Tax evasion is as old as tax collection, so it is no surprise that there is tax evasion related to crypto. In a recent case, United States v. Frank Ahlgren III, Federal prosecutors allege that between 2017 and 2019, the defendant failed report gains from the sale of appreciated bitcoin on his federal income tax returns. If the allegations are proven beyond a reasonable doubt, this case is tax evasion in its plainest form.
This case is unlike prior criminal cases that involved cryptocurrency. Previous cases included tax evasion allegations as an additional set of charges on top of allegations of other criminal activities, such as fraud, money laundering, theft, trafficking contraband or terrorism financing. In Ahlgren, the defendant legally bought and sold bitcoin, and faces no allegations of other illegal activity. This case is novel because it focuses purely on tax evasion with an underlying legal, cryptocurrency fact pattern.
Ahlgren is significant because it signals a willingness and readiness by the Internal Revenue Service (“IRS”) to investigate potential tax abuse and pursue civil and criminal tax cases. IRS spokespeople have previously indicated that the IRS would prosecute crypto tax crimes when it feels comfortable that it could win a conviction from a federal jury. In other words, the IRS feels comfortable fielding a jury that understands cryptocurrency enough to convict on tax evasion. If the IRS believes it will prevail (and usually does), we should expect more federal income tax audits and tax controversy activity of this kind.
If you receive a notice commencing a tax examination or proceeding from the IRS, you should not delay contacting your tax advisors, including Seward & Kissel’s Tax Controversy Practice.