How To Survive A Cryptocurrency Tax Audit

Cryptocurrency is being targeted by the IRS as evidenced by the April 13, 2021, hearing of the Senate Finance Committee, Sen. Rob Portman (R-OH) and IRS Commissioner Charles Rettig discussed issues relating to the reporting of cryptocurrency transactions.

Commissioner Rettig specifically highlighted new cryptocurrency disclosure obligations on the Form 1040 tax return and has 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

 

 

IRS Issues New Revision of Form 433-A

The Internal Revenue Service has updated Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, revised in July 2022.

What's new on Form 433-A in comparison with previous vision of May 2020?

 1. New “Country” field has been added to many of the address lines:

·         Taxpayer’s and Spouse’s address

·         Employer’s address

·         Car Loan Lender’s address

·         Location of Personal Assets address

·         Payment Processor’s address

·         A/R customer address

·         Location of Business Assets address

 2. Under Employment Information field about number of exemptions claimed has been renamed to “Number of dependents claimed on your Form 1040”.

 3. Under Other Information, questions about being a beneficiary of a trust, estate or life insurance policy and safe deposit boxes, have been clarified to include those located in foreign countries and jurisdictions.

 4. Section “Virtual Currency (Cryptocurrency” is now renamed to “Digital Assets” and new types of assets have been added, such as Non-fungible token (NFT) and Smart Contract.

 5. Under “Other Income” the IRS added description to include recurring capital gains form the sale of securities including cryptocurrency and non-fungible tokens. And the IRS clarified that income received through digital platforms (e.g. YouTube, TikTok, etc.) and income from providing on-demand work, services or goods (e.g. Uber, Lyft, Airbnb, VRBO) should be included as well. We disagree that some of the income the IRS classifies as Other Income should go under that line. Income from Uber, Lyft and Airbnb, for example, most frequently is reported on Schedule C and, therefore, would be disclosed under “Net Business Income” line.

If you use PitBullTax Software to prepare these forms, then they have updated the Form 433-A and their Questionnaire to include updates mentioned above. 

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

Source:

PitbullTax 

TIGTA Confirms That The IRS Respected The Restrictions on Directly Contacting Represented Taxpayers!

The IRS has a number of policies and procedures to help ensure that taxpayers are afforded the right to designate an authorized representative to act on their behalf in a variety of tax matters. 

In addition, the IRS has a process to handle the review and disposition of taxpayer allegations of direct contact violations. 

TIGTA selected a statistically valid stratified sample of 105 taxpayers from a population of 1,365 taxpayers who had collection actions documented in case history narratives by Field Collection employees between October 1, 2020, and September 30, 2021. 

TIGTA Reviewed The Case History Narratives For
These Sampled Taxpayers And Found "No"  Instances
In Which The Field Collection Employee Violated
A Taxpayer’s Rights Under I.R.C. § 7521 And
Fair Tax Collection Practices Of I.R.C. § 6304(A)(2).

While the majority of Field Collection employees appeared to be familiar with the direct contact provisions and fair tax collection practices, not all revenue officers are familiar with the requirements of the provisions.

TIGTA interviewed a judgmental sample of 20 revenue officers out of the 2,505 Field Collection employees as of September 30, 2021. When presented a hypothetical situation involving a revenue officer’s response to a taxpayer asking to speak to a certified public accountant for an opinion on the issue at hand, four of the 20 revenue officers did not state that they would suspend or reschedule the interview. Sixteen of the 20 who would end the interview would allow consultation times that ranged from two to 30 calendar days. The revenue officer is to allow a minimum of 10 business days for the consultation with an authorized representative after a suspended interview. 

When presented hypothetical situations involving taxpayers requesting or already having a power of attorney, the majority of revenue officers would require the appropriate form to designate a power of attorney but do not know to request an updated form when all open tax periods are not covered.

TIGTA recommended that the IRS issue a reminder memorandum to all revenue officers and group managers reemphasizing the importance of revenue officers following established guidelines and procedures on the taxpayer’s right to representation and direct contact. The IRS agreed with our recommendation and plans to issue a formal reminder to all revenue officers and group managers.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

IRS Is Going After Tax Evaders, Not Honest Americans - Rettig Op-ed

In case you missed it, IRS Commissioner Chuck Rettig published an op-ed on Yahoo Finance: IRS sets the record straight: We’re going after tax-evaders, not honest Americans (yahoo.com). 

This is an op-ed from Charles P. Rettig, the 49th Commissioner of the IRS.

As the nation’s tax administrator, the IRS plays a unique role in our nation. It can be a difficult job. After all, does anyone really like paying taxes? Of course not. But they’re essential to fund the roads we drive on, the schools our children attend, support our military and so much more. Unfortunately, given the nature of this work and historical stereotypes, the IRS is often perceived as an easy target for mischaracterizations of what IRS employees do — and that’s exactly what’s happened in recent weeks.

The recent debate over providing badly needed funding to the IRS is filled with outright false suggestions about what the agency and our hard-working employees do — as well as how the additional resources will be handled.

The bottom line is this: These resources are absolutely not about increasing audit scrutiny on small business or middle-income Americans. The investment of these important resources is designed to support honest, compliant taxpayers. Our investment is designed around a Treasury directive that audit rates do not rise relative to recent years for households making under $400,000.

We all want a fair and impartial system where everyone contributes their fair share, no more and certainly no less. A robust, visible tax enforcement effort focused on high-end tax evaders and those supporting them is a priority. Underpayments by tax evaders shift the burden of operating our great country onto honest, hard-working Americans who follow the law.

With this new law, honest taxpayers will see badly needed, meaningful service improvements at the IRS. The IRS should be able to answer the phones and process information — including tax returns — in a timely manner. Enhanced IT systems and taxpayer services will mean that honest taxpayers will be better able to comply with the tax laws, ultimately resulting in a lower — yes, lower — likelihood of being audited and a reduced burden on them.

To set the record straight on this important legislation and dispel any lingering misperceptions, here are some key facts to keep in mind:To set the record straight on this important legislation and dispel any lingering misperceptions, here are some key facts to keep in mind:

False Statement: The IRS is hiring 87,000 armed special agents to harass taxpayers.

Reality: Absolutely false. The majority of new hires the IRS makes will be those who answer the phones, work on processing individual tax returns or go after high-end taxpayers or corporations who are avoiding their taxes. Less than 1% of new hires will be in our IRS Criminal Investigation (IRS-CI) area, which currently has a total of about 2,100 special agents and is currently hiring about 300 more.

These CI special agents investigate criminal tax violations typically related to money laundering, Bank Secrecy, National Security and National Defense matters. They have been involved in dismantling terrorist financing efforts and criminal cartels as well as eliminating child exploitation operations in the Dark Net that led to the arrests of hundreds of people throughout the world. They do not perform civil tax administrative functions such as audits of tax returns. They are law enforcement officers, and every American should be extremely proud they are on our team.

False Statement: All IRS employees — and those being hired under the new legislation — will carry firearms.

Reality: Again, absolutely false. More than 97% of IRS employees do not carry weapons. This includes key civil-side enforcement personnel, including revenue agents, examiners and others involved in audits and compliance work. Less than 3% of IRS employees — expressly limited to Criminal Investigation special agents — carry firearms. IRS Criminal Investigation oversees the entirety of the work related to criminal violations of the tax law and other financial crimes. This is consistent with other federal law enforcement agencies.

False Statement: The additional funding will be used to hire more auditors to “shake down” average taxpayers.

Reality: False. Wage-earning taxpayers like firefighters, construction workers, teachers and police officers are among the most compliant taxpayers, given that their incomes come from Forms W-2 and 1099. These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans. Instead, the additional resources will also be focused on large corporate and high net-worth taxpayers to enforce laws already on the books that the IRS does not have enough resources to pursue.

False Statement: The new legislation will be a massive overnight expansion of the IRS.

Reality: False. This funding — which will be spread over 10 years — will add employees over time as we modernize our operations with meaningful technological enhancements. In addition, the IRS has one of the oldest workforces in government, and staffing has been in a deep decline for many years. More than 50,000 employees will retire in the next few years, leaving the foundation of the tax system that the nation relies on at risk. We’ve been losing 10,000 employees a year.

Overall, current IRS staffing is far below historical norms. In 1992, the IRS had 117,000 employees — 38,000 more than today. Back then, the agency was dealing with fewer taxpayers; the U.S. population has grown almost 30% since 1992.

False Statement: This new funding will allow overreach by the IRS, putting agents on every street corner and prying into people’s personal financial lives.

Reality: False. This funding will allow the IRS to better serve the nation’s taxpayers — and ultimately meet the critical needs of our country. Our employees care and, like others in government, take an oath to support our country. We take pride in hiring veterans, people with disabilities and people from all walks of life and from every corner of our country. Many of our employees, including myself, are members of a military family. And all of our employees reflect the taxpayers we serve.

I am an extremely proud American, a member of a proud military family, and simply will not accept baseless, harmful assertions against the interests of our country and the proud, hard-working employees of the IRS. Everyone should know this about IRS employees: We care, a lot, about this country and you.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

 

Preparer Penalty Applies When a Tax Firm Willfully Gives Bad Advice

In a Field Attorney Advice 20223301F, the IRS Chief Counsel's Office determined that a penalty should be assessed against a tax preparer who advised their client that a reserve for estimated liabilities could be excluded from income. 

Generally, federal tax rules prohibit a taxpayer from using reserves to offset gross revenue. Instead, those rules require that liabilities be "fixed" before becoming deductible under the "all events test" in Code Sec. 461. During the tax year at issue, reserves were treated differently for financial statement purposes.

The parent of a consolidated group that had undergone a "technical termination" during a reorganization was advised by the firm preparing its tax return that it could employ the reserve method of accounting for tax purposes and include income items net of its reserves (e.g., the estimated cost of its anticipated discounts and disputed claims

According to the Chief Counsel's Office, the return position the preparer advised the taxpayer to take ran contrary to settled law applicable to the facts and circumstances. The IRS should therefore assess the preparer penalty for willful or reckless conduct under Code Sec. 6694(b).

The Chief Counsel's Office determined that the penalty under Code Sec. 6694(b) was proper because all of the tax professionals involved in giving the taxpayer advice had to have been aware of Code Sec. 461 and its corresponding regulations when providing the advice. 

They knew the taxpayer couldn't use book accounting to exclude or deduct estimated liabilities for tax reporting, so their written advice that the taxpayer should do just that intentionally disregarded the rules and regulations.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

IRS Training of Additional 20,000 – 30,000 New Employees Could Take up to "Three Years"

The IRS is set to receive billions in new funding to catch wealthy tax evaders, but the effects may not be visible for years and enforcement could initially drop as agency workers are pulled away to train new agents.

The Internal Revenue Service will receive $45.6 billion in enforcement funding as part of a nearly $80 billion funding increase included in the Inflation Reduction Act, Democrats' tax, climate and health care bill signed into law Aug. 16 by President Joe Biden.

However, former senior agency officials told Law360 it will take years for the IRS to ramp up enforcement efforts following the funding boost. Hiring a large number of workers will take time, as will training them. Further, existing employees will be involved in training new personnel, and senior agency management will need to put plans in place to avoid significant disruptions to their work, they said.

"As you get new funding to hire more auditors, instead of revenue going up it often goes down" initially, according to former IRS Commissioner Lawrence Gibbs, who is now with Miller & Chevalier Chtd. "You're taking experienced agents out of the line working to train new agents and that's an extremely important task."

Measures of enforcement performance often decline somewhat the first year or two after the agency receives new funding, said Mark Matthews, a former deputy commissioner of services and enforcement at the IRS and a former chief of the agency's Criminal Investigation division. That's because the most effective agents are typically taken offline to train new workers, said Matthews, who is now at Caplin & Drysdale.

"The programs with the longest training cycles like criminal investigation generally will take longer to show progress statistically," he said.

The New Funding Will Be Directed At Enforcing Compliance Among The "Wealthiest Taxpayers" With Complex
Tax Situations, Meaning The Agents Pursuing
Them Will Need Extensive Training.

IRS Commissioner Chuck Rettig told agency employees this month that the law provides needed resources to address noncompliance among large corporate and wealthy taxpayers, along with pass-throughs and multinational companies with international tax issues. Doing so will require sophisticated and specialized teams that can analyze complex structures to ensure fairness in the system, he said.

Eric Hylton, a former commissioner of the agency's Small-Business/Self-Employed division and former deputy chief of the Criminal Investigation division, told Law360 that fully training compliance personnel generally takes about three years.

Training includes a year of classroom and on-the job instruction for revenue agents, who perform audits, and revenue officers, who collect taxes, he said. Revenue agents receive additional training.

Special agents in the IRS' Criminal Investigation division receive training for six months at the Federal Law Enforcement Center, then do one to two years of on-the-job training with an experienced special agent, said Hylton, who is now national director of compliance at Alliantgroup.

To reduce the training burden on existing workers, CI is using contractors and recent retirees for some academy and on-the-job training roles, Cole said. The division is also increasing its use of technology in training, he said.

Improved technology will play a part in boosting collections, Koskinen said. Audit rates for wealthy people and corporations have dropped much more than others, and increasing them to be on par with historical rates "will generate significant funds," Koskinen said.

Treasury Secretary Janet Yellen has directed the IRS to submit a report within six months detailing how it plans to spend the nearly $80 billion provided by the Inflation Reduction Act. Meanwhile, Rep. Bill Pascrell Jr., D-N.J., who chairs the House Ways and Means Oversight Subcommittee, has called on Rettig to provide him a spending plan by Aug. 30.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)