Page 2 - Reporting Virtual Currency Transactions to the IRS: Time May Be Running Out for Affected Taxpayers

(“IRS to Receive Unprecedented Amount situation. They should also consider filing determined to be applicable by the IRS.
of Information in UBS Agreement,” Aug. amended returns to report their transac- While this is a simple process, it does not
19, 2009, http://bit.ly/2HfbFFq). No doubt tions in accordance with the IRS’s 2014 provide any specific penalty protection and
because of this success, the IRS is now notice. While additional taxes may be due, does not result in the IRS issuing a closing
using the John Doe summons in matters these taxpayers may be able to avoid agreement. Furthermore, even if the returns
related to virtual currency. penalties if they can show reasonable and payment are processed, the filing may
In 2016, the IRS issued a John Doe sum- cause for their failure to report. still result in an audit or even a criminal
mons to Coinbase, one of the world’s largest Taxpayers who engaged in unreported investigation.
virtual currency exchanges, seeking the iden- virtual currency transactions but are not Third, a taxpayer may be able to partic-
tities of all of its customers and account affected by the Coinbase summons have ipate in the IRS’s formal domestic voluntary
records for 2013, 2014, and 2015. When several options available to them, which disclosure program (IRM section 9.11.9),
Coinbase failed to comply with the sum- should be discussed with a tax professional. thereby possibly eliminating the risk of
mons, the IRS initially agreed to narrow the First, and most unlikely, in the case of a penalties, including criminal prosecution.
scope, then moved to compel disclosure. In taxpayer whose failure to report virtual cur- Sometimes referred to as a “noisy disclo-
support of its petition, the IRS submitted an rency transactions is due to reasonable sure,” this is likely the best option for any
affidavit from an IRS agent stating that it cause, filing qualified amended returns may taxpayer who the IRS may conclude filed
believes that virtual currency gains are not be an option. In general, a qualified amend- a fraudulent return that failed to report virtual
being reported, in part because only 800 to ed return is an amended return that is filed currency transactions. In order to initiate a
900 taxpayers had filed an IRS Form 8949 by a taxpayer before— domestic voluntary disclosure, the tax rep-
in 2015 to report virtual currency gains or ■ the taxpayer is contacted by the IRS with resentative should fax a power of attorney
losses, while Coinbase had 5.9 million users respect to the return, along with the taxpayer’s name, date of birth,
[U.S. v. Coinbase, 2017 WL 5890052 (N.D. ■ a person who promoted a tax benefit Social Security number, and address to the
Cal. Nov. 28, 2017) (JSC)]. After Coinbase claimed by the taxpayer is contacted by IRS Criminal Investigation Division (CID).
objected to the summons and a Coinbase the IRS, CID then will review its databases to deter-
customer moved to intervene and quash it, ■ a pass-through entity in which the taxpayer mine whether or not the taxpayer is eligible
the court issued an order in November 2017 holds an interest is contacted by the IRS, to participate in the domestic voluntary dis-
limiting the summons to only those cus- ■ a John Doe summons relating to the tax- closure (i.e., the disclosure is timely). If the
tomers of Coinbase who bought, sold, sent, payer’s liability is served, or taxpayer is precleared to participate, he must
or received more than $20,000 of bitcoin in ■ an IRS settlement initiative with respect comply with IRM section 9.11.9 by submit-
any one year during 2013–2015. Pursuant to a listed transaction reported on the ting truthful and complete returns and agree-
to the court’s order, Coinbase is required to return is announced. ing to cooperate with the IRS. If the IRS
turn over taxpayer identification number, A qualified amended return will not, accepts the voluntary disclosure, it will issue
name, date of birth, address, records of however, help the taxpayer avoid fraud a Form 906 closing agreement setting forth
account activity, and all periodic statements penalties with respect to fraudulent posi- the amount of tax, interest, and penalties due
of account or invoices relating to the nar- tions taken on the original return (IRS for the tax period at issue, which will bring
rowed class of customers. On February 23, Notice 2004-38, http://bit.ly/2JS5VU5). an end to the process.
2018, Coinbase sent an e-mail to approx- Accordingly, if there is any indication of Taxpayers who do not file amended
imately 13,000 of its customers notifying fraud (e.g., the taxpayer chose not to returns, either because they are no longer
them that it will be complying with the inform the tax return preparer in response eligible or because they decline professional
court order (“IRS Notification,” to a specific question about virtual curren- advice to do so, still may be able to avail
http://bit.ly/2qHMe8y). The IRS is there- cy), filing qualified amended returns would themselves of certain arguments to try to
fore in the process of learning the identity be a risky approach. avoid civil penalties. If, for example, tax-
of Coinbase customers who may not have Second, a taxpayer may be able to file payers disclosed to their accountant that they
properly reported their virtual currency amended returns pursuant to the Internal were involved in virtual currency transac-
transactions on their tax returns. Revenue Manual’s (IRM) voluntary disclo- tions, and the accountant did not inquire
sure provisions (IRM section. 9.11.9). This further or advise the taxpayers to make full
Reporting Options is accomplished by submitting a letter from disclosure, the taxpayers may be able to
Taxpayers who have received notifica- an attorney, providing amended returns that assert that they relied in good faith on their
tion from Coinbase that their data is being are complete and accurately report previous- accountant’s advice. Since the IRS did not
turned over to the IRS should realize that ly omitted legal source income, and offering take a public position on the taxation of vir-
they must notify their tax preparer of the to pay the tax, interest, and any penalties tual currency until early 2014, it would be

MAY 2018 / THE CPA JOURNAL 65