Follow the Money: How Forensic Accounting Helps Crack Cases and File Taxes Smarter

April 10, 2025

With tax season upon us once more, the AnChain.AI team has been hard at work, helping Big 4 accounting firms and global regulators alike unravel the intricacies of countless crypto transactions across hundreds of cases. This past year’s unsealing of a five-count criminal indictment in New York, which charged a Canadian individual with siphoning approximately $65 million from decentralized finance protocols KyberSwap and Indexed Finance, starkly highlights the ongoing battle against crypto crime, as well as the continuous advancement of criminal money laundering efforts. However, as criminals evolve to exploit tech innovation to their advantage, so too must our technology offerings advance to match them.

The AnChain.AI Investigation team sat down with Willie Rondon, formerly the Director of International Operations and Chief of Staff at the United States IRS-CI, to discuss these issues, and how US Federal regulators are working with leading firms including AnChain.AI to stay ahead of bad actors. Our conversation illuminated the sophisticated strategies that today's criminals employ and the innovative forensic techniques needed to effectively combat them.

The Key Role of Forensic Accounting in Fincrime Investigation & Prevention

Rondon was quickly to point out both the similarities and the critical differences between forensic accounting standards for investigators and tax preparers, stating:

‍

‍

"Forensic accountants tracing funds from illegal proceeds, such as in an SEC stock fraud case where for example tainted funds are deposited into a married couple’s account, use a different approach compared to CPAs tracing crypto transactions for tax purposes."

- William Rondon
Former Director of International Operations & Chief of Staff, IRS-CI

‍

Per Rondon, the landscape of digital asset accounting is witnessing transformative changes, driven by new regulatory frameworks that directly affect how CPAs and forensic accountants manage and report cryptocurrency transactions. The IRS's recent Revenue Procedure 2024-28, effective from January 1, 2025, marks a pivotal shift, mandating a wallet-by-wallet accounting method over the universal method previously employed. This transition demands a more detailed approach to tracking and reporting the cost basis of digital assets, which could introduce both precision and complexity into the tax reporting process.

In addition, starting in 2025, the IRS will default to the First-In, First-Out (FIFO) method. Those using the Last-In, First-Out (LIFO) method must adjust, as the IRS will now default to FIFO unless specific identification is made. This IRS requirement aims to assist crypto exchanges and wallet services in accurately calculating the basis of taxpayers' coins when reporting crypto transactions using the new form 1099-DA.

AnChain.AI is proud to support these efforts to bring clarity to digital asset accounting, and to collaborate with regulators, CeFi and DeFi service providers to help quickly and efficiently transition.

‍

LIFO vs. FIFO & How They Work

Financial fraud Investigators often grapple with complex transaction networks when tracking stolen or suspicious funds. The overwhelming volume of transactions often obscures critical insights, making it difficult to prioritize key movements. This is where differing accounting forensics techniques come into play

The Last-In, First-Out (LIFO) methodology, comes into play, ensuring recent and significant transactions are highlighted first. By focusing on the latest entries, LIFO helps highlight significant and recent transactions
The First-In, First-Out (FIFO) methodology, on the other hand, assesses transactions in the order they occurred, starting from the oldest. This method is valuable in ensuring that no transactions are overlooked

The AnChain.AI team has been at the forefront of anti money laundering (AML) investigation, with leading US government agencies and financial institutions, and is proud to support these efforts with AnChain.AI CISO’s Forensic Accounting capabilities, enabling users to select the accounting methodology that best suits their investigative priorities during the course of an investigation.

User Pain Points

Overwhelming Transaction Data
Investigators often face large volumes of irrelevant or low-priority transactions.
Difficulty Prioritizing Fund Flows
Lack of clear methodologies to focus on impactful transactions leads to inefficiencies.
Time-Consuming Tracing
Manual sorting and filtering slow down investigations, especially when working with large datasets.

‍

Forensic Accounting In Action

Let’s use an AnChain.AI Auto-Trace example from the Ronin Bridge hack to illustrate CISO’s forensic accounting capabilities empower investigators with a clearer picture of critical investigative leads.

Case Study: The Ronin Bridge Hack

Prioritizing Key Transactions

LIFO focuses on the most recent and largest fund movements, reducing noise and enabling investigators to quickly identify critical flows.
The second hops of transactions occurred immediately after the initial transfers, emphasizing the importance of prioritizing temporal proximity in fund tracing.

Tracking Major Fund Movements

144.8K ETH sent to a sanctioned entity right after the initial theft.
42.8K ETH moved to unaffiliated wallets in the second hop of transfers.
30.8K ETH routed to exchanges for liquidity, indicating potential laundering stages.

Detecting Laundering Patterns

LIFO highlights flows through mixers like Tornado Cash (e.g., 46.6K ETH) and tracks their fragmented outputs to centralized exchanges.
The methodology ensures laundering activities are flagged quickly by following high-priority paths.

Benefits of LIFO In This Specific Case

In cases like the Ronin Bridge hack, time and clarity are critical:

Focus on impactful transactions: Start with the latest and largest sums, skipping unnecessary noise.
Speed up investigations: Automating prioritization means investigators spend more time analyzing and less time sorting.
Make connections clearer: Intuitive graphs ensure known entities like mixers and exchanges are easily identifiable.

‍

Converting Results into Transaction Graphs for Deeper Analysis

You can convert Auto-Trace results into a transaction graph for further manual investigation.

‍

Creating Auto-Reports

Investigators can add transactions from the graph into an auto-report to document findings.
Auto-Reports includes:
- Summarize transaction flows, entities involved
- Automatically visualize the flow path and record steps of each transaction in details

‍

Conclusion: Adapting to New Standards

As the IRS moves to standardize digital asset reporting with the FIFO methodology, both investigators and financial professionals must adapt their practices to comply with these changes. The shift ensures greater accuracy in financial reporting and positions professionals to handle the increasing complexity of crypto transactions effectively. AnChain.AI’s capabilities in employing various forensic accounting methods, demonstrates our commitment to providing frontline investigators and financial institutions alike with the technology required to tackle the most pressing threats in today’s crypto crime landscape.

Ready to simplify your blockchain investigations? Discover how CISO Auto Trace can help you solve cases faster, smarter, and with greater precision.

👉 Request a Demo Today

‍