Now that the US Congress and the Internal Revenue Service (IRS) have digital asset transactions firmly in the crosshairs for investigations and reporting, we are in the midst of what I will call crypto-currency tax anxiety. Millennials may make up a larger group of persons dealing with crypto, and may be very concerned about prior tax noncompliance. In light of this spotlight on digital assets, we can expect to see many articles by tax advisors with all level of experience who will claim to have come up with a panacea for those who have not been meeting their US tax obligations with respect to such digital assets.
The lay reader with unreported crypto transactions is likely scared and concerned; unsure what to do next. He or she may believe that because crypto is so new, there is some special tax solution for crypto and easily buy into the promise of a panacea. My post today expels this myth. One has to be careful. Be informed.
Be Informed; Be Smart
I am seeing more and more marketing of “solutions” for US tax noncompliance associated with crypto. What follows is a recent example, which I expect will only be one of many more to come: providing a power of attorney (IRS Form 2848) to someone who will regularly monitor (for regular fees), the taxpayer’s online tax account at the IRS looking for audit flags or other computer generated indications that an audit may be underway. (A Stateside taxpayer can do this monitoring himself; more on this in my blog post next week). I do not understand how this is a solution. The marketing indicates having this tax information before the audit is initiated by the IRS gives the taxpayer time to file an amended tax return to fix the crypto omissions (i.e., before the audit). It seems that amending tax returns before indication that an audit may be on the way is not being recommended. Rather a “wait and see” approach seems to be advocated. (At least, this is my interpretation of the marketing materials I have seen.)
In reality, filing amended returns does not prevent audits and also does not mean the taxpayer will not be penalized if audited. Another concern I have is what an IRS agent might think if the agent learns the underlying facts. Would a taxpayer being audited who has been “monitoring” the IRS tax account and “waited”, be treated differently from one who attempted to rectify the tax noncompliance by amending as soon as he realized he had omitted income from crypto transactions? I don’t know.
The goal of the vast majority of taxpayers is to be in compliance with their tax obligations. I believe that to the extent there are tax noncompliance issues, they can be resolved in traditional ways. The US taxation issues associated with digital assets are full of uncertainty since these are very new. In addition, we currently lack much needed guidance from the IRS as to the tax treatment of transactions involving such digital assets. These are important factors to be considered in adopting an approach to regain tax compliance.
What to do?
Tax professionals are considering what might be best for their client with tax noncompliance due to unreported transactions involving digital assets. There is no “one-size-fits-all” answer to this problem.
There are various approaches that can be taken and the facts are critical. For example, is the taxpayer living and working abroad and may be able to use a penalty-free approach to correcting his errors? What is the taxpayer’s past tax history (is there anything in the past that may cause IRS to think this particular tax noncompliance might be “willful”?). Hosts of questions must be answered and the various options considered with an experienced professional. A smart taxpayer will learn about each of the possible options and understand the possible penalties that can be imposed with regard to each one. With the advice of competent counsel, the taxpayer can have the best chance to choose the one that is most reasonable in his particular case.
I am here to help you. With my tax colleagues who are attorneys, CPAs and EAs we can get your situation under control before the IRS comes calling. Even if the IRS has contacted you and assessed penalties, it is possible we can help get them abated.
Want more information about the US tax issues associated with virtual currency and blockchain? See my blog post category devoted to this topic.
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