Regular readers of our tax law blog know that our Bitcoin tax attorneys frequently write about tax issues surrounding virtual currencies. Most recently, we warned taxpayers to accurately report cryptocurrency transactions to the IRS, which has in recent years made combating Bitcoin tax evasion a top enforcement priority. The IRS is now making good on its promises to root out tax evaders who use virtual currencies to mask fraud. This summer, the Internal Revenue Service began issuing cautionary letters to certain cryptocurrency holders, targeting taxpayers who, to quote the relevant press release, “potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.” If you received a letter from the IRS warning you to report cryptocurrency transactions, be on high alert – and contact a tax defense attorney as soon as possible. As IRS Commissioner Chuck Rettig cautioned, “Taxpayers should take these letters very seriously,” because “the IRS is expanding its efforts involving virtual currency, including increased use of data analytics.”
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Based on the wording of these letters, recipients of Letter 6174-A may have the greatest cause for concern – at least, in cases where the improper reporting was willful (i.e. criminal, as opposed to merely negligent). However, taxpayers in all three categories were urged by the IRS to file amended or delinquent (late) returns as necessary, depending on their unique situations. Our tax compliance attorneys, who have experience providing tax guidance to numerous cryptocurrency holders, can help you determine the safest and most appropriate course of action.
Approximately 10,000 of the notices were generated by the IRS, which reported that the last of the letters would reach taxpayers by the end of August 2019. Unabridged copies of each letter may be accessed by following the appropriate link above.
If you were on the IRS’ list of recipients, you should have received your Letter 6173, Letter 6174, or Letter 6174-A by now. If you did not receive one of these notices, you may temporarily be “in the clear,” but be careful: the IRS, working with governments, financial institutions, and law enforcement agencies around the world, continuously monitors tax returns and financial records to detect and track unreported cryptocurrency accounts, wallets, and transactions. The IRS has even sought – and successfully obtained – “John Doe” (anonymous) subpoenas for information about cryptocurrency holders, gaining access to thousands of Coinbase customer records.
Together, these facts paint a clear picture for Bitcoin and other virtual currency holders: it is essential to comply with reporting instructions, or, as the IRS warned, become liable for tax (plus interest and penalties, where applicable). Moreover, taxpayers who act willfully could, as the IRS stated, “be subject to criminal prosecution” for tax fraud. Tax crimes that could potentially involve Bitcoin or other digital currencies include tax evasion (26 U.S. Code § 7201), the willful failure to file or pay taxes (26 U.S. Code § 7203), or tax preparer fraud (26 U.S. Code § 7206(2)), in cases where CPAs assist taxpayers with false and fraudulent returns – for example, by omitting reportable cryptocurrency transactions from clients’ tax returns.
Unfortunately, successful compliance has for many taxpayers been hindered by confusion around the IRS’ cryptocurrency rules (which the Treasury Inspector General for Tax Administration, or TIGTA, recommended for major overhauls in 2016). Cryptocurrency holders are advised to seek guidance from qualified tax professionals, like the virtual currency tax lawyers and CPAs at the Tax Law Office of David W. Klasing.
To schedule a reduced-rate Bitcoin tax consultation, contact us online today, or call our law offices 24 hours at (800) 681-1295. We serve taxpayers and business entities throughout Northern and Southern California, in addition to international taxpayers such as expats, military servicemembers who are stationed overseas, and U.S. citizens who work or study abroad.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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