While most taxpayers probably haven’t been thinking much about cryptocurrency reporting requirements over the last few months (for good reason), the IRS has not forgotten, and begun analysis, about the vast number of taxpayers who are likely not reporting their cryptocurrency income, intentionally or otherwise. To the contrary in fact, the IRS appears to be ramping up their enforcement activity, or at least preparing for a charge (have to pay for those stimulus checks somehow, right?)
In mid-May, the IRS issued a solicitation to several major developers of cryptocurrency tax software, offering the opportunity to consult with the IRS on how best to identity virtual currency transactions and presumably cross-reference those transactions with taxpayers who have not reported any such activity. In addition to these consulting duties, the proposal issued by the IRS states that contractors should be available to consult with the IRS during meetings with taxpayers or their representatives, assist the IRS with trial preparation, and if necessary, testify at trial as a summary witness. Based on that job description, it certainly sounds like the IRS is preparing for battle.
One interesting aspect of this outsourcing, contracting or however you want to describe it, is that historically the IRS has not been allowed to engage outside firms for assistance in taxpayer audits, with the exception of certain niche areas such as the valuation of artwork. In fact, as recently as 2019 legislation to this effect has been passed. Specifically, the Taxpayer First Act of 2019 specifically prohibits outside consultants from examining taxpayer records, except for the purpose of providing expert valuation services. This act also specifically prohibits anyone besides an IRS agent from questioning a witness in court.
Will these outside consultants be permitted to serve in the capacity that the IRS seemingly is planning on? It seems like that might be an uphill battle, based on the Taxpayer First Act. One thing does seem certain however – while the global focus may be on COVID-19, don’t count on the IRS forgetting about the cryptocurrency issue. If you own virtual assets and want to make sure you’ve been reporting them correctly, please don’t hesitate to reach out to your Henry+Horne advisor. Taxpayers in this position will be much better off by getting ahead of the situation, before it becomes a potential examination.
If you own cryptocurrency and need help with analysis for the tax implications of your situation, or have any IRS questions in general, be sure to contact your Henry+Horne tax advisor. For more on how Henry+Horne can employ their decades of tax experience to your benefit, check out our Accounting Services page.
Austin Bradley, CPA