IRS uses AI to fight crypto-tax fraud

The Internal Revenue Service (IRS) is increasing its oversight of cryptocurrency transactions using artificial intelligence (AI).

In a dramatic move, the IRS has issued a draft of Form 1099-DA for Digital Asset Income from Brokerage Transactions, marking a major step forward in enforcing crypto tax compliance.

Concerns arise as the IRS employs AI to track crypto transactions

This development is in line with the agency's proposed regulation last year, which aims to refine the reporting of digital asset sales and exchanges by brokers. The rules mandate that beginning January 1, 2025, brokers, which include digital asset trading platforms and payment processors, must report these transactions to the IRS using the newly issued form.

In addition, the reporting requirements will extend to real estate transactions starting January 1, 2025, with relevant entities disclosing digital asset holdings and fair market values ​​in real estate transactions.

In a separate but related revelation, the House committee expressed concern that the IRS's use of requests to audit Americans' financial information could infringe on civil rights. The committee, led by Chairman Jim Jordan (R-OH) and Representative Harriet Hageman (R-WY), will investigate allegations that the IRS is deploying AI without proper legal procedures to track personal transactions and financial accounts.

“However, recent reports suggest that the IRS's use of IIS also includes surveillance of US citizens' bank accounts on a mass basis and without due process. Video footage obtained by Investigative Media appears to capture IRS official Alex Mena, who works in the agency's criminal investigation division, admitting that the IRS has a ‘new system' that uses AI to scrutinize all returns, bank statements and target ‘criminals'. Statements and related financial information ‘potentially fraudulent'.

Additionally, this request follows reports of IRS officials using warrants to target taxpayers' bank accounts. The allegations, reported by investigative journalism, suggest the IRS has extensive access to bank information, raising questions about privacy and the scope of government oversight.

Read more: Final US Crypto Tax Guide for 2024

Consequently, the IRS's engagement in AI-based enforcement demonstrates the agency's commitment to modernizing its tax collection approach and maintaining the integrity of the financial system. However, the balance between technological advancement and the protection of individual rights remains a crucial discussion in this changing narrative.