IRS increasing efforts to catch crypto cheats
The IRS has indicated that catching crypto cheats is a very high priority. They continue pursuing actions to find taxpayers who have not paid tax on their crypto gains.
In 2021, Congress passed the $1.2 trillion bipartisan infrastructure law, requiring an annual tax reporting provision for digital currency brokers starting in 2023.
The measure may bring in nearly $28 billion over a decade, according to a 2021 estimate from the congressional Joint Committee on Taxation.
The IRS recently had a big win. The U. S. District Court for the Southern District of New York granted the IRS a so-called John Doe summons of M. Y. Safra Bank after an investigation of SFOX, a digital currency broker. Judge Paul Gardephe said there was a reasonable basis to believe at least ten people may have failed to pay tax on crypto transactions.
The court order will provide information regarding over 175,000 users and over $12 billion in transactions since 2015. It’s not the first summons for crypto records. However, it’s unusual because the broker is relatively small, which suggests the possibility of more to come.
“The government’s ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats,” IRS Commissioner Chuck Rettig said. “The court’s granting of the John Doe summons reinforces our ongoing, significant efforts to ensure everyone pays their share. Taxpayers earning income from digital asset transactions must comply with their filing and reporting responsibilities.”
If you are audited for not reporting taxable crypto activity, you may incur interest, penalties, or even criminal charges. It may be considered tax evasion or fraud.
It is much better to file an amendment than to let the IRS audit you for not reporting crypto gains.
Depending on your scenario, you could potentially be subject to a 20% accuracy-related penalty and a 75% fraud penalty or worse. The greater the frequency and the larger the unreported gains, the more likely the IRS will be interested in the fraud penalty or criminal referral charges.
It’s crucial to file an amended return before the IRS contacts you. A Qualified Amended Return (QAR) is an amended return that is filed before the IRS contacts you.
The gains reported on a QAR that were omitted from the original return are excluded from the deficiency calculation on which accuracy-related penalties are based. However, an amended return does not qualify as a QAR if the amount reported is a correction of a fraudulent position taken on the original return.
If you haven’t reported cryptocurrency income on your tax returns, you should speak with a tax professional with digital currency expertise.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at email@example.com.