How the IRS tracks down people who don’t report their crypto

Crypto income taxation is a murky arena at present. It would seem that even the U.S. Internal Revenue Service, or IRS, has a tough time figuring out who owes what, according to Wendy Walker, solution principal at the tax compliance company Sovos. 

"In the typical tax system, the IRS uses 1099 reporting," Walker told Cointelegraph in an interview. "So, 1099, W2, that tax reporting, it's the primary tool that they use to enforce tax compliance," she added. When people fail to report their crypto activities, the IRS is left with a headache.

In 2019, 10,000 crypto-involved people received warning letters from the IRS, informing some folks that they owed money, or had incurred fines. Others were told to add their crypto activities onto their reporting.

The tax authority also just recently added a question to the top of the 1040 form, asking filers if they handled crypto at all during the relative tax year. 

"Now they're getting back all of this information to substantiate that they have to sift through," Walker explained. " To combat this massive pile of data, in May 2020 the IRS publicized its request for proposal, or RFP — a search for digital asset-savvy persons to navigate the stacks of information, Walker mentioned. 

"My point is that they go about it the hard way. This question on the 1040, this RFP for people to sift through information that was sent back, enforcement letters to tax payers — it's like they're throwing stuff out there to see what will stick."

The difficulty comes as a result of old processes that, in some instances, have trouble fitting new possibilities brought on by technological innovation.