International and state authorities could soon bolster enforcement efforts by rewarding individuals who provide information about underreporting income on virtual currency transactions. As a result, digital asset investors and their tax advisors could find themselves subject to liability under yet another regulation creeping into cryptocurrency governance. Taxpayers who skirt tax payments on virtual investments could be exposed to both criminal and civil liability under state False Claims Acts (FCAs). Specifically, Delaware, Florida, Illinois, Indiana, Nevada, New York, Rhode Island and Washington, D.C., authorize state FCA suits based on tax liability for failure to report income and making false statements on those returns.
On March 23, 2022, New York Attorney General Letitia James warned, “The consequences of a taxpayer’s failure to properly report income derived from transactions involving cryptocurrency are potentially far-reaching and severe.” The New York FCA allows for recovery up to three times the damages (two times the damages for voluntary and immediate self-reporting of fraud) and civil penalties of $6,000 to $12,000 per violation in addition to attorneys’ fees and costs – higher than the federal FCA, which allows for $5,500 to $11,000 per violation.