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IRS Crackdown On Wealthy Focusing On Crypto, International Holdings

The IRS’s efforts to crack down on enforcement among wealthy taxpayers—boosted by massive funding from last year’s Inflation Reduction Act—appear to be taking aim at those with cryptocurrency and international holdings.

“The IRS is looking at the returns that have a lot of moving parts or taxpayers that may have been engaged in activities where reporting requirements have been in the early stages of formulation. Digital assets certainly fall into that category,” said Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn.

“Rumor has it that many in the crypto world, using offshore exchanges, may not have been reporting all of the activity in the digital asset world,” he said.

The IRS has said that its “Virtual Currency Compliance Campaign” will continue in the months ahead after an initial review showed the potential for a 75% non-compliance rate among taxpayers identified through record production from digital currency exchanges. Cryptocurrency can be taxed either as income if a client is paid in crypto or as an investment subject to capital gains taxes. For now, good-faith efforts to report crypto shouldn’t encounter an audit.

The IRS also says that high-income taxpayers continue to stash money overseas to evade paying taxes. One tool to go after such cheats is the Report of Foreign Bank and Financial Accounts (FBAR). Filing this form is required by anyone who has a financial interest over a foreign financial account if the aggregate value of all their foreign financial accounts exceeds $10,000 in the tax year.

The IRS claims it has unearthed hundreds of possible FBAR non-filers with account balances that average more than $1.4 million. Penalties for FBAR non-filing are stiff, from $10,000 to six figures depending on whether tax authorities determine that the non-filing was intentional.

Advisors stress that clients shouldn’t avoid crypto and overseas assets amid this renewed interest by the IRS, but just attend to the details of compliance. The foreign-asset tax compliance crackdown, for instance, has created mitigation programs.

The U.S. Treasury has been interested in the FBAR issue for a decade “and have made available programs for people to come clean with lesser penalties,” Armstrong said. “Voluntary disclosure programs are an example, where those with foreign accounts [can] correct errors of the past with more favorable consequences.”

The best advice for clients is to be open with the IRS, advisors say.

“It just isn’t worth the risk of operating outside the boundaries of the tax law,” said Bruce Primeau, president of Summit Wealth Advocates in Prior Lake, Minn. I’m a firm believer that you are guilty until proven innocent in the eyes of the IRS, and the interest and penalties associated with getting caught just aren’t worth it.”

Kyle Hafstad, estate planning advisor at Exencial Wealth Advisors in Plano, Texas, said, “Clients can protect themselves by avoiding overly aggressive and excessive valuation discounts on intra-family transfers, making pro-rata distributions to partners and members and not treating the entity as a personal checking account and attempting to deduct personal expenses.”  

Clients also need to remember that the IRS has the ability to use artificial intelligence to direct its auditors, said Sophia Duffy, associate professor of business planning at the American College of Financial Services in King of Prussia, Pa.

“We can also assume the AI technology will look for general audit flags, such as unusually high deductions and credits, disproportionately low tax liability compared to income, large or consecutive years of losses, earning foreign income or not reporting earned foreign income and engaging in cryptocurrency trading,” Duffy said. 

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