IRS Is Using Data Analytics to Identify Taxpayers Who Invest in Cryptocurrency and Fail to Report Their Gains
In our Exton PA office, we are seeing more taxpayers invest in Bit Coin or some other form of Virtual Currency. The IRS has also taken notice. Whereas our clients meet with us to discuss the proper reporting of gains (or losses) from their investments, the IRS focus is on taxpayers who may have willfully or non-willfully failed to report their cryptocurrency and non-crypto virtual currencies.
IRS Action Plan
IRS Commissioner Chuck Rettig stated that “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the laws and helping taxpayers fully understand and meet their obligations.”
The IRS, in its effort to identify taxpayers who may have unwillingly or willingly failed to report gains from their virtual currency transactions, will send 10,000 educational letters to cryptocurrency investors in August. These letters are not being sent at random to taxpayers, but the IRS has obtained the names of cryptocurrency investors through its ongoing compliance efforts and these letters target those individuals.
The IRS is asking taxpayers to review their tax filings and if currency transactions were omitted, to file amended past returns and pay the taxes, interest and penalties related to these unreported transactions.
How Will the IRS Contact Taxpayers
There are three variation of the educational letter (6173, 6174, and 6174-A). Letters 6174 and 6174-A require no action from the taxpayer. On the other hand, Letter 6173 alleges noncompliance and requires taxpayer action. If the taxpayer fails to respond to the Letter 6173, the IRS will likely examine that tax return.This withholding requirement applies to payments made to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.
Does It Make a Difference If a Taxpayer Invests in Cryptocurrencies Located Outside the US?
Yes! A taxpayer’s reporting requirements are greater if investing in virtual currency abroad. There are additional filing requirements, such as the Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114, that may be required. Failure to comply with FBAR reporting carries some very significant penalties.
What If a Taxpayer Does Not Hold Virtual Currencies for Investment Purposes, But Merely Uses this Currency to Pay Vendors?
Taxpayers who pay vendors or others via Bitcoin (or any other virtual currency) may have taxable transactions to report to the IRS.W
Tax Planning Tip #1:
Taxpayers who pay vendors or others via Bitcoin or some other virtual currency, and/or taxpayers who invest in virtual currencies and sell or exchange those holdings, need to speak with an experienced tax professional to ensure compliance with the Code and IRS Regulations.
Tax Planning Tip #2:
If a taxpayer has cryptocurrency exposure, it is always better to be proactive and report these transactions to the IRS before you receive one of the above letters from the IRS. If the IRS imposes a penalty against the taxpayer, the taxpayer usually is in a better position to have the IRS abate the penalty by being proactive.
Tax Planning Tip #3:
Aside from trading in mutual funds and stocks that are listed on a U.S. securities exchange, taxpayers who hold foreign stocks, bonds, bank accounts or any other type of foreign investment, directly or indirectly, as well as taxpayers who have a retirement plan in a foreign country or hold property in a joint account with a parent or other relative in a foreign country, should consult with an experienced tax professional to ensure that they are in compliance with the FBAR reporting requirements.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.