- TIGTA’s audit discovered that the IRS struggles to identify crypto users, which reduced tax compliance to 45%.
- The IRS was requested by TIGTA to introduce stricter compliance rules for crypto exchanges.
- The nature of crypto leads to additional challenges, however, which makes crypto taxation extremely difficult.
The US IRS has been struggling to convince US crypto users to report their crypto dealings and pay on the profits they made from trading for years now. However, it appears that its efforts did not have too much effect. The number of crypto tax non-reporting cases are growing, which might force the US tax authority to introduce stricter rules on crypto exchanges.
The IRS needs to do more to identify crypto users
Recently, the Treasury Inspector General for Tax Administration (TIGTA) conducted an audit that discovered that the IRS is having trouble with identifying crypto-users among taxpayers. The main issue, according to the audit report, appears to be poor third-party information reporting.
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As a result of these findings, the administration has requested that the IRS take extra steps to reduce the information gap. The Agency was instructed to enforce stricter rules on digital currency exchanges in order to ensure more accurate data sharing.
The so-called third-party information reporting that seems to be the core of the problem is a smart mechanism that the IRS is using to ensure tax compliance.
This is actually the very reason why taxpayers have to fill out tax forms. Form issuers send these forms to the taxpayer and IRS alike, and when taxpayers file their tax returns, the tax agency’s systems match reports by issuers with reports filed by taxpayers.
The system quickly notices if the reports don’t match, and the IRS then makes a move to inquire further about the mismatch.
3rd-party information reporting doesn’t work on crypto
So far, this system proved to be rather effective, with compliance from the taxpayers being at around 95%. However, it would seem that compliance saw a 50% drop when it comes to cryptocurrencies.
The real issue here is crypto exchanges. With crypto regulations still being mostly non-existent, exchanges are expected, but not actually forced to comply, which is why they interpret the current rules in different ways from one another, and more importantly — from the IRS.
As a result, the IRS will be forced to modify the information reporting system, so that it will have accurate information regarding cryptocurrency. However, there are too many issues tied to crypto transactions, which makes the future of digital currency taxation unclear.