Excellent Article on IRS CI Special Agent and Cryptocurrency (10/2/24)

I post today on an excellent article—Geraldine Brooks, The Cyber Sleuth (WAPO 10/1/24), here. This is one article in a WAPO series on “Who is Government?” where seven writers are said to “go in search of the essential public servant.” The articles in the series with author of each article are:

•  The Canary: Michael Lewis on the Department of Labor
• The Sentinel: Casey Cep on the Department of Veterans Affairs
• The Searchers: Dave Eggers on NASA’s Jet Propulsion Lab
• The Number: John Lanchester on the Bureau of Labor Statistics
• The Cyber Sleuth: Geraldine Brooks on the Internal Revenue Service
• The Equalizer: Sarah Vowell on the National Archives
• The Rookie: W. Kamau Bell on the Department of Justice

Each article in the series (so far) is outstanding. It is appropriate that Michael Lewis starts with the first installment because of his book, The Fifth Risk, which has been described as “a love letter to federal workers -- and a dig at Trump’s ‘willful ignorance’.” See WAPO book review here. Lewis tells a great story of the bureaucracy—the deep state, if you will—and how much the bureaucrats do for the country, keeping the country on an even keel in turbulent times (particularly the first (and hopefully the only) Trump administration where chaos reigned as Trump haphazardly filled the ranks of political appointees to the agencies).

The Cyber Sleuth installment deals with Jarod Koopman, an IRS “Cyber Sleuth.” Koopman is an example of IRS employees and government employees generally who bring dedication and unique skill to the mission of the IRS, an agency that Congress chronically underfunds seemingly to hamper the IRS’s ability to do the tasks Congress assigned it to do. The article says:

Until last year, the staff who work inside had watched their budget get cut for a decade. Their staffing numbers had reached lows not seen since the 1970s, even as the U.S. population swelled and the quantity of tax returns soared. There was no money to update failing technology, or even the software that ran it. The result was a pileup of paper returns that colonized corridors and cafeterias, and an American public vexed by poor service.

That, of course, was the goal: anti-tax activist Grover Norquist’s famous shrink-it-till-you-can-sink-it strategy. So the civil servants who had been valiantly struggling to serve more people with fewer resources found themselves unappreciated — even despised.

And perhaps most despised are the 3 percent of IRS personnel involved in criminal investigation, who have become piñatas for the agency’s critics. Fox News’s Brian Kilmeade characterized agents such as Koopman as dangerous threats who could “hunt down and kill middle-class taxpayers,” while Rep. Lauren Boebert (R-Colo.) accused them of “committing armed robbery on Americans.” Republicans even attached a rider to a spending bill limiting the number of bullets the IRS can buy. “A weapon is rarely discharged by one of our agents,” says a frustrated Werfel. “But you can’t send an agent into a criminal enterprise unarmed, so they have to train, and there’s a minimum inventory required for that.” 

6th Circuit Remands Case for Consideration of Certain Constitutional Claims Against § 6050I(d)(3) Addition to Include Digital Assets in CTR Reportable Cash (8/21/24; 8/22/24)

In Carman v. Yellen, ___ F.4th ___, 2024 U.S. App. LEXIS 20033 (6th Cir.), CA6 here and GS here, the plaintiffs made a number of constitutional claims against the 2021 addition to the definition of cash reportable on currency transaction reports under § 6050I. The addition is in § 6050I(d)(3) to include digital assets in the definition of reportable “cash.” The plaintiffs were particularly concerned about cryptocurrency. The constitutional claims as set forth by the Court are (Slip Op. 9-11, cleaned up for readability principally by omitting citations to the record): 

          Plaintiffs launch five distinct constitutional attacks on the amended § 6050I, including a Fourth Amendment claim, a First Amendment Claim, a Fifth Amendment vagueness claim, an enumerated-powers claim, and a Fifth Amendment self-incrimination claim. For each of these, plaintiffs bring facial challenges, meaning they contend all (or almost all) applications of the law are unconstitutional. That creates some confusion, however, because their legal theories, as we note in our analysis, sound in as-applied challenges by contending that specific applications of § 6050I or hypothetical future events tied to the statute would create constitutional infirmities. Yet, for all claims, plaintiffs’ requested relief is the same: a declaration that § 6050I is facially unconstitutional and that enforcement of the law be enjoined.

           Plaintiffs’ first claim is that the amended § 6050I violates the Fourth Amendment. Specifically, plaintiffs claim that the amended law compels senders and receivers of cryptocurrency in reported transactions to “share their personal identifying information in conjunction with the details of their covered transactions, and thereby reveal sensitive details about their personal affairs.” Because of the private nature of cryptocurrency transactions, plaintiffs contend that they have a reasonable expectation of privacy and that the amended law will invade that expectation of privacy, all without the need for a warrant. Plaintiffs additionally claim that the government will conduct searches by violating their property rights.

GAO Report on Virtual Currency Guidance (2/13/20)

The Government Accountability Office (“GAO”) issued a report titled:  Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance (2/20), here.  The Report is addressed "to the Ranking Member, Committee on Ways and Means, House of Representatives.”  The ranking member is the minority ranking member, Kevin Brady (R.-TX).  (I suspect that all members of Congress have received complaints about the IRS initiatives against virtual currencies, so favored by crooks and tax cheats, but also suspect that Republican members are more sympathetic to the complaints from people whose real or hidden agenda is not to pay tax).

At any rate, the Report summarily describes virtual currencies, including cryptocurrencies such as Bitcoin, generally, estimates the size of the market, the regulation by agencies (such as CFTC, FinCEN and SEC), the tax treatment of virtual currency and the IRS’s compliance efforts for virtual currencies, including sharing of information with other agencies.

I focus here on what the Report says about IRS guidance for tax reporting requirements for virtual currency transactions.  The guidance includes principally Notice 2014-21 (including public comments), Revenue Ruling 2019-24 and Frequently Asked Questions (FAQs) released in October 2019.  The principal guidance is Notice 2014-21 which the GAO Report describes as follows (p. 8 n. 15):

According to IRS Notice 2014-21, a taxpayer generally realizes a capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. Capital gains may be subject to lower tax rates than ordinary gains. Capital gains and losses are classified as long-term or short-term. Generally, if a taxpayer holds the asset for more than one year before disposing of it, the capital gain or loss is long-term. If a taxpayer holds it one year or less, the capital gain or loss is short-term. For more information, see IRS Publication 544, Sales and Other Dispositions of Assets.

The Report has a section titled: “IRS’s 2019 Virtual Currency Guidance Answers Some Taxpayer Concerns, but Presents Additional Challenges for Taxpayers.”  See pp. 18-20.  This sections reports concerns and complaints about the published guidance.

The Report then has a section titled: “IRS Did Not Include That the 2019 FAQs Are Not Legally Binding.” See pp. 20-21.  Since I focus the rest of this blog to that portion of the report, I will just excerpt it in full here (some footnotes omitted):