The Treasury Inspector General for Tax Administration (TIGTA) specialize in them, just released their latest report. It underscores major shortcomings in the Internal Revenue Service Criminal Investigation (IRS-CI) unit’s management of seized digital assets. Making matters worse, the investigation uncovered serious inventory management, documentation, and valuation errors that further called into question the integrity of the process. As of late 2023, the IRS-CI was in possession of around $8 billion in digital assets connected to active criminal investigations. Even so, these lapses should not have happened. The watchdog's report has prompted calls for improved oversight and revised internal guidelines to ensure proper handling of seized cryptocurrencies.

Inventory Management Issues

One of the most shocking discoveries was the incorrect reporting of where seized crypto assets came from. Per their report, almost 43% of seized crypto assets were misclassified. This lack of consistent data hinders the ability to track and manage these assets, raising the risk of loss or mismanagement.

When investigators discovered that three hardware wallets were missing, it alarmed investigators. These wallets were seized from the FBI and later transferred to the IRS-CI. The loss of these wallets highlights the importance of more secure and accountable custodial practices and procedures from the IRS-CI.

They fail to comprehensively account for and properly safeguard digital assets confiscated as a result of criminal investigations. Without a more accurate and reliable inventory system, the IRS-CI exposes itself to the predatory risk of losing control over significant amounts of seized cryptocurrency.

Documentation and Valuation Errors

The TIGTA report found failures in documentation and valuation. In another case, the wallet addresses were accidentally flipped, which would have caused user confusion and risked their assets being lost.

The report’s biggest find was an alarming error. It showed that one of its seized bitcoin holdings had been undervalued by more than $9,000 due to a decimal place error. These types of valuation errors can pose very material financial impact, especially when handling billions of digital assets.

Errors in documentation and valuation should raise a red flag. Specifically, the IRS-CI should be held accountable for greater accuracy and attention to detail when handling seized crypto assets. Having stricter quality control guidelines and more extensive training for their staff would go a long way in preventing these things from happening again.

Recommendations for Improvement

TIGTA reacted to these findings with six equally robust recommendations. These recommendations are aimed at the IRS-CI and improving its oversight of seized digital assets. Each of these recommendations works to improve inventory tracking, provide transparency through clear internal policies, and strengthen accountability through established documentation deadlines.

Specifically, TIGTA urged the IRS-CI to implement more robust inventory systems to accurately track the location and status of seized crypto assets. The watchdog recommended that the IRS-CI clarify its internal guidelines to provide clear and consistent instructions for handling digital assets.

Moreover, TIGTA made another important point about the need to enforce documentation timelines to maintain complete and current records. By following through on these recommendations, the IRS-CI can enhance its transparency and accountability, minimizing the risk of errors and mismanagement.