The US Internal Revenue Services, IRS, has agreed to three key recommendations made by the US Treasury Inspector General for Tax Administration (TIGTA), which may introduce changes to virtual currencies such as Bitcoin.

The currencies are presently used for tax purposes, especially by businesses in the US, according to a newly released tax review report.

The TIGTA now views virtual currencies - especially Bitcoin which it says controls 82 percent of the entire virtual currency market - as allowing taxpayers to pay for goods and services in the same way as traditional currencies.

The review was aimed at evaluating the IRS’s strategy for addressing income produced through virtual currencies.

TIGTA has made recommendations that border on the need for IRS to develop an overall strategy to address taxpayer use of virtual currencies as property and as currency.

In addition, the Office of Audit states that as the IRS develops its strategy to ensure taxpayer compliance related to virtual currencies, the IRS also needs a methodology for gathering data on virtual currency transactions in order to identify and measure the risk of non-compliance.

The Office of Audit’s comment says:

“The IRS has already established that taxpayer compliance is higher when income is subjected to third-party information reporting. We believe that by identifying virtual currency transactions through third-party information reporting documents, the risk of taxpayer non-compliance can be reduced.”

Where to expect changes

The three recommendations are for the IRS 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. This action plan is to provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies, and to revise third-party information reporting documents in order to identify the amounts of virtual currencies used in taxable transactions

The TIGTA states in the report titled, As the Use of Virtual Currencies in Taxable Transactions Becomes More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance:

“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. In addition, it does not appear that any of the actions already taken by the IRS to address virtual currency tax non-compliance were coordinated to ensure that the IRS develops the overall “big picture” associated with taxpayer use of virtual currencies. However, according to Large Business and International Division management, in January 2016, a subgroup of the VCIT was established to look at the feasibility of creating a campaign around how the IRS should address tax non-compliance related to virtual currency. This work is still in the discussion stages.”

Why the changes are imminent

Some of the factors that would likely push the IRS into action include the claim that the estimated average gross tax gap for tax years 2008 through 2010, which was prepared by the IRS in April 2016, was around $458 bln per year, with the largest portion of the tax gap, $387 bln annually, due to underreporting.  

The TIGTA also notes that the IRS has not assessed the tax compliance risks of OpenFlow virtual currencies developed and used outside of virtual economies, because they were introduced after the IRS’s last review of compliance related to virtual economy transactions. Rather, it primarily focused its limited virtual currency efforts on tax compliance issues and not the enforcement of the potential criminal activities that are subject to the BSA - Bank Secrecy Act.

Also, the IRS is yet to identify virtual currencies used outside of virtual economies as a tax compliance risk that warrants specific attention, a position that has remained relatively unchanged.

The IRS agreed that its Large Business and International Division will collaborate with other business operating divisions in order to identify and address potential noncompliance issues in the virtual currency area, though it cites that it is faced with competing funding priorities requiring a needs-based prioritization of information technology expenditures in its current fiscal climate, and it does not consider modifying information reporting documents to capture virtual currency amounts as a priority at this time.