IRS Criticized for Flawed Crypto Seizure Protocols

The Internal Revenue Service (IRS) criminal investigation division has been criticized by a US government watchdog for its handling of digital assets. The watchdog's report, released on Tuesday, highlighted repeated failures by the IRS to adhere to established protocols for seizing and safeguarding cryptocurrencies.

The evaluation, conducted by the US Treasury Inspector General for Tax Administration, revealed significant shortcomings in the IRS Criminal Investigation (IRS-CI) division's procedures. Specifically, the IRS did not follow all guidelines between December 2023 and January 2025 for seizure memorandums, which are crucial for documenting the addresses, dates, and amounts of confiscated crypto.

The watchdog's recommendations, which the IRS-CI agreed with, include ensuring that personnel are familiar with and adhere to seizure memorandum requirements, establishing an inventory system to manage seized digital assets accurately, and updating internal guidelines to include time frame requirements for preparing seizure memorandums and updating records in the inventory tracking system.

The seizure and holding of digital assets by US government authorities have become increasingly relevant, especially since efforts by the Trump administration to establish national Bitcoin (BTC) and crypto reserves. Initially, White House officials proposed stockpiling crypto primarily from that seized in criminal cases, but some have suggested alternatives through tariffs and revaluing gold certificates.

The implications of these findings are far-reaching. Cryptocurrencies, due to their decentralized nature, are often used in illicit activities, making effective seizure and safeguarding by the IRS crucial. The agency's failure to meet standards could allow criminals to evade detection and prosecution, undermining efforts to combat financial crimes.

This report comes at a time when the IRS is already under scrutiny for its handling of other financial matters. The agency has been pressured to improve transparency and accountability, and these latest revelations add to the growing concerns. The IRS must take immediate steps to address these issues and restore public confidence in its ability to manage and seize digital assets effectively.

In response to the watchdog's findings, the IRS has acknowledged the shortcomings and pledged to implement corrective measures. The agency has stated its commitment to improving procedures for seizing and safeguarding cryptocurrencies and will work closely with the watchdog to ensure compliance with all relevant guidelines. However, the effectiveness of these efforts remains to be seen.

The situation highlights the broader challenges faced by regulatory bodies in adapting to the evolving landscape of digital currencies. As cryptocurrencies gain traction, it is essential for agencies like the IRS to develop and enforce robust frameworks for managing these assets. This includes improving seizure protocols, enhancing training and resources for staff, and fostering greater collaboration with other law enforcement agencies and international partners.

In conclusion, the IRS's failure to meet standards for seizing crypto serves as a wake-up call for the agency and the broader regulatory community. It underscores the need for greater vigilance, transparency, and accountability in handling digital assets and serves as a reminder of the ongoing challenges in combating financial crimes in the digital age. The IRS must take decisive action to address these issues and ensure it is equipped to effectively manage and seize cryptocurrencies in the future.