If a taxpayer underreports or fails to pay income tax from cryptocurrency income sources, they could face criminal and civil liability. While federal statutes have failed to reach this far in the past, cooperative agency efforts are using state legislation to target noncompliant taxpayers across the country.
To further their efforts, some of these programs are considering implementing whistleblower programs to bolster their own abilities to identify and prosecute tax evasion and fraud involving digital currencies and non-fungible tokens. It is more important now than ever to ensure that you do stay or become tax compliant.
At the Tax Law Offices of David W. Klasing, our seasoned Dual Licensed Cryptocurrency Tax Attorneys and CPAs are here to help. To get a first-time special reduced rate case assessment, call our offices today at (800) 681-1295 or schedule online here.
This is a new step that expands on the federal version of the False Claims Act (FCA). Tax cases, specifically those involving the underreporting of income on tax returns of any sort, are explicitly excluded from the federal version of the FCA. However, certain states that have adopted their own version of the FCA may present a unique threat for tax enforcement.
Taxpayers who skirt tax payments on virtual investments could be exposed to both criminal and civil tax liability under state versions of the FCA. 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.
The underreporting of virtual currency transactions is also a target of the IRS. The 2021 IRS Form 1040 prominently includes the following question at the top of the first page; “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
While the federal FCA explicitly excludes tax cases, the IRS and the U.S. Department of Justice (DOJ) have made no secret of their efforts to address cryptocurrency tax fraud through criminal prosecutions. Federal tax code provides for the assessment of a 75% civil penalty for any underpayment of taxes where the taxpayer committed fraud. Even if fraud cannot be established, penalties for failure to report income or for underreporting income could apply.
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.
In the past, whistleblowers have proven to be a helpful resource in identifying and pursuing FCA violations. Potential tipsters have found motivation in state FCA provisions that allow whistleblowers to share in potential recovery awards.
The frequency of these tips is likely to rise if the the Joint Chiefs of Global Tax Enforcement (also known as the J5) adopt their own form of whistleblower program to boost their enforcement efforts. The J5 has launched its own coordination event to target non-fungible tokens and decentralized exchanges. Blockchain technology, which publicly records digital asset transactions, now allows the government to independently test the veracity of whistleblower claims and focus in on egregious violators.
The developments discussed above suggest that further Treasury regulations and IRS actions regarding cryptocurrency reporting enforcement are likely to come in the near future. With additional cooperation among federal, state and non-U.S. tax authorities, taxpayers should be mindful of their reporting requirements.
The first step in remaining compliant with your cryptocurrency income tax filings is to identify what the government is looking for. Any sale or disposition of a digital asset, including trading one form of cryptocurrency for another, is a reportable transaction. You must also report any cryptocurrency you receive as payment for goods, services, or income through employment, as well as any cryptocurrency earned through mining.
Crypto gains and losses should be reported on Form 8949, which requires the name of the cryptocurrency; purchase date; purchase quantity and price; date sold, traded or disposed of; sale price; and market value of the digital asset at the time of sale. These should all be tracked rigorously, so you should have a reliable system for recording your cryptocurrency transactions that you can look to when preparing your filings.
Of course, it is possible that mistakes have already been made. Rather than ignoring the issue or waiting for the government to come knocking on your door, there are actions that you can take today to reduce the potential consequences of any missteps in your cryptocurrency income reporting.
Just this year, the IRS released its revised Form 14457, which now allows taxpayers facing criminal tax issues to disclose all domestic and foreign noncompliant currency either directly owned or controlled by the taxpayer or of which the taxpayer was the beneficial owner. This is one form of voluntary disclosure, a process by which taxpayers can come forward with amended filings and additional documentation of their past noncompliance. In exchange for the taxpayer’s cooperation, the government offers potential reductions in penalties and reductions in charges.
Voluntary disclosure does not work in all cases and may end up doing more harm than good if handled the wrong way. You should only apply for voluntary disclosure after having a thorough assessment of your situation from a seasoned Tax Attorney and CPA.
If you have failed to file a tax return for one or more years, failed to report cryptocurrency based gains or taxable income or have taken a position on a tax return regarding cryptocurrency that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported cryptocurrency taxable income coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
To get experienced and dedicated assistance in answering all of your cryptocurrency reporting concerns, contact the skilled Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing by calling us at (800) 681-1295 or book online today.