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IRS Looks to Third-Party Contractors in Crackdown on Virtual Currency Transactions

Client Updates

The Internal Revenue Service (the “IRS”) is moving forward with its targeted oversight of virtual currency transactions but evidently is facing challenges processing virtual currency data inhouse. On May 12, 2020, the IRS issued a Statement of Work (as reported by multiple news outlets), seeking third-party contractors to help review taxpayers’ virtual currency transactions and calculate gains and losses.

According to the Statement of Work, the contractor must be able to analyze various types of data, including blockchain data and API keys obtained through exchanges or wallets, and create a detailed tax report summarizing its analysis. Tax year 2017 is specifically referenced, although the “years at issue will vary from case to case.”

The Statement of Work implies that the IRS has identified cryptocurrency owners with suspect transactions—perhaps through its “John Doe” summons on Coinbase, discussed here—and is now taking the next steps in building a case against such cryptocurrency owners. The Statement of Work requires the contractor to be available to consult with the IRS during meetings, meet with an IRS Appeals Officer, prepare for trial, and testify at trial if necessary.

The Statement of Work also reflects that the IRS is looking to contractors for help identifying and obtaining missing information. The Statement of Work requires the contractor to identify “potential gaps in completeness of data and/or accuracy of calculations” and to “ingest all data provided by the IRS, as well as any attendant or related data the contractor collects through their systems.” Contractors with a deep understanding of the blockchain, potentially equipped with a database of identifying information, could make substantial headway identifying and obtaining missing information, much more than many cryptocurrency owners expect the IRS could make on its own.

Should you have any questions about the Statement of Work or its implications, please contact any member of the Baker Botts Virtual Currency IRS Task Force listed below.

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