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Takeaways:  <ul> 	<li>2022 IRS Criminal Investigation Annual Report highlights significant prosecutions and identifies cryptocurrency as an area of top priority heading into 2023.</li> 	<li>Criminal Investigation Chief Jim Lee reveals plans to hire 500 new employees to continue to pursue cases and warns that hundreds of crypto-related cases are ready to be publicly charged.</li> 	<li>Taxpayers with a potential issue should consider resolving matters now, before IRS agents target them in criminal prosecutions.</li> 	<li>Companies in this industry should ensure compliance addresses tax-avoidance risks in their business operations.</li> </ul>  The 2022 annual report<a href="#1">[1]</a> from the IRS Criminal Investigations (CI) division (the Report) demonstrates an impressive year for enforcement, particularly with regard to cryptocurrency. Following the publication, CI Chief Jim Lee made clear that the division will continue to closely scrutinize crypto transactions. He warned: “Expect more outward-facing tax crypto cases here in the near future” – “outward-facing” referring to publicly brought charges.<a href="#2">[2]</a> Lee also warned that criminal charges may result from “off-ramping transactions” (i.e., the process of converting digital assets into fiat currency). Bolstered by the prominent placement of reporting language on the front of Form 1040, law enforcement can be expected to bring more criminal tax cases against those who fail to disclose transactions involving digital assets. Given the division’s 90.6 percent conviction rate on cases accepted for prosecution in fiscal year (FY) 2022, companies and individuals should act now to work with counsel to ensure they are in compliance with all applicable laws and regulations.  FY 2022 Report Touts Major Successes  According to the Report, in 2022, the division identified $32.6 billion involved in fraud, $5.7 billion of which was tax fraud – reportedly three times the amount of fraud identified by the division in FY 2021. Additionally, the division seized approximately $7 billion in crypto, reportedly double the amount seized in the previous year. Further, more than 2,550 criminal investigations were opened, of which 1,564 resulted in convictions (resulting in the 90.6 percent conviction rate noted above). Touting these victories in the Report, Lee cautioned that “if a CI special agent has you in their [sic] crosshairs, there is a good chance you are going to jail.” The Report also details cybercrimes as a major priority and an area of strength for the division, including the introduction of the Office of Cyber and Forensic Services, which unites various teams within the division to investigate crypto-related misconduct. However, the battle is just beginning, according to Lee, who advised that the division is simply “laying the groundwork to do more in 2023.”  Hundreds of Crypto Cases and Increased Hiring for IRS Criminal Investigations Coming Soon  Compounding his earlier warnings, Lee publicly announced on a recent call with Bloomberg Tax that the division already has hundreds of crypto-related cases for which it expects to bring charges, a significant announcement for all companies or individuals operating in the cryptocurrency space or who have engaged in digital asset transactions. Lee also noted that many of these cases will be related to off-ramping transactions.  To support the division’s aggressive enforcement efforts, including continued investigations and prosecutions, Lee has announced plans to hire more than 500 new IRS employees, including 360 new special agents. In light of the ambitious hiring plan, failure by taxpayers to report digital asset transactions is more likely to be scrutinized by the division. This is a continuation of the division’s focus on digital asset enforcement, which began as early as 2019 when IRS Form 1040 first required front-page disclosure of taxpayers’ virtual currency activity. In the updated Form 1040 for 2021, the language referring to “virtual currency” has been changed to “digital asset” – likely a sign that the IRS is targeting a broader scope of reported transactions and will be aggressive against underreporting.  The IRS has been open about its aggressive stance on enforcement, willingness to bring cases and the types of cases it is prioritizing. The IRS’s increased enforcement activities mirror actions taken by other agencies in 2022 that have also signaled prioritization of crypto-related enforcement. For example, the Securities and Exchange Commission nearly doubled the size of its Crypto Assets and Cyber Unit and the Department of Justice (DOJ) is making concerted efforts to improve policing with the Digital Asset Coordinator Network that will be led by the National Cryptocurrency Enforcement Team.<a href="#3">[3]</a> Now more than ever, it is imperative for companies and individuals to take steps to comply with all applicable laws and regulations and ensure they have competent counsel in the event they become the target of an investigation.  The BakerHostetler Tax Practice Group provides clients with sound and practical advice in federal, international, tax controversy, employee benefits, private wealth, tax-exempt, and state and local matters. The group’s experience extends to structuring transactions and representing clients in the course of IRS examinations, audits and appeals. The Criminal Tax Defense team assists individuals and institutions with assessing and identifying issues of concern and implementing measures to reduce potential exposure. The team has successfully represented clients at each stage of the criminal tax process in administrative IRS investigations, joint IRS-DOJ grand jury investigations, and indictments and prosecutions by U.S. Attorneys’ Offices. The BakerHostetler Blockchain Technologies and Digital Assets team has members across all our core groups, and our attorneys have extensive experience across all sectors of the blockchain and cryptocurrency markets, including investigations, securities law, commodities law, Bank Secrecy Act/anti-money laundering compliance, tax, privacy, transactions, advertising law, intellectual property and technology design, as well as government affairs, public policy and advocacy across federal departments and agencies and in Congress.  Please feel free to contact any of our experienced professionals if you have questions about this alert.  Authorship credit: Carlos F. Ortiz, Elizabeth Ann Smith, Veronica Reynolds, Kayley B. Sullivan and Christina O. Gotsis  <hr /> <a id="1" name="1"></a>[1] 2022 Annual Report, IRS CI Division, available at https://www.irs.gov/pub/irs-pdf/p3583.pdf.  <a id="2" name="2"></a>[2] “‘Hundreds’ of Crypto Cases Coming, IRS Criminal Chief Says,” Bloomberg Tax, Nov. 3, 2022, 4:52 p.m., available at: https://news.bloombergtax.com/daily-tax-report/hundreds-of-crypto-cases-coming-irs-criminal-chief-says.  <a id="3" name="3"></a>[3] “SEC Signals Ramp-up in Crypto Enforcement by Nearly Doubling Its Crypto Assets Cyber Staff,” BakerHostetler, May 5, 2022, available at https://www.bakerlaw.com/SEC-Signals-Ramp-Up-in-Crypto-Enforcement-by-Nearly-Doubling-Its-Crypto-Assets-Cyber-Unit-Staff; “DOJ Targets Cryptocurrency Fraud,” BakerHostetler, Oct. 12, 2021, available at https://www.bakerlaw.com/DOJ-Targets-Cryptocurrency-Fraud.

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New York

Partner

Elizabeth Ann Smith

Associate

Christina O. Gotsis

Kayley B. Sullivan

Veronica Reynolds

Carlos F. Ortiz

Criminal Tax Defense

Blockchain Technologies and Digital Assets

IRS Warns: Hundreds of Crypto Criminal Tax Cases Coming Soon;  Hiring of 300 Special Agents Means More to Follow

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