On April 16, 2019, the Large Business and International (LB&I) Division of the Internal Revenue…
New IRS Enforcement Letters Warn of Cryptocurrency Non-Compliance
Last week, the Internal Revenue Service began sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.
“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,” said IRS Commissioner Chuck Rettig. “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.”
The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.
For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.
Some people have already received their letter. The least intimidating one according to people is one version that asks taxpayers to review their returns and file an amended one if necessary.
The second letter is a more serious warning dealing with possible noncompliance with US tax law and potential IRS enforcement. Lastly, the third requires a response, or the recipient will be audited.
Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
An IRS compliance campaign is a targeted directive on a particular issue; they happen when the IRS determines that there are taxpayer issues which require a response from the agency. When the IRS announces a campaign (or campaigns), it’s a signal that they will be dedicating time, resources, training, and tools towards a tax compliance goal. To date, IRS has announced a total of 59 campaigns.
Virtual currency is an ongoing focus area for IRS Criminal Investigation.
IRS Notice 2014-21 (PDF) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.
In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF) making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. However, two years later in 2016, only 802 individual tax returns out of the 132 million filed electronically with the IRS reported income related to cryptocurrencies. The government is clearly seeking to increase compliance.
There are clear parallels between the IRS’ focus on cryptocurrency and the prior targeting of offshore accounts. Investigations into offshore accounts began with subpoenas to financial institutions and eventually became a full-fledged IRS compliance initiative.
The IRS anticipates issuing additional legal guidance in this area in the near future.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution. People should take this matter very seriously by reviewing their tax filings.
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