IRS Fails to Track $8 Billion in Seized Crypto Assets

The Internal Revenue Service’s (IRS) criminal division has been criticized for its inadequate documentation and tracking of seized cryptocurrency assets, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). The investigation revealed significant shortcomings in how the IRS Criminal Investigation (IRS-CI) manages digital assets seized in criminal cases.

As of late 2023, the IRS had seized approximately $8 billion in digital assets related to ongoing investigations. However, TIGTA found that the IRS-CI did not consistently follow its own procedures for documenting these seizures, resulting in missing or incorrect data. One of the key issues identified was the lack of proper seizure memoranda, which are documents meant to formally log the transfer of digital assets into government-controlled wallets. Many of these memos were incomplete, missing crucial details such as wallet addresses, transaction amounts, or the date of the seizure. In one instance, wallet addresses were incorrectly swapped.

Beyond documentation issues, the report highlighted more serious concerns. Investigators discovered that three hardware wallets had gone missing after being handed over by the FBI. In another case, IRS staff shredded the recovery seed phrase for a government wallet, risking permanent loss of access to the funds. Although the funds were eventually recovered, such errors could have resulted in irretrievable losses.

The IRS-CI was also criticized for converting a Litecoin asset into Bitcoin during a seizure, failing to preserve the asset in its original form. This practice was later corrected after TIGTA raised concerns in May 2024, leading the agency to update its guidelines to maintain seized crypto in its native format. Additionally, recordkeeping failures were found in the IRS’s own inventory system, known as AFTRAK. Around 43% of seized crypto assets were listed in the wrong location, and several entries had quantity mismatches that could impact asset valuation. For example, one seized bitcoin holding was undervalued by more than $9,000 due to a simple decimal error.

TIGTA issued six recommendations to address these issues, urging the IRS-CI to improve inventory systems, clarify internal guidelines, and enforce timelines for documentation. The IRS agreed to five of the recommendations and partially accepted the sixth, citing real-world complications in preserving asset types during seizures. With the likelihood of increasing crypto seizures, the pressure is now on the agency to enhance its controls and prevent costly errors.