IRS WARNING TO TAXPAYERS
Cyrpto Currency Tax Reporting & Compliance
IRS Large Business and International division
On July 2, the IRS Large Business and International division (LB&I) announced a new audit campaign to address tax noncompliance related to the use of virtual currency. LB&I campaigns to direct the IRS’s audit resources to specific areas the IRS believes have the greatest risk of noncompliance. Virtual currency is one of 40 campaigns that have been announced by the IRS since January 2017. The IRS’s announcement means that taxpayers who failed to report virtual currency transactions face an increased risk for audit.
The IRS stated that it does not plan to start a voluntary disclosure program specifically for virtual currency as it had in the past for foreign bank account reporting. But the IRS has a general procedure in place for voluntary disclosure. Voluntary disclosure does not guarantee that a taxpayer will not be prosecuted, but may result in the government not recommending prosecution. In order to be considered a voluntary disclosure, the taxpayer must (i) engage in a truthful, timely, and complete communication with the IRS, (ii) show a willingness to cooperate with the IRS to determine his correct tax liability, and (iii) make arrangements with the IRS to pay in full the tax, interest, and any penalties determined by the IRS to be applicable. The disclosure must occur before the IRS has initiated a civil or criminal investigation of the taxpayer or notified the taxpayer of its intent to do so. The IRS’s Internal Revenue Manual sets forth in more detail the requirements for voluntary disclosure.
If a taxpayer has failed to report foreign financial assets, the taxpayer may also be able to take advantage of the IRS’s Streamlined Domestic Offshore Procedures. The streamlined procedures are available to taxpayers whose failure to pay tax did not result from their own willful conduct. Streamlined procedures include procedures for filing amended or delinquent and terms for resolving taxpayers’ tax and penalty obligations. Like voluntary disclosure, a taxpayer cannot participate in the streamlined procedures if the IRS has already initiated a civil or criminal investigation of the taxpayer or notified the taxpayer of its intent to do so.
The Internal Revenue Service has begun sending letters to more than 10,000 cryptocurrency holders, warning about penalties for failing to report income and pay tax on transactions involving virtual currencies. The agency expects its mailing to be completed by the end of August. It is sending three variations of one letter, depending on the information it has about the recipient. If you have received one of these letters, contact us and we can help you respond to the IRS and meet our compliance obligation. Failure to properly respond to these notices could subject you to significant penalties and interest. This is a very serious matter and you should take any inquiry from the IRS seriously.