Page 1 - Reporting Virtual Currency Transactions to the IRS: Time May Be Running Out for Affected Taxpayers
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COL.   COLUMNS I Tax Practice & Procedure




                   Reporting Virtual Currency Transactions to the IRS


                                          Time May Be Running Out for Affected Taxpayers

                                                         By Sharon L. McCarthy



                     RS Notice 2014-21, issued on March 25, 2014, made it clear  those transactions and, when appropriate, can be liable for
                     that the IRS would treat virtual currencies that can be converted  penalties and interest. In more extreme situations, taxpayers
                  Iinto traditional currency as property for federal income tax pur-  could be subject to criminal prosecution for failing to properly
                  poses (http://bit.ly/2C5pFzq). This means that gain from the sale  report the income tax consequences of virtual currency trans-
                  and exchange of virtual currency is subject to taxation. Given that  actions. Criminal charges could include tax evasion and filing
                  many are attracted to virtual currency because of its anonymous  a false tax return (emphasis added).
                  nature, tax preparers should expect that individual clients might  This change in the IRS’s position on virtual currency reporting
                  not volunteer information about virtual currency transactions at tax  should set off alarm bells for taxpayers who thought they could
                  time. Recent events suggest, however, that the IRS is not sitting  avoid reporting these transactions. It should also encourage CPAs
                  back and waiting for taxpayers to fully disclose their virtual currency  to ask individuals about their virtual currency activities.
                  activities. Failure to report such transactions may result in penalties
                  and, potentially, criminal prosecution.           IRS Efforts to Obtain Virtual Currency Users’ Information
                    On March 23, 2018, the IRS issued a reminder that income  Taxpayers should be mindful of the fact that the IRS has a
                  from virtual currency transactions is reportable (“IRS Reminds  number of effective enforcement tools available, such as the
                  Taxpayers to Report Virtual Currency Transactions,”  “John Doe” summons that, pursuant to Internal Revenue Code
                  http://bit.ly/2vpWHer). While the 2014 notice mentioned potential  (IRC) section 7602(a), can be issued by the IRS only after
                  accuracy-related and information reporting penalties and noted that  approval by a district court. Such a summons allows the IRS to
                  “penalty relief may be available” due to reasonable cause, it did  investigate the tax liability of a specific unidentified taxpayer or
                  not reference potential criminal penalties. The 2018 reminder states:  group of taxpayers. The John Doe summons has been used with
                      Taxpayers who do not properly report the income tax con-  great success in the IRS’s enforcement of undisclosed offshore
                      sequences of virtual currency transactions can be audited for  bank accounts, starting with the summons issued to UBS in 2008




































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