The Internal Revenue Services has reportedly purchased software to assist it in its efforts to uncover the identities of Bitcoin-using tax cheats. The news was reported today by The Daily Beast, which posted a document that appears to be an IRS purchase agreement with an outside contracting firm called Chainalysis. The company provides analysis software to various government agencies and companies in the financial services sector.
Chanalysis’ Reactor tool is said to be capable of tracking and analyzing anonymous Bitcoin transactions. Reactor tracks Bitcoin movement between wallets, and could provide an effective way for law enforcement to follow digital currency in much the same way that they can monitor the electronic movement of fiat currencies.
According to publicly available records obtained by The Daily Beast, Chainalysis has been under contract with the IRS since 2015, receiving a total of $88,700 from the agency.
The IRS objective was clearly outlined in the contract:
“The purpose of this acquisition is to get access to the contractor reactor to help us trace the movement of money through the bltcoin economy. This is necessary to identify and obtain evidence on individuals using bltcoin to either launder money or conceal income as part of tax fraud or other Federal crimes.”
A letter from Chainalysis Co-Founder Jonathon Levin describes Reactor’s capabilities, and claims that the tool has already gained access to at least some information about one-fourth of all Bitcoin addresses:
“Transactions in Bitcoin are made with pseudonyms, which need to be tied to real world identities in order to gain insights about the parties involved in a transaction and their purpose. Our tool has information on 25 percent of all Bitcoin addresses, which account for approximately 50 percent of all the Bitcoin activity; We additionally have over 4 million tags on Bitcoin addresses that we have scraped from web forums and leaked data sources including dark market forums and Mt Gox deposit and withdrawal information.”