Expect new IRS crypto surveillance to come with a slew of controls

As the Internal Revenue Service (IRS) moves forward with its proposal to increase cryptocurrency surveillance, a past report may provide a glimpse into how this information will be used in practice. In short, as the IRS prepares to track Americans' cryptocurrency use through an expected $8 billion in new refunds, the Department of Justice (DOJ) may soon have the tools it needs to confiscate cryptocurrency at an unprecedented rate.

The case stems from a 2022 report written by the DOJ in response to Executive Order 14067. For those who may not remember, Executive Order 14067 is President Biden's first major cryptocurrency initiative. Although many initially feared a crackdown was on the way, the executive order delayed major changes by calling on agencies to issue reports to inform future policies on cryptocurrency and related issues.

The report, written by the DOJ, covered several topics. Broadly divided into four categories, the recommendations include ways to aid prosecutions, ways to improve investigations, ways to expand penalties for cryptocurrency-related crimes, and ways to increase resources for government employees.

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Most interesting for the current discussion, however, is where the DOJ has argued for increasing its ability to hold cryptocurrency.

For example, the report states, “It is critical for the United States to have the power to confiscate proceeds from cryptocurrency fraud and swindling in order to prevent such activity and to discourage those who infringe on their ill-gotten gains.” Therefore, the DOJ recommends expanding its jurisdiction over criminal, civil, and administrative damages.

The DOJ said these reforms are necessary because the department's experience with cryptocurrency cases has shown “limitations on remittance instruments used to deprive abusers of their ill-gotten gains and, in some cases, refund money to victims.”

However, this argument makes it difficult to understand how much and how often the government has been able to control cryptocurrency over the years. In fact, the report itself mentions such issues. In the year Between 2014 and 2022, the FBI seized about $427 million worth of cryptocurrencies. The IRS seized another $3.8 billion between 2018-21.

The DOJ litigation report's recommendation that the US government is struggling to contain cryptocurrencies with more than $4 billion in assets is not clear.

Related: IRS proposes unprecedented data collection on crypto users

Still, the IRS broker's proposal casts the DOJ's report in a new light in light of the widespread surveillance the proposal would create — and widespread surveillance that will begin to take hold of cryptocurrencies at a faster rate.

The problem is the so-called loss of governance. As Nick Sybilla explained in his Forbes report, “In ‘administrative' or ‘non-judicial' cases, it is the agency – not the judge – who decides whether to confiscate property. In other words, agencies do not need to prove to a judge that a crime has been committed in order to seize the property.

The DOJ praised this process for promoting “efficient allocation of government resources” while promoting “an unnecessary burden on the federal justice system.” Indeed, this process appears to be the DOJ's preferred practice, accounting for 78 percent of all convictions between 2000 and 2019.

With the IRS collecting vast amounts of new data on Americans' cryptocurrency use, the DOJ could “suddenly” find a wide range of new platforms to seize cryptocurrency. And again, it's important to note that these raids don't have to start with a crime – mere suspicion.

With controversies surrounding cryptocurrency dominating the news, it's not hard to imagine how such doubts could arise. For example, a month ago, more than 100 members of Congress filed a false report calling for action on cryptocurrency.

Considering the IRS proposal in this light helps illustrate one of the main dangers of mass data collection. Whether the DOJ wants to expand its seizure activities, the IRS wants to increase audits, or a hacker wants to exploit, massive government databases make attractive targets for both internal and external attacks.

If the IRS moves forward with the proposal, cryptocurrency users should watch carefully how that information is ultimately used by the government as a whole.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.