IRS Calls on Congress for Stronger Crypto Disclosure Rules Following New Hampshire Theft

The IRS published a letter addressed to state senator Maggie Hassan (D-NH) calling on Congress to strengthen its cryptocurrency disclosure rules to help prevent cyberattacks.

The letter, dated December 21, comes in response to a letter sent by Sen. Hassan expressing her ongoing concerns for the welfare of New Hampshire residents, who were scammed out of $2.3 million and were unable to trace the funds once converted to cryptocurrency. Hassan, a member of the Homeland Security Committee explained how the town of Peterborough sent $2.3 million to criminals, instead of to the ConVal School District. The town recovered $594,000 of the stolen funds back in October 2021.

Specifically, the IRS recommends that money service businesses (MSBs) such as crypto exchanges, kiosks, and over-the-counter trading desks be required to collect know-your-customer (KYC) information to help discourage anonymity in transactions.

Through the IRS lens

The IRS proposes that more stringent measures be used to track cybercrime involving cryptocurrencies, including making mandatory certain reporting requirements.

Enhancing KYC measures or due diligence procedures for all MSBs, including cryptocurrency exchanges, will decrease the number of suspicious transactions, according to IRS Commissioner Charles Rettig.

“For all MSBs, including virtual currency exchanges, either enhancing due diligence procedures on high-volume customers or implementing KYC requirements regardless of volume and risk is likely to decrease the volume of suspicious transactions, provide a stronger [suspicious activity reports (SAR)] program, and help identify both the business purpose of transactions and the source of funds,” Rettig states in his letter.

“A stronger SAR program should, in turn, enhance recovery of stolen or embezzled funds or even prevent such crimes in the first place.”

Register with Financial Crimes Enforcement Network

The Bank Secrecy Act (BSA) requires MSBs to register with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), have an anti-money laundering program, file suspicious activity reports, and file currency transaction reports – all of which are ensured by the IRS.

Allow information sharing with FinCEN

The IRS recommends the allowance of information-sharing between itself and FinCEN regarding those taxpayers who transact in crypto outside the U.S. The agency also recommended imposing penalties, both civil and criminal, for negligence or civil cases of fraud involving cryptocurrencies, to ensure compliance.

Additional $21M in funding is needed

The IRS has requested $21M in additional funding to support investigations into highly technical crimes, including those involving cryptocurrencies.

“This $21 million additional funding is specifically designated to support cyber, cryptocurrency and other highly technical investigations and plays an important role increasing IRS-CI’s law enforcement capabilities,” the letter reads.

The letter from the IRS Commissioner also opines that the mandatory electronic filing of Form 8300 would result in more accurate information regarding businesses or people who receive $10000 in crypto transactions. Also, Title 331 of Form 8300 legislation should be such that the form includes digital asset disclosures. This could also prevent evasion since multiple forms are not required.

“Electronic filing facilitates more accurate tax information and supports the broader goals of improving IRS service to taxpayers and modernizing tax administration,” it continues. “Electronic filing also ensures valuable information is timely available for law enforcement purposes.”

Headaches for exchanges?

The IRS recommends making the recording of Cash Transaction Reports include the definition of “established customer.”

Unless a customer is deemed “established,” their driver’s license or social security number must be recorded for transactions over $3000. This could be a challenge, since crypto exchanges do not have an onboarding procedure for all customers. This could mean that every transaction exceeding $3000 could be part of a transaction report.

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