IRS Suggests Need to Disclose Crypto Exchange Information to Law Enforcement

dem10/Getty Images

A letter the tax bureau sent to a key senator says stronger penalties for failure to report cryptocurrency-based income gains might also help deter cyber criminals.

Sharing information with law enforcement about the beneficial ownership of companies trading cryptocurrencies and related entities is one of several ways the Internal Revenue Service could help combat cyber attackers that use decentralized ledger technology as a cloak for their escape, according to the bureau.

“The IRS generally may not share information it collects with [the Financial Crimes Enforcement Network] or other law enforcement agencies, like the FBI, currently receiving” reports regarding income in excess of $10,000, the bureau said in a recent letter to Sen. Maggie Hassan, D-N.H. “If those agencies can’t receive digital asset transaction information, it will significantly degrade the utility of the information they do collect.”

The letter explains that despite Congress calling for relevant federal agencies to contribute to a database on who ultimately owns and profits from a company—in the Corporate Transparency Act that became law with the National Defense Authorization Act of 2021—the IRS is not permitted to do so due to confidentiality provisions of the Internal Revenue Code.

The beneficial ownership database, which FinCEN is working to implement, has been a bipartisan effort aimed at countering money laundering and various other purposes for which criminals use shell companies. The IRS is empowered to levy penalties on “illicit money-transmitting businesses engaged in the use of both crypto and fiat currencies,” the bureau said, adding “enhancements to these civil and criminal penalties for egregious behavior in the cryptocurrency space could also be applied to promote voluntary compliance.”

A spokesperson for the IRS told Nextgov, “our responsive letter does not ask for a change in legislation.” Indeed the IRS was not asking, but responding to, questions in a letter Hassan had addressed to Commissioner Charles Rettig, along with Attorney General Merrick Garland, Homeland Security Department Secretary Alejandro Mayorkas, Securities and Exchange Commission Chairman Gary Gensler and FinCEN Acting Director Him Das. 

Hassan’s office said only the IRS has so far replied to her letter, which highlighted cybercriminals' use of cryptocurrency infrastructure after a town in her state lost $2.3 million. The perpetrators of that incident had fooled officials into turning the dollars over through a business email compromise, which is essentially a high-level phishing attack. The criminals then converted the fiat money into an untraceable cryptocurrency. Hassan’s letter notes that not all cryptocurrency exchanges are the same, but that those using decentralized systems are especially guilty of facilitating cyber crime by not requiring identifying information from their customers.  

“Decentralized exchanges allow the direct exchange of cryptocurrency by using software to match buyers and sellers who wish to trade cryptocurrencies without an intermediary institution controlling the funds. Many decentralized exchanges have far less stringent [Know Your Customer] requirements than the centralized exchanges, and some have no KYC requirements at all,” she wrote. “Recent studies have found that many exchanges, both centralized and decentralized, have weak KYC requirements.”

While FinCEN has issued guidance for cryptocurrency exchanges on implementing KYC—improving the effectiveness of Suspicious Activity Reports the IRS helps to review for illicit activities like money laundering—the bureau is not currently allowed to cite a lack of compliance with KYC as grounds for an enforcement action.

Asked what additional authorities would assist in preventing and prosecuting the criminal use of cryptocurrency, Rettig said: “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 SAR program, and help identify both the business purpose of transactions and the source of funds. A stronger SAR program should, in turn, enhance recovery of stolen or embezzled funds or even prevent such crimes in the first place.”

Hassan has successfully invoked the plight of state and local entities in passing bipartisan legislation to send them federal cybersecurity aid in the way of grants and personnel.  

“The release of this letter from the IRS comes as part of Senator Hassan’s work to crack down on criminals who use crypto, and she is now looking into how we can move on the IRS’s recommendations,” Hassan’s office told Nextgov following a press release Thursday.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.