Watchdog: IRS needs strategy on virtual currencies

 Watchdog: IRS needs strategy on virtual currencies
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The IRS needs to take additional steps to ensure that users of virtual currencies such as bitcoin are complying with tax law, a federal watchdog said in a report made public Tuesday.

"Until a comprehensive virtual currency strategy is developed, the IRS is open to the risk that undetected noncompliance of virtual currency taxable transactions will result in an increase to the Tax Gap," the Treasury Inspector General for Tax Administration (TIGTA) said in its report.

Virtual currencies have become more popular in recent years. While they can have lower transaction fees and be transferred faster than traditional currencies, there is also a greater possibility that virtual currencies are used in illegal transactions because the identities of those involved in the transactions tend to be anonymous, TIGTA said.

The IRS issued guidance in 2014 that stated that virtual currencies should be considered property for tax purposes. The agency also established an issue team that shares knowledge about virtual currency across the IRS.

But there is still more the agency could do to enforce tax rules relating to virtual currency, TIGTA said.

None of the IRS's operating divisions have developed guidelines for conducting audits and investigations about virtual currencies. The IRS hasn't taken any action to address the comments it received on its 2014 guidance. And reporting documents from third parties don't currently specify the amount of virtual currency used in taxable transactions, the watchdog said.

TIGTA made several recommendations, and the IRS agreed with them.