The IRS expects to be flooded with an unprecedented volume of information returns once the digital asset transaction reporting rules take effect, according to an official.
“Our estimate right now is that we will ingest — don’t fall off your chairs — 8 billion” information returns, and that’s just the in-development Form 1099-DA, Julie Foerster, IRS director of digital assets, said during the meeting of the Council for Electronic Revenue Communication Advancement October 25.
That avalanche of information returns — which Foerster said alone would be about double what the IRS now receives for every other Form 1099 combined — threatens to overwhelm the agency.
“Our technology, the way it is today, will not support the data and the volume,” Foerster said. That’s where the Inflation Reduction Act funding comes in, which is giving the IRS the wherewithal to update the underlying technology so it can be ready when the information reporting rules go live, she said.
The IRS released long-anticipated proposed regs (REG-122793-19) in August that cover information reporting by digital asset brokers. Under the proposed regs, the broker reporting requirements wouldn’t go into effect until January 1, 2026, to give brokers time to comply.
The IRS and Treasury estimate that between 13 million and 16 million taxpayers will account for the deluge of the new Forms 1099-DA.
The IRS has already received over 13,000 comments on the proposed regs, according to Foerster. The public hearing may take place over two days if enough speakers sign up, she added.
The IRS plans to soon release a draft Form 1099-DA to be used by brokers to report transactions after the form’s instructions are completed, according to Foerster.
The IRS is finalizing whether every transaction from a Form 1099-DA will be listed on a taxpayer’s wage and income transcript, or if it will just list aggregate transactions, Foerster said. Still, with the IRA funding at its disposal, the IRS hopes to have something that “works incredibly well and is easy to read and follow,” she added.
Great Expectations
Getting that information reporting regime up and running should be a game changer for compliance in the digital asset area.
The information collected under the new requirements should greatly help the IRS get better metrics and insight on the tax gap stemming from digital asset transaction tax noncompliance, Foerster said.
Seth Wilks of TaxBit observed that information returns are well known to dramatically improve tax compliance because they inform the taxpayer that the IRS knows about their transaction.
Wilks told Tax Notes he had no reason to believe that the IRS wouldn’t have its technology ready for the influx of Forms 1099-DA. He said that the IRS has been “thinking about this issue for much longer than just the two months since the regulations were proposed,” and that it should now be focusing on communicating to taxpayers about preparing for the new reporting regime.
Foerster said her team was looking into how the IRS can communicate its expectations of taxpayers in a way that is different than what was done in the past, including producing instructional videos for taxpayers with digital asset transactions.
Correction, October 26, 2023: Foerster said the IRS is finalizing whether every transaction from a Form 1099-DA will be listed on a taxpayer’s wage and income transcript, not whether every transaction will be listed on the Form 1099-DA.