Letter to the Hon. David Kautter, Acting Commissioner, IRS - Brady Calls on IRS to Update Virtual Currencies Guidance
Dear Acting Commissioner Kautter:
The Ways and Means Oversight Subcommittee has been working diligently on this issue throughout the 115th Congress and will continue to monitor the IRS's enforcement actions going forward. The Committee has also sought to clarify the IRS's use of its John Doe Summons authority in the Taxpayer First Act (H.R. 5444), which unanimously passed the U.S. House of Representatives in April 2018. The Ways and Means Oversight Subcommittee will continue its work to ensure taxpayers clearly understand their tax obligations and are treated fairly by the IRS.
On May 17, 2017, we wrote to the IRS to raise questions about the enforcement actions being taken against those holding virtual currencies and the lack of a comprehensive virtual currency strategy. More than a year after our initial letter, the IRS continues to expand its enforcement activities without issuing any further guidance for taxpayers. We therefore write again today to strongly urge the IRS to issue updated guidance, providing additional clarity for taxpayers seeking to better understand and comply with their tax obligations when using virtual currencies.
Since the emergence of virtual currencies, the IRS has struggled with how to treat virtual currencies for tax purposes and the amount of guidance necessary to assist taxpayers in understanding their tax obligations. In March 2014, the IRS began working to clarify tax issues related to virtual currencies by issuing guidance indicating that virtual currencies would be treated as property for tax purposes. However, in September 2016, the Treasury Inspector General for Tax Administration reported that the IRS had yet to develop a comprehensive virtual currency tax strategy, citing a need for the IRS to update its initial guidance to reflect the various uses of virtual currencies. The Association of International Certified Professional Accountants, the American Bar Association, and other organizations have all raised similar concerns, each noting the need for additional clarity through updated guidance. Furthermore, the IRS Commissioner, in his response to our May 2017 letter, described Notice 2014-21 as "preliminary guidance," leaving the Committee to conclude that the IRS intended to issue additional guidance. However, to date, the IRS has not issued any additional guidance that taxpayers may rely upon to better understand their tax obligations.
Despite the issuance of only preliminary guidance on this issue, the IRS has made enforcement of this guidance a priority, undertaking robust enforcement actions on a number of fronts. For example, the IRS has used its John Doe Summons authority to seek the records of approximately half a million Americans who held virtual currencies between 2013 and 2015. In addition, on July 2, 2018, the IRS's Large Business and International division announced five new compliance campaigns, one of which focuses on non-compliance related to virtual currencies. At the same time, the IRS also announced that it would not be providing leniency for taxpayers by allowing for a voluntary disclosure program to address tax non-compliance related to virtual currencies.
The IRS has also sought to remind taxpayers of the penalties for non-compliance with its preliminary guidance. In March 2018, the IRS reminded taxpayers that those who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and held liable for penalties and interest. In more extreme situations, taxpayers can be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.
While the Committee appreciates the IRS's need to undertake enforcement actions to ensure that taxpayers generally meet their tax obligations, in this case, we are concerned that the IRS is seeking to enforce guidance that does not adequately advise taxpayers of their tax obligations when using virtual currencies. Furthermore, while the issues surrounding virtual currencies are complicated and ever evolving, a key component of the IRS's duties as the nation's tax administrator is to assist taxpayers in understanding what their tax obligations are and how they may best meet them. A failure to put forth adequate guidance severely hinders taxpayers' ability to do so. The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.
We therefore strongly urge the IRS to expeditiously issue more robust guidance clarifying taxpayers' obligations when using virtual currencies. We also ask that you provide a written response outlining where the IRS is in its efforts to issue updated virtual currency guidance, what the IRS intends to cover in this guidance, and a timeline for its release. In addition, to assist the Committee in better understanding this issue, we will be asking the Government Accountability Office to undertake an audit on this matter.