IRS Taps TaxBit to Audit Bulk Crypto Transactions

11 May 2021

The Internal Revenue Service (IRS) has contracted with crypto tax service provider TaxBit to help the U.S. tax agency audit entities and individuals.

Utah-based TaxBit announced the one-year contract Tuesday, saying it would provide auditing services for cryptocurrency transactions as needed by the IRS, helping the agency verify whether high-volume traders accurately reported their crypto taxes. The company just raised $100 million in a Series A funding round.

“We’ll be providing data analysis and support and calculations for the IRS to help them really get to the right answer,” said Seth Wilks, TaxBit’s director of government relations. “[We’ll fill] some of the gaps in tools that just don’t exist right now within their own ecosystem, and so we’re coming in to make sure that they are fully understanding the data.”

The IRS will not be specifically auditing TaxBit customers with the contract. Rather, the federal agency will provide its own data and ask Taxbit to analyze the transactions as part of this contract.

Nor are these crypto-specific audits, Wilks said. The IRS audits a number of entities and people every year, initiating some of these examinations through a random selection of taxpayers and others based on red flags. When these audits include cryptocurrency transactions, the IRS will tap TaxBit to conduct any necessary analysis. 

In other words, the IRS may not even be alleging wrongdoing or tax evasion for some of these audits.

While Wilks said he could not share specific details about the contract, he did say TaxBit would likely be examining high-volume entities or traders, who report thousands or millions of transactions per year.

“Those are more high-net-worth individuals or investment funds,” he said. “The typical everyday investor … we won’t see them.”

TaxBit will use its platform, which it’s been building out for three years, to aggregate and normalize any inputted data before automatically calculating the gains and losses. This data can come from different exchanges or wallets.

The rest of the TaxBit team may be tasked with looking for missing transactions or verifying that all the transactions that should be reported are filed (in the U.S., every crypto sale or transfer creates a taxable event). 

“We see our role as, number one, [being] very unbiased, … [W]e’re just here to help get it right,” Wilks said. “But also, the report that we’re providing to the IRS will be provided to the taxpayers as well, so it will help them. To an [extent] that they forgot to provide something or [are] missing information, they have an opportunity to rectify that and provide it.”

The challenge for the IRS is that while some exchanges and individuals file specific forms to the agency, others just provide a CSV file with transaction data.

In Wilks’ view, the move indicates a growing regulatory understanding that crypto is here to stay.

“They’re seeing more and more people who are filing crypto,” he said of the IRS, “which means that in their random audit selections they’re going to see more people reporting cryptocurrency.”

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