TIGTA: Digital Asset Form Delay Hindering IRS Compliance Enforcement

Without a dedicated information return, the IRS’ “line of sight” into digital asset transactions is limited because of a lack of third-party reporting, according to the Treasury Inspector General for Tax Administration (TIGTA). (Report No. 2024-300-030)

In a July 10 report, TIGTA said IRS research shows that compliance is improved when the IRS has “visibility” on amounts subject to information reporting and/or withholding. While the report was drafted, TIGTA mentioned in footnote, the IRS released final digital asset regs implementing provisions of the Infrastructure Investment and Jobs Act (PL 117-58), including reporting responsibilities of digital asset “brokers.” The digital asset laws from the 2021 bill have been delayed as the IRS worked through the rulemaking process, and the regs begin to phase in starting 2026.

The IRS is soliciting stakeholder feedback on Form 1099-DA, Digital Asset Proceeds from Broker Transactions, after releasing a draft of the form in April. Digital asset brokers, a term clarified in the regs that describes certain entities that facilitate digital asset transactions, will be required to submit the form to the IRS and furnish copies to digital asset holders. For more on the form, see Deloitte’s Jonathan Cutler Weighs in on New Digital Asset Reporting Form (5/28/2024).

As the form is refined, the IRS should develop an agency-wide strategic plan for how it will use the data it receives from Forms 1099-DA, TIGTA recommended. This will especially benefit the IRS Large Business and International (LB&I), Small Business/Self-Employed (SB/SE), and Criminal Investigation divisions, as well as the Office of Research, Applied Analytics and Statistics and the Digital Assets Initiative Project Office, read the report. Such data will better inform enforcement case identification and selection, it added.

Revenue agents in LB&I and SB/SE “rely on third-party information documents when conducting income probes of taxpayers during their examinations,” the Treasury watchdog said. “The new Form 1099-DA will allow the examiners to be more efficient when determining if a taxpayer has not correctly reported income from digital asset transactions because gross proceeds from transactions will be reported on all forms.”

Currently, the IRS asks on the first page of Form 1040, U.S. Individual Income Tax Return, if a taxpayer has received, sold, sent, exchanged, or acquired an interest in digital assets. This question was added to the 2020 Form 1040, building upon the previous year’s version that asked about “virtual currency” on Schedule 1.

TIGTA reported that from tax years 2019-2022, nearly 12.6 million taxpayers self-reported digital asset transactions. “The number of taxpayers who annually self-reported as having digital asset transactions increased by 649 percent from TYs 2019 to 2021,” per the report. “In TY 2022 that number decreased to 2.7 million, but that was still a 202 percent increase from TY 2019.”

Overall, TIGTA commended the “proactive” efforts on the criminal enforcement side but conversely determined that civil examinations focusing on digital assets “are mostly indirect and negligible.” Although total tax assessments from audited returns with a digital asset component increased from $507,850 in fiscal year 2022 to over $12.2 million through May 2023, TIGTA could not gauge “whether this increase is due only to examinations of the digital asset component.”

Nonetheless, the uptick does demonstrate how digital asset examinations “have the potential to uncover significant underreporting of digital asset activity if performed on a larger scale,” which will be easier when Form 1099-DA takes effect, TIGTA said.

For more on digital assets under the Infrastructure Investment and Jobs Act, see Checkpoint’s Federal Tax Coordinator ¶ S-3721.