IRS launches audits of bitcoin holders

Bitcoin is the largest and oldest cryptocurrency so it makes sense that IRS would take enforcement action against these account owners first. Some owners may have heard incorrect information that their transactions were not taxable or that IRS could not get their account information. Both of these are false. IRS announced last year that it is making cryptocurrency noncompliance a high priority and designed an audit program to target Bitcoin users.

About a month ago IRS received detailed information from Coinbase about account owners with more than $20,000 in their accounts and is not using an audit program to determine if the correct amount of tax was paid.  About 14,000 US taxpayers were affected.

Tax professionals believe that IRS examination letters to taxpayers with suspected unreported 2014 and 2015 bitcoin income have either just recently begun or will soon begin. If you get one of these audit letters it is important to respond – but don’t do it yourself. The IRS is skilled at using one relatively small audit issue, like failure to report bitcoin trading profits, into other larger tax compliance areas to launch additional tax audits. Now, just like the owners of offshore bank accounts over the past decade, these account owners are likely to need the help of CPAs and tax attorneys to untangle the mess created by IRS assessments, penalties and liens on personal and business property.

Despite reports that this is a complicated or difficult issue, it really is not. Tax laws on cryptocurrency are straightforward and not difficult to understand (at lest no more difficult than other parts of the tax law).

My hunch is that most large account bitcoin users do have an unpaid tax liability and should take proactive measures to avoid further problems. These tax liabilities don’t go away. They only get worse over time. I am pleased to discuss cryptocurrency tax issues with any cryptocurrency account owners and discuss a compliance strategy if you are one of the 14,000 account owners who are included in this first IRS cryptocurrency enforcement project.

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