IRS Launches Virtual Currency Compliance Campaign Using Chainalysis

The Internal Revenue Service announces a Virtual Currency Compliance Campaign to address tax noncompliance related to cryptocurrency use, heavily relying on Chainalysis blockchain surveillance software. The IRS Cyber Crimes Unit (CCU), a five-year-old division of IRS Criminal Investigation, deploys Chainalysis’s “Reactor” software to identify taxpayers who may be non-compliant with tax laws or involved in criminal activity related to cryptocurrency transactions.

IRS Cyber Crimes Unit Expansion

The IRS Criminal Investigation division establishes the Cyber Crimes Unit specifically to handle cryptocurrency-related tax enforcement. The unit uses Chainalysis tools as its primary blockchain analytics platform, joining at least 10 federal agencies in deploying the surveillance software. This specialization reflects the IRS’s recognition that cryptocurrency tax evasion requires dedicated technical expertise and specialized tools.

Contract Scale and Investment

By 2018, the IRS significantly increases its spending on Chainalysis services. Public records show the IRS becomes Chainalysis’s biggest federal partner, ultimately spending $4.1 million over five years, with $3.6 million of that coming between 2018 and 2020. The IRS Cyber Crimes Unit alone spends over $3.3 million on four years of Chainalysis services, demonstrating substantial government investment in cryptocurrency surveillance capabilities.

Enforcement Approach

The compliance campaign uses Chainalysis software to conduct outreach and examinations of taxpayers suspected of virtual currency tax evasion. The IRS employs blockchain analytics to trace cryptocurrency transactions, identify exchange accounts, and link blockchain activity to individual taxpayers. This systematic approach transforms cryptocurrency tax enforcement from reactive investigations to proactive surveillance of blockchain transactions.

Notable Cases and Capabilities

IRS-CI Chief Don Fort publicly credits Chainalysis with helping the IRS and Department of Justice dismantle a sprawling child pornography ring in South Korea, demonstrating the software’s use beyond tax enforcement. The agency’s blockchain analytics capabilities allow investigators to trace cryptocurrency flows across multiple blockchains, through mixing services, and to ultimate cash-out points at exchanges.

Significance

The 2018 compliance campaign marks the IRS’s transition from limited, ad-hoc cryptocurrency investigations to systematic surveillance and enforcement. By investing millions in Chainalysis tools and establishing a specialized unit, the IRS demonstrates that government tax enforcement capabilities will keep pace with cryptocurrency adoption. This development fundamentally challenges claims that cryptocurrency enables tax avoidance, as the blockchain’s transparency actually provides investigators with unprecedented visibility into financial transactions. The campaign establishes a model for tax enforcement that treats cryptocurrency as more traceable than cash, potentially making blockchain transactions more surveilled than traditional financial transactions.