IRS strategy for digital assets stymied by regulatory process delays

The IRS has begun coalescing its diverse policies and procedures towards digital assets into a singular central strategy, but actual implementation is being delayed by the regulatory approval process, according to a recent report from the Treasury Inspector General for Tax Administration.

The report noted that the Inflation Reduction Act of 2022 mandated that the IRS provide digital asset monitoring and compliance activities. Prior to this, each IRS function addressed virtual currency tax issues with different procedures. Since then, according to TIGTA, the IRS has taken several actions to centralize its approach to addressing the significant impact that digital assets have and will continue to have on tax administration.

The report pointed to the formation of the Digital Asset Advisory Committee (DAAC), which was created to enable IRS-wide information sharing and coordination, the development of the Digital Asset Initiative which outlines the IRS’s priorities on the topic, and the setting up of the Digital Asset Initiative Project Office (DAIPO), which continues to coordinate Service-wide efforts including developing forms, instructions, and guidance; information systems to receive, store, and access the new digital asset information reporting returns; as well as conducting other outreach activities.

However, the IRS cannot complete the development of the forms, instructions, and guidance until after the final digital asset regulations have been issued. Final regulations have yet to be completed and remain under development within the various stages of the federal government’s required regulatory review process. Specifically, as of August 29, 2023, I.R.C. § 6045 Notice of Proposed Rulemaking was published in the Federal Register. The I.R.C. § 6050I regulations remain in draft mode within the Treasury Department. This means the IRS cannot comply with the mandate in the Inflation Reduction Act.

The IRS said the regulations are taking so long because they concern a very complex topic. These proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors,26 and certain digital asset hosted wallets, to file information returns, and furnish payee statements on dispositions of digital assets effected for customers in certain sale or exchange transactions. TIGTA added that they have also required participation from multiple external agencies.

IRS management noted that the passage of additional legislation related to digital assets could further delay its ability to move forward. The IRS noted that more than 40 potential bills are pending, including, but not limited to:

• The Keep Innovation in America Act.
• The Responsible Financial Innovation Act.
• The Virtual Currency Tax Fairness Act

TIGTA made no recommendations in the report.
IRS hasn’t stopped TikTokers

In other TIGTA news, another report faulted the IRS for not being able to fully implement the ban on social media app TikTok on government devices, a prohibition made out of security concerns connected to the platform’s China-based owner. TIGTA said the IRS took steps in October 2022 to block Internet access to TikTok on 6,300 mobile devices and also noted that the TikTok application is not available for download on them.

However TIGTA noted that the IRS Criminal Investigation division still maintains extensive access to the social media app. Inspectors identified more than 2,800 mobile devices used by CI that could access TikTok’s website and approximately 900 CI employees that had the ability to get access to TikTok’s website via their computers.

In response to concerns raised to CI management, they issued a memorandum on May 15, 2023, instructing employees to identify and remove TikTok from IRS devices and systems. CI management also responded that they were evaluating whether a law enforcement exception would be requested to continue to permit access to TikTok. As of August 2023, CI has yet to request the required exception from the Department of Treasury nor has it taken steps to block access to TikTok on computers and mobile devices assigned to its personnel

Inspectors also found 23 other devices which still had access, mostly belonging to members of the agency’s Communications and Liaison group as a way to monitor social media sites. When TIGTA informed the IRS of this, the agency took corrective action to add these devices to the existing mobile device management software to ensure that the 23 devices could not access TikTok.

TIGTA said the IRS should:

• Remove and/or prohibit access to TikTok on the 23 unmanaged devices to ensure compliance with the OMB mandate in the Act;
• Work with the OMB to update the BYOD program’s policies and procedures to ensure that IRS participants comply with the Act; and
• Have CI ensure that access to TikTok is blocked on mobile devices and work with the OMB to determine whether an exception process is needed for the approximately 900 CI employees who can access TikTok on their computers.

IRS management agreed with five recommendations. The IRS disagreed with the recommendation to block access to TikTok on more than 2,800 mobile devices used by CI. It said the IRS is developing an internal process to adjudicate limited exceptions.