Watchdog: IRS Needs To Pay More Attention to Bitcoin

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Citizens could be using virtual currencies to avoid paying taxes.

The Internal Revenue Service needs to crack down on virtual currency being used for illegal transactions, a new watchdog audit concludes.

People may be using virtual currency—digital forms of payment not issued by governments—to avoid paying taxes, which could result in an tax gap increase because of underreporting, according to the Treasury Inspector General for Tax Administration.

Bitcoin, perhaps the most well-known form of virtual currency, are generated through a process known as "mining"—solving complex mathematical equations. Bitcoin owners can use them just as they would government-issued money to pay for goods and services, assuming the vendor accepts them. There are also ATMs that accept cash in exchange for bitcoin. As of April, bitcoin had a total market value of at least $6.8 billion.

While virtual currency has "potential benefits" such as "lower transaction fees and faster transfer of funds for services provided,” the audit, they're often popular because "the identity of the parties involved is generally anonymous, leading to a greater possibility of their use in illegal transactions.”

Yet, there isn't evidence to suggest IRS is creating guidelines for examining virtual currency tax compliance, the audit said, and none of IRS disparate efforts related to virtual currency are being coordinated. IRS previously issued a virtual currency guidance, but hasn't really updated its position on the phenomenon since 2013, the report said.

Also, third-party tax reporting—outside employers and businesses—don't separate out which payments were made in virtual currencies, the audit found.

TIGTA recommended IRS create a new virtual currency oversight strategy, and identify how much virtual currency is being used in taxable transactions. The tax agency agreed with the recommendations.