A recently published U.S. Internal Revenue Service (IRS)
slide describes alarming recommendations on how tax agents should deal
with digital currency users who are not paying taxes. The slide
recommends that agents question crypto users’ friends and family, comb
through social media posts and issue subpoenas to make sure U.S.
residents are paying taxes on their cryptocurrencies.
IRS Proposes Extreme Tactics for Investigating Crypto Users
An IRS slideshow
created by James Daniels, IRS-CI cyber crimes program manager,
describes some concerning methods IRS agents should use to crack down on
crypto-using tax evaders. The slide follows the IRS’ recently announcing
tax guidelines on cryptocurrencies, which will contain rules about the
tax treatment of digital assets and forks. Even though the new tax
guidelines haven’t been issued to the public, IRS agents who enforce the
tax laws have have had no problems prosecuting bitcoin users for tax evasion.
Agent Daniels’ recently published slide gives a lot of detail on how
agents should combat crypto tax evaders by using a variety of
investigation methods. Within the 181-page document, there are thorough
descriptions of what a cryptocurrency is and chronicled paragraphs on
assets like ripple (XRP) and bitcoin cash (BCH). The report discusses a myriad of digital currencies including BTC, XMR, BCH, XLM, XRP, and LTC. Daniels’ descriptive study even calls certain hardware wallet users “fanboys.”
Toward the end of the report, the slideshow explains how agents can
track a bitcoin address using a public block explorer. “Once a Bitcoin
Address is identified, it can be looked up on a Bitcoin Blockchain
Explorer to find information such as value, transaction times,
transaction locations, which may help in corroborating information,
identifying additional addresses, or assist in locating the subject,”
the text expounds. “It can also be used to show if bitcoins were
transferred after a seizure warrant was served, which is discussed
below.” Additionally, the slides give a well-documented summary of
bitcoin mixers and how they are used to obfuscate trails of transactions
on a public ledger. If an IRS agent determines a tax-evading suspect,
the slide recommends sending grand jury subpoenas to a variety of tech
companies. The slideshow states:
Issuance of a Grand Jury Subpoena should be
considered for Apple, Google, and Microsoft for the Subject’s complete
application download history.
Investigating a Bitcoin User’s Financial Habits
What’s more alarming is that Daniels’ slide advocates agents
investigate the financial habits of individuals who are using crypto to
evade taxes. This includes, but is not limited to, conducting interviews
with “bank tellers, family, and friends of the subject (if feasible),
and establishments the subject frequents that may accept bitcoins.
[Investigating] Facebook, Twitter, and other social media outlets.” The
IRS slide suggests searching the subject’s financial accounts, including
bank, credit card, and Paypal records. “[Automated clearing house] ACHs
and wire transfers should be identified to see if any of them are
related to bitcoin,” Daniels’ slide suggests. The “Getting Information”
section in the slide states:
Transfers to and from a subject’s Paypal
account should be analyzed in much the same way, verifying the parties
involved with each transaction — Vendors who accept bitcoin, such as
Amazon Payments, can also be considered for subpoena. However, this
method may not reliably yield results.
Further into the slides, the agent explains that if the subject in
question does maintain a bitcoin balance, an attempt should be made to
identify their bitcoin wallet and associated addresses. The IRS report
emphasizes that a user could also have numerous crypto addresses. A
person can be identified if they posted a public address on social media
and the slide recommends searching “through posts by the subject on his
Facebook page or Twitter account.” If the suspected tax evader uses a
bitcoin wallet service, a subpoena for records could be issued to the
wallet company to identify the subject’s bitcoin balance, addresses, and
any identifying information. The IRS cybercrime agent also states that
there are various blockchain surveillance
companies available that can help with an investigation. Firms that
offer distributed ledger monitoring services mentioned in the IRS slides
include Chainalysis, Elliptic, and Ciphertrace.
“This software could accurately trace the history of bitcoin payments
and wallets — Moreover, it is able to map wallets into known
“clusters”— that is, mapping addresses to known entities like Silk Road,
Coinbase, and other large Bitcoin players,” the presentation explains.
Slideshow Shows Agents Are Studying Cryptocurrency Technology Extensively
The 181-page report is a daunting display of how IRS agents can
invade a person’s private life in order to prosecute them for tax
evasion. James Daniels’ slides also show that the IRS is well aware of
bitcoin mixers, the use of Tor, and other transaction obfuscation
methods. The study gives a detailed analysis of Bitmixer.io and explains that before the site closed down it mixed 65,000 BTC
per month since 2014. “In addition to Bitmixer’s website on clearnet,
the operation also had an official Tor mirror as well on the deep web,”
the powerpoint presentation details. The slides also give step-by-step
instructions for crypto beginners and explain how agents can easily sign
up for Coinbase and other popular exchanges as well as a Bitcoin ATM walkthrough.
People will likely be shocked by this display of law enforcement
going to great lengths to obtain cryptocurrency information on specific
people. Very few crypto users are actively taking steps to protect their
privacy 100% of the time. Perhaps this slideshow will urge more people to use mixing applications like Cashshuffle, operate wallets using a VPN
and make sure they keep addresses off the clearnet. The recent IRS
announcement that virtual currency guidelines are on the way is all but
meaningless when agents will investigate or prosecute you anyway if you
don’t follow the criteria. Pay taxes or wind up in a cage.
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