Flash Alert: Delay in Digital Asset Form Impeding IRS Compliance Enforcement
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- On July 29, 2024
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The Treasury Inspector General for Tax Administration (TIGTA) noted that the IRS has limited visibility into digital asset transactions due to inadequate third-party reporting. According to a report dated July 10, IRS research indicates that compliance has improved when the IRS can clearly track amounts subject to information reporting and/or withholding. The IRS has also finalized regulations for digital assets, implementing provisions of the Infrastructure Investment and Jobs Act. However, the implementation of the 2021 digital asset laws has been delayed as the IRS continues its rulemaking process, with regulations slated to phase in starting in 2026.
The IRS is seeking stakeholder feedback on Form 1099-DA, Digital Asset Proceeds from Broker Transactions, following its draft release in April. Under the new regulations, digital asset brokers will be required to submit this form to the IRS and furnish copies to digital asset holders. TIGTA recommends that the IRS develop an agency-wide strategic plan for utilizing the data obtained from Forms 1099-DA, which would particularly benefit divisions like Large Business and International (LB&I), Small Business/Self-Employed (SB/SE), and Criminal Investigation.
The upcoming Form 1099-DA is expected to streamline the process for IRS examiners to verify accurate reporting of income from digital asset transactions, as it will report gross proceeds from all transactions on the forms. On the initial page of Form 1040, U.S. Individual Income Tax Return, the IRS currently inquires whether taxpayers have engaged in any digital asset transactions.
While the number of taxpayers self-reporting digital asset transactions surged by 649% from tax years 2019 to 2021, it decreased to 2.7 million in tax year 2022, still representing a 202 %increase from 2019. Nonetheless, this trend underscores the potential for digital asset examinations to uncover substantial underreporting if conducted on a larger scale, facilitated by the implementation of Form 1099-DA, as highlighted by TIGTA.
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