The IRS Has Begun Sending Letters to Virtual Currency Owners
The Internal Revenue Service announced on Friday July 26 that it has begun sending letters to virtual currency owners advising them to file amended returns for virtual currency transactions they failed to report or did not report properly on their tax returns and pay back taxes, interest and penalties.
According to the news bulletin, the agency expects that “more than 10,000 taxpayers” will receive such letters by the end of August. According to the agency, the names of these taxpayers were obtained through “various ongoing IRS compliance efforts.”
“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Chuck Rettig said in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
This announcement came shortly on the heels of the IRS announcing that it will be issuing new guidance on the tax treatment of transactions using virtual currencies.
The IRS taking a more proactive and aggressive stance should come as no surprise to taxpayers and tax practitioners.
Gary Alford, the IRS special agent who gained national attention for helping solve the Silk Road online drug trafficking case that led to the 2013 arrest of kingpin Ross Ulbricht, and EisnerAmper tax partner Walter Pagano recently spoke about the potentially severe consequences of failing to report virtual currency transactions that result in sales or exchanges or ordinary income at an event in New York City hosted by EisnerAmper.
Now a national cybercrime coordinator for the IRS, Alford said the IRS has begun moving past money laundering cases that it continues to investigate and into more routine enforcements of tax law involving sales or exchanges of cryptocurrency transactions including transactions entered into for profit and transactions occurring in trades or businesses.
Both Alford and Pagano warned that because of cryptocurrency’s widespread publicity, ignorance of the law is no excuse to conceal or not report cryptocurrency transactions. If the IRS can prove that a taxpayer willfully concealed or failed to report cryptocurrency transactions, gains or income, he could be subjecting himself to criminal prosecution in addition to incurring significant civil penalties and interest.
According to Pagano, “My advice to taxpayers is to contemporaneously record every virtual currency transaction to determine their tax consequences, to consult with their tax advisors and return preparers and to err on the side of caution before filing their tax returns because the IRS’s tax enforcement “toolbox” to uncover unreported transactions includes tracing digital currency transactions by employing data analytics, artificial intelligence and algorithms as well as traditional investigative techniques.”