Are You at Risk for Facing Allegations of Cryptocurrency Tax Fraud? Here’s What You Need to KnowHot Topics, News
Posted in on November 30, 2020
If you follow cryptocurrency news, you may have read that the Internal Revenue Service (IRS) is sending yet another round of warning letters to cryptocurrency traders and investors. If this news has you concerned, you will need to carefully review your prior years’ tax filings, and you will want to work with an experienced Virginia tax attorney to make sure that you are not at risk for serious consequences.
How This Round of IRS Cryptocurrency Warning Letters is Different
The IRS’ prior warning letters to cryptocurrency traders and investors were intended to ensure that these individuals and businesses were aware of their cryptocurrency-related federal income tax obligations. These were form letters, and they did not contain any specific information about the taxes that individual recipients had (or hadn’t) paid or that they might (or might not) owe.
Now, however, the IRS is sending a very different type of warning—in the form of a CP2000 tax notice. These notices do contain taxpayer-specific information; and, while a CP2000 tax notice, “isn’t a bill,” recipients must respond affirmatively in order to avoid the imposition of liability for back taxes, interest and penalties.
Of course, if you have not received a CP2000 tax notice, this does not necessarily mean that you have accurately reported and paid what you owe. Given the IRS’ current focus on combatting cryptocurrency-related tax fraud, all traders and investors who have questions or concerns about their prior years’ tax returns would be well-advised to review their filings and proactively make any adjustments that are necessary.
Making Sure Your Tax Returns Match Your Cryptocurrency Form 1099-Ks or Form 1099-MISCs
The trigger for the issuance of a CP2000 tax notice is the existence of a discrepancy between the information contained in an individual’s or business’s annual return and the information the IRS receives from other sources. In the context of cryptocurrency, this primarily involves a discrepancy between a taxpayer’s return and the Form 1099-K or Form 1099-MISC prepared by the taxpayer’s cryptocurrency exchange.
Under federal law, cryptocurrency exchanges are required to report transactions that exceed certain thresholds—either in terms of a dollar amount or in terms of volume. However, while Form 1099-K and Form 1099-MISC are their primary options for doing so, neither is particularly well-suited to the unique nature of cryptocurrency. Taxpayers have run into particular issues with exchanges using Form 1099-K, which does not allow for due consideration of a taxpayer’s basis when reporting potential taxable income to the IRS.
What does all of this mean for you? Regardless of whether you have received a CP2000 tax notice, you need to make sure that your tax filings (and your cryptocurrency exchange’s tax filings) are not putting you at risk for undue tax liability and penalties. If you have questions or concerns, you should consult with a Virginia tax attorney promptly.
Request a Consultation with Virginia Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group
For more information about ensuring the accuracy of your cryptocurrency-related tax filings and avoiding unwanted scrutiny from the IRS, schedule a consultation at Thorn Law Group. To request an appointment with Virginia tax attorney and Managing Partner Kevin E. Thorn, please call 703-752-3752, email firstname.lastname@example.org or inquire online today.Share This Post