Jeffrey Saviano, global tax innovation leader at Ernst & Young and host of its Better Innovation podcast, spoke with Checkpoint about the current state of digital asset tax administration, as well as the emergence of advanced technologies in the evolving space.
The following interview has been edited for length and clarity.
CP: Do you foresee any growing pains next tax season when the digital asset broker filings required under the Infrastructure Investment and Jobs Act are due for transactions occurring this year?
JS: I think it will be hard like anytime that you have first-time reporting requirements. I think there’ll be some growing pains on scope and the methods of reporting. And I think anytime we see expanded reporting requirements like this, the first year or two there’s always a bit of hiccups.
CP: If there were to be any modifications to the definition of a digital asset broker to address any potential confusion, should there be new legislation or rules?
JS: I’m not sure that it would have to be done legislatively. But I do think that, like any of these provisions, that we’ll see a regulatory regime follow and perhaps that’s the place to define. One of the biggest issues across the industry now is who has the reporting responsibility—who should have that reporting responsibility?
I think the industry will struggle. That’s an area that’s really ripe for public-private sector collaboration. We’re starting to see some use of commentary periods to provide their input to help find classes of organizations in a way so it falls on the right class of business.
CP: If a taxpayer is unsure if they’re subject to certain reporting requirements and they have exhausted publicly available information, what is their recourse?
JS: In the past week, we’ve been hearing about mechanisms that the IRS is taking to bolster personnel. I don’t believe that the addition of all the personnel that we’ve been hearing about is solely to increase audits. There’s an expectation and there’s a hope that there will be additional personnel who will be available to provide some relief to taxpayers. That may be hard in certain areas.
I spent much of my career in the state and local tax area. We saw these issues all the time where we had competition definitions and laws across the states that, of course, were not always consistent. We’re going to see that happening around the world, especially in the next two to three years as these laws develop. It will be important for governments to provide taxpayer relief and there’s an expectation that we’ll see that in the U.S. as well.
CP: The IRS recently released a draft Form 1040 amending the question on crypto, changing “virtual currency” to “digital asset.” What’s the significance of that change in terminology?
JS: I think it’s an important change. I think it’s a healthy change. We are going to see that around the world. These are not just cryptocurrency issues. With the advent of nonfungible tokens and other digital assets that are producing tax issues, that are, technically speaking, really not a cryptocurrency. We’re seeing a greater percentage of discussions at the digital asset layer, which is a layer above the cryptocurrency layer. I would consider cryptocurrencies as a subset of digital assets.
There are a lot of tax issues at the digital asset layer, and fewer for cryptocurrency as a subset of that class.
CP: A common complaint of digital asset tax or reporting proposals is that taxpayers would be subjected to increased compliance burdens. How can lawmakers strike a balance between implementing rules to close the tax gap, curtail evasion and avoidance behaviors, and raise revenues without creating what are often described as overly broad administrative requirements?
JS: It’s an area government should look to for opportunities. For example, states impose nonresident reporting requirements and there are opportunities for employers to file nonresident composite returns to ease that compliance burden for individuals. It’s more efficient to put the tax withholding or information reporting burden at the organization level and more effective, frankly, than trying to chase taxpayers that may not be in the best, optimal position to comply. They may not understand, and you will get less of a compliance response there.
It’s that balance. Going to the organizations for withholding and information reporting in many, many examples has proven to be more effective for tax administration.
CP: In March, both the Biden administration and the Organization for Economic Cooperation and Development released their digital asset reporting proposals. Is the overlap between the two frameworks by design, and what signal does that send to the global tax community?
JS: There are a lot of similarities, and it does help a bit even at this stage to see the U.S. alignment to the Crypto Asset Reporting Framework (CARF). One of the biggest areas [where] we haven’t seen that alignment is that perhaps the U.S. wouldn’t have as much information about non-U.S. citizens. If you look to the information that other governments may receive under the Common Reporting Standard (CRS), in many respects we’re seeing CARF will equate to the expanded broker reporting and the new cash reporting in the Infrastructure Investment and Jobs Act.
But really, the U.S. law is of course only applicable to U.S. customers. Under CRS, there’s additional information with respect to foreign customers and foreign holders within those countries. That’s one distinction that we’re watching.
CP: The IRS will receive $80 billion through 2031, over half of which is appropriated for enforcement. What does this mean for taxpayers with digital assets?
JS: The vast majority of taxpayers are honest taxpayers. We’re all looking at this latest investment into the IRS and there’s a hope that there will be additional personnel to help make sense of the tax laws. That’s part of the role and the obligation of tax authorities. The rules are complicated, and there’s an obligation to make that even easier on citizens and that citizen experience.
Governments around the world are using new technology and digital platforms in ways to meet the modern taxpayer, and it doesn’t always have to just be to answer phone calls from a phone bank, but how can you use new digital portals and digital technology to serve citizens in new ways? I’m personally excited to see where that goes in the U.S.
CP: Can artificial intelligence be used to better serve taxpayers?
JS: I run our Advanced Technology lab at EY that’s focused on tax and trade. We collaborate with the Massachusetts Institute of Technology and much of our work has been how to leverage AI in both the public and private sector to improve taxation, the administration of payments, and collections determinations. AI is better than us at finding patterns in data. Both tax administrators and the private sector use AI for classification and use it to predict certain outcomes. There are new engines that have absorbed case law and can predict on a set of facts how a reviewing court would rule on that issue.
There are examples of governments that are using AI to improve communication with taxpayers. The old way is that a government may send the same communication to every taxpayer reminding them of an upcoming filing obligation. Through the use of AI systems, some governments like Australia have tailored communication to groups of taxpayers and let AI guide the administration more effectively.
That will have a profound effect on tax administration for years to come.
CP: Can AI extract information from blockchains?
JS: To the extent that it’s a public blockchain, then yes, it can. That’s actually one of the areas that we’re most bullish on, this idea of the convergence of technologies to address these issues. How can both governments and the private sector converge these technologies?
It’s no longer just about an AI system, nor is it about a blockchain system. But we’re seeing blockchain systems being built with AI capabilities infused in it and that’s important.
CP: Does the advancement of AI pose privacy concerns? How much pushback has there been from the crypto industry?
JS: It’s a question of where does the data come from? The revised version of Code Sec. 6050(I) requires any taxpayer that’s in a trade or business to file an information return if they have $10,000 or more digital assets. That was a provision applicable to cash transactions and we’re already seeing lawsuits saying that is overreaching and that there’s privacy concerns about the data.
I don’t think we have the depth of data privacy issues in this space as a society to properly address these questions. That day has to come where there is debate. I don’t think we’ve had that debate sufficiently. It’s a debate and a question that has to be asked on a jurisdiction-by-jurisdiction basis before this industry can be appropriately regulated.
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