdog also recommended that the IRS improve coordination on virtual currency work within the agency. In response, the IRS agreed to improve coordination and "develop the appropriate strategy for addressing" tax fraud tied to the use of virtual currency.
The watchdog did acknowledge a number of measures the IRS has taken in recent years to address the rise of virtual currency.
In December 2013, the agency created an internal team dedicated to virtual currency. Initially the group was focused on investigating tax evasion schemes perpetrated with bitcoin, but last year its mandate was expanded to "meet and share knowledge on virtual currency." Also, in 2014 the IRS published guidance that specified that virtual currency is taxable like property.
But the IG said the agency has made little progress addressing tax compliance risks associated with bitcoin. Since 2003, "the IRS's position on virtual currency as a tax compliance risk requiring additional oversight has remained relatively unchanged," the report said.
In addition, the watchdog found that the IRS had failed to study how bitcoin could be used in money laundering or terrorism financing. IRS agents are responsible for examining nonbank financial institutions, including many virtual currency exchanges registered as money services businesses, for Bank Secrecy Act compliance.
"The IRS has significant tools available to help ensure that virtual currency exchanges are following the law and that unscrupulous individuals are not engaged in criminal activities through the use of virtual currencies," the inspector general said. "However, the IRS has primarily focused its limited virtual currency efforts on tax compliance issues and not enforcement of the potential criminal activities that are subject to the BSA."
The IG also recommended that the IRS issue additional guidance for the public and update common tax reporting forms to include a separate slot for virtual currency transactions. The agency said it would evaluate whether it had enough resources to take those measures.
"It is imperative that the IRS ensures that those who engage in activities using virtual currencies comply with all of their tax obligations," J. Russell George, the Treasury inspector general for tax administration, said in a statement accompanying the report.