IRS Solicits Contractors to Help Examine Crypto Traders' Tax Returns

The Internal Revenue Service (IRS) is seeking third-party contractors to help it assess whether certain U.S. taxpayers have properly paid taxes on their crypto holdings.

According to an email posted online by CryptoTrader.Tax and verified by CoinDesk, IRS Assistant Deputy Commissioner John Cardone said the agency is looking for contractors to “assist our Revenue Agents in calculating taxpayers’ gains or losses as a result of their transactions involving virtual currency.” At least one other company in the space, which asked not to be named, also received the email.

"The IRS can confirm the authenticity of the email," the agency told CoinDesk.

The call for contractors comes as the IRS is paying increasing attention to the crypto space, having issued its first guidance on the matter in years last October and adding a question about digital currency ownership to this year’s return form. Privacy-conscious crypto users are likely to chafe at the idea that the IRS may be hiring outside parties to review their transactions.

“I don't think people will be pleased about this. However, those who have been accurately reporting their crypto taxes will have nothing to worry about,” said David Kemmerer, CEO of CryptoTrader.Tax, a software platform used for reporting.

See also: Crypto Holders Still Face Issues Reporting Tax Liabilities, Survey of CPAs Finds

Kemmerer emphasized his firm would not be pursuing the contract. “Our dedication is 100% to our users. We have no plans of working with the government in this regard,” he said.

The email was sent from an IRS government domain, and there is a John Cardone with the agency’s Large Business and International division (LB&I), according to the IRS website.

As CoinDesk reported at the time, Cardone led a session at the IRS crypto summit in March 2020. Cardone, who also welcomed the summit’s audience at the beginning of the event, opened his panel by telling audience members the tax collector was looking for specific issues of interest to the industry.

In his email, dated May 12, Cardone said the IRS is starting with “a few single-case contracts as pilots with a goal of publishing a solicitation and request for proposal for a larger multi-case contract.” Companies that participate will need to sign a non-disclosure agreement and consent to a tax compliance check, the email states.

“I wanted to make you aware of our efforts in case your company has any interest in pursuing this type of work,” Cardone wrote.

Cardone could not immediately be reached for comment.

'Hundreds of thousands' of transactions

An attached six-page “Statement of Work” details what, specifically, the IRS is looking for its potential contractors to do.

According to the document, attached in full below, the contractors would have to look at both on-chain and off-chain data; information obtained through API keys, taxpayer submissions and other sources; determine the gains and losses for each taxpayer and note cost basis; track sales and other transactions; and find any inconsistencies in how the taxpayer is reporting their data.

One section, under the “Services to Be Provided” heading, detailed the complexity of calculating an individual’s tax burden when dealing with cryptocurrencies. The document noted a taxpayer could have “hundreds of thousands of digital asset transactions” per year, which could occur on different exchanges and wallets.

“These transactions need to be aggregated, and the assets involved need to be valued, as part of the process of computing gains and losses,” the document said. “Additionally, specialized technology and infrastructure is required to digest, contain and analyze virtual currency data due to unique requirements such as but not limited to decimal place precision, varying field formats and file formats.”

See also: IRS Crypto Summit Was About the Exchange of Ideas, Not Tax Guidance

While the document detailed examples of how much data the contractors would have to look at, it does not specify which exchanges or types of taxpayers the contractors would assess.

The contractors who take on the project may also need to “testify at trial as a summary witness explaining the calculations derived from the underlying data,” the document said.

Ramping up

Tuesday’s email is the latest in a series of steps the IRS has taken to more closely oversee the crypto space.

In 2019, the tax collector sent three variations of warning letters to thousands of traders it believed to have misreported their tax liabilities after trading on crypto exchanges.

The letters advised traders to look at the exact date and time they conducted a transaction, diverging from IRS guidance from 2014, which said to apply “the exchange rate, in a reasonable manner that is consistently applied.”

The agency did not update its tax guidance until October 2019, when it published a new FAQ and additional guidance. In the same month, the IRS updated the main form individual U.S. taxpayers use to report their income to include a question about whether they owned cryptocurrencies.

The agency’s lack of detailed guidance has long been a source of frustration for crypto investors, who claim a lot of cryptocurrencies still don’t fall neatly into existing tax laws.

Read the full "Statement of Work" below: