The Tax Times

Thursday, November 5, 2026

Cryptocurrency in the IRS Crosshairs: Are Your Digital Assets Putting You at Risk of a Tax Audit?

Cryptocurrency is being targeted by the IRS. Former commissioner Rettig specifically highlighted new cryptocurrency disclosure obligations on the Form 1040 tax return and had it listed on the IRS' "Dirty Dozen" list.

Preparing and undergoing a tax examination for Crypto can be exhausting, but hopefully, this post will help you prepare to survive an IRS Crypto Currency Audit.

What Information Will I Need For A Cryptocurrency Audit?
During an audit, it’s likely that the IRS will ask you for the following information:

All blockchain addresses and wallet IDs that you own/control
All crypto exchanges and wallets you are using, as well as your user IDs, email addresses, and IP addresses related to those accounts. ‍

You’ll also need the following information on each one of your cryptocurrency transactions.

The date and time each unit of your cryptocurrency was acquired
The fair market value of each cryptocurrency at the time of acquisition
The date and time of each time you disposed of your cryptocurrency
The fair market value of each cryptocurrency at the time of disposal, and what you’ve received in exchange for each cryptocurrency
The accounting method that you used to calculate your capital gains at each disposal event

(FIFO, LIFO, or HIFO)

How Do You Hold Your Cryptocurrency?
A cryptocurrency wallet that cannot be compromised because it is not connected to the Internet. Also called a "hardware wallet" and "offline wallet," the cold wallet stores the user's address and private key and works in conjunction with compatible software in the computer. Contrast with "hot wallet," which resides in the user's desktop or mobile device or in a cloud-based service, all of which are online to the Internet and can be hacked.

While you may think this information is not discoverable, you should think again the IRS not only requires reporting of crypto currency by crypto currency exchanges, but they also have frequently summoned the information on accounts > $20,000 at least four times and as recently as Aug. 15, 2022 when they issued a John Doe Summons To SFOX Seeking the Identities of U.S. Taxpayers Who Have Used Cryptocurrency.

Review the Crypto Audit IDR
When you receive a notice of examination from the IRS, they will also receive an IDR which is an Information Document Request. Some IDRs are relatively short and others can be more extensive. Therefore, when you are under a crypto audit, the first step always is to evaluate the IDR to determine what the IRS is asking for, so that you can make notes as to what you’ll need to respond and prepare a strategy of how to respond.

How Far Back Does A Cryptocurrency Audit Go?
Audits include all tax returns that are filed in the last three years for overstatement of deductions or six years for substantial understatement of income. (Though they typically don’t go back further than six years).

If no return was filed, or a fraudulent return is filed, there is no limit to how far back the IRS can audit.

Frequently Asked Questions
To summarize what we’ve discussed we have provided a few frequently asked questions about cryptocurrency tax audits.

Can you get audited for cryptocurrency?
Yes. If the IRS has reason to believe that you are underreporting your crypto taxes, it is likely that they will initiate an audit.
How long does a crypto tax audit typically take?
The maximum length of an audit is generally 3 years. However, the length of a crypto tax audit can vary heavily depending on the specifics of your situation.
How do you avoid a cryptocurrency tax audit?
To minimize your chances of being audited, be sure to accurately report your cryptocurrency capital gains and income across all your wallets and exchanges.

Which Crypto Exchanges Do Not Report To The IRS?
To legally operate in the United States, all major cryptocurrency exchanges are required to abide by relevant IRS reporting requirements.
More FAQ's regarding cryptocurrency?
Go to the IRS' webpage.

Unreported Cryptocurrency?
About 1-2 years ago, the IRS stated it would not be developing a “stand-alone” cryptocurrency voluntary disclosure program, but no such program currently exists. If you are out of cryptocurrency tax and reporting compliance, we can also advise you of the benefits of a domestic or offshore Voluntary Disclosure, which we handle on a regular basis.

Hybrid Offshore Accounts (Did You Report on Forms 114 & 8938)

Currently, holding cryptocurrency does not require you file an FBAR filing on a FinCEN 114. Similarly, it also does not require a Form 8938.

It's not clear whether an FBAR is part of reporting requirements for U.S. investors who have traded virtual currencies on internationally-based exchanges. This is because there's no definitive guidance that accounts on exchanges count as "international bank accounts."

However, on 31st December 2020, the IRS quietly dropped a Bitcoin bombshell as it released a statement saying that “FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account.” This regulation will apply to accounts on foreign crypto exchanges as well. Thus, a conservative approach would be to file an FBAR if at any time you held $10,000 or more in one or more internationally based accounts during the tax year.

Note that this total is not for a single account, but for all foreign accounts. For example, if you held $6,500 of ETH on Bitfinex (Taiwan) and $5,000 of LTC on KuCoin (Hong Kong), you might need to file an FBAR for each account.

Should I Seek The Help of A Tax Attorney Like TaxAid?
Yes, many investors choose to seek the help of a tax attorney that can advocate their tax positions before the IRS.

If you choose to hire a tax professional, be sure that the tax attorney who you work with has a strong background in cryptocurrency, like Marini & Associates, PA - TaxAid.com.
We have experience in representing taxpayers with cryptocurrency tax issues.
We know how to use various cryptocurrency tax software.
The tax attorneys at Marini & Associates, PA (TaxAid.com), will meet with the IRS on your behalf, so you don't have to. and
If you are out of cryptocurrency tax and reporting compliance, we can also advise you of the benefits of a domestic or offshore Voluntary Disclosure, which we handle on a regular basis.

Have a Virtual Currency Tax Problem?

Value Your Freedom?

Contact the Tax Lawyers at

Marini & Associates, P.A.

for a FREE Tax Consultation Contact us at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

Sources

CoinLedger

Lexology

Inside the IRS’s New Voluntary Disclosure Proposal - IR-2025-124

The IRS has a proposal, IRS News Release IR-2025-124, to overhaul its Criminal Voluntary Disclosure Practice, including a more “streamlined” penalty framework and tighter timelines for compliance. For taxpayers with potential criminal exposure and the advisors who represent them, this proposal is both an opportunity and a warning.

What The IRS Is Proposing

The proposal would reshape how the Voluntary Disclosure Practice (VDP) works from preclearance through closing agreement, with an emphasis on speed, full payment, and standardized penalties.

Key elements include:

· A defined “Disclosure Period”

o The disclosure period would generally cover the most recent six years of delinquent or amended income tax returns and related international information returns and FBARs.

o Taxpayers must still identify all years of noncompliance on Form 14457, even though the IRS will typically focus on this six‑year window for filing and penalty purposes.

· A three‑month completion deadline

o Once CI grants conditional approval, taxpayers would have only three months to file all delinquent or amended returns, all required international information returns, and all FBARs.

o Within that same three‑month period, they must also execute all required agreements (closing agreement, statute extensions, penalty and FBAR agreements) and pay all tax, penalties, and interest in full.

· Mandatory electronic Form 14457

o All applicants must use the electronic Form 14457, Voluntary Disclosure Practice Preclearance Request and Application.

o The form must identify every year of noncompliance and include a full and accurate description of the taxpayer’s willful conduct, including income streams, entities, and foreign accounts or assets.

The New Penalty Framework

The proposed penalty structure is intended to be clear, predictable, and consistent across all disclosures:

For delinquent returns, failure-to-file penalties apply for each year in the Disclosure Period; failure-to-pay penalties do not apply.
For amended returns, a 20-percent accuracy-related penalty applies for each year in the Disclosure Period.

This replaces the current 75% civil fraud penalty for one year, currently required by the Voluntary Disclosure Procedure.

For delinquent or amended FBARs, penalties apply per year and are subject to annual inflation adjustments.
For delinquent or amended international information returns (e.g., Forms 5471, 8938), the IRS contemplates penalties of up to 10,000 dollars per return, per year during the disclosure period.

These penalties will be integrated into the overall VDP settlement, rather than left entirely to separate exam discretion.

Criminal Exposure And Enforcement Risk

The fundamental trade‑off of the VDP remains: come in early, tell the full truth, and pay in full to avoid a criminal recommendation.

· Protection from criminal referral (with caveats)

o Taxpayers who make a timely, truthful, and complete voluntary disclosure and fully comply with the proposed terms “will not be recommended for criminal prosecution” by CI.

o However, the IRS reminds taxpayers that voluntary disclosure does not automatically guarantee immunity; CI retains discretion in egregious cases.

· Consequences of failing to follow through

o CI may rescind conditional approval if the taxpayer fails to meet filing, payment, or agreement‑execution requirements within the deadlines.

o Noncompliant taxpayers may then face full civil examination and potential criminal investigation, with exposure to all applicable penalties outside the VDP framework.

What This Means For Your Clients

For taxpayers with serious compliance issues—especially those with willful offshore, digital asset, or long‑running domestic underreporting—the proposed changes raise the stakes for early, strategic engagement.

· Need for readiness before preclearance

o Because the proposal compresses the timeline to just three months post‑conditional approval, taxpayers will need much of the factual and documentary heavy lifting done before Form 14457 ever goes in.

o Advisors should evaluate records, reconstruct income, and scope the full set of returns and FBARs in advance to avoid defaulting inside the program.

· Renewed emphasis on modeling risk vs. reward

o A more formulaic penalty structure should make it easier to model the cost of entering VDP versus the risk of detection and full‑bore enforcement.

o For some taxpayers, especially those with large undisclosed foreign balances or digital asset activity, the program may still be expensive—but the alternative could be far worse.

Tax professionals who have seen the evolution of voluntary disclosure—from offshore initiatives to today’s CI practice—now have a rare chance to shape the next iteration.

Thoughtful, experience‑based comments between now and March 22, 2026, may help determine whether the “new and improved” VDP truly encourages compliance or simply raises the barriers to coming in from the cold.