If you’ve recently visited our tax blog, perhaps you read our article discussing the Internal Revenue Service’s plans to target 10,000 taxpayers who failed to report transactions made using digital currencies like Bitcoin (BTC) and Ripple (XRP). These taxpayers can expect a letter from the IRS before the end of August, possibly to be followed by a tax audit or even criminal prosecution if the taxpayer has exhibited signs of acting willfully to evade tax (“indicators of fraud”). Don Fort, Chief of the IRS Criminal Investigation Division (IRS-CI), has hinted at plans for the IRS to crack down on Bitcoin tax evasion – and with this summer’s wave of letters, the agency’s message could not be clearer: U.S. taxpayers who have failed to report or pay taxes on cryptocurrency transactions are squarely in the IRS’ crosshairs, and should therefore take corrective action before it is too late. For some taxpayers, this may involve making a voluntary disclosure, though this option may be off the table for taxpayers who have already been contacted by the IRS. Due to the complex nature of cryptocurrency tax requirements – and the costly fallout that can result from noncompliance with them – it is prudent to review your options, such as filing amended returns, with an experienced Bitcoin tax lawyer before contacting the IRS.
There are three versions of the letter that taxpayers might expect to receive: Letter 6173, Letter 6174, or Letter 6174-A. The basic format of each letter is similar: first, the IRS explains why they are contacting the taxpayer – namely, to resolve an apparent tax compliance issue concerning unreported income or capital gains from cryptocurrency transactions. For example, Letter 6174-A contains the following introductory language:
“We have information that you have or had one or more accounts containing virtual currency [such as a Bitcoin wallet] but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.”
After introducing the purpose for the letter, the IRS briefly explains steps the taxpayer must take to resolve the issue and reenter compliance. To continue using Letter 6174-A as an example, the taxpayer will see the following message:
“After reviewing the information below, if you believe you didn’t accurately report your virtual currency transactions on a federal income tax return, you should file amended returns or delinquent returns if you didn’t file a return for one or more taxable years.”
In other words, you should file a corrected (“amended”) version of the tax return you previously submitted; or, if you did not file to begin with, you should consider filing a late (“delinquent”) return. However, take heed: failure to file tax returns puts you at risk for substantial penalties, along with interest charges. Moreover, criminal tax charges may result if the failure to file was willful. In light of these facts, you should consult with a tax evasion defense attorney prior to communicating with the IRS. Your communications will be protected by the attorney-client privilege while you receive personalized, trustworthy guidance on the right steps to take to resolve your compliance issue.
If you have received Letter 6173, 6174, or 6174-A from the IRS regarding your cryptocurrency account(s), try not to panic. Receiving a letter from the IRS does not necessarily mean that you will be criminally investigated for Bitcoin tax evasion; but it does mean that the IRS is aware of your financial activities, which could spell trouble for taxpayers who have incorrectly reported virtual currency transactions in the past.
If you have any questions about how to report and pay taxes on Bitcoin transactions, no matter how seemingly minor or trivial, we urge you to contact our California tax lawyers for an in-depth consultation. Only by reviewing your situation in detail can we determine which sort of approach or strategy is likely to yield the best results. To set up your reduced-rate Bitcoin tax consultation, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295. You may also wish to browse our Bitcoin archives for additional information.
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