On behalf of Silver Tax Group posted in IRS Tax Audits on Thursday, March 8, 2018.
Due to possible underreporting of income, the IRS is taking a close look at bitcoin transactions. This is in part because Bitcoin values increased over 20 times in 2017. Also, many bitcoin transactions take place outside of the public light.
While such IRS crackdowns are not new, there are more and more consequences coming about due to such crackdowns. During the past decade the IRS has cracked down on reporting of foreign assets and income, and we have already seen the serious consequences due to that.
Coinbase and other cryptocurrencies
The IRS is focusing attention on cryptocurrencies introduced by big and small businesses that recently entered the market. Coinbase, one of the largest retailers of cryptocurrencies including bitcoin, was the subject of a recent federal court decision. It appears the IRS was asking Coinbase about extensive information on its users.
The IRS asked Coinbase to turnover identification of users including transaction information. By access to this information, the IRS was also hoping to access full user profiles and information to gain access to accounts. The IRS also sought copies of correspondence between users and Coinbase.
While the court did not allow for such a broad access to information, it does show how much information the IRS seeks. The agency is looking for information regarding individuals who they feel did not fully report gains due to bitcoin use. By such broad requests, the IRS likely is hoping to locate information that goes well beyond Coinbase users.
When to seek information
Please note that in the lawsuit, the IRS was not alleging wrongdoing on the part of individual Coinbase users. Rather, they were looking for this information because they believed there was underreporting going on by Coinbase and other bitcoin users overall.
Michigan taxpayers with significant bitcoin portfolios need to understand how serious the IRS is about cracking down on unreported income. These transactions can be enormously complex, and the failure to report income correctly can result in trouble with the IRS. Please remember that the penalties for underreporting are severe.