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IRS Increases Efforts to Target US Taxpayers Who Failed to Report and Pay Taxes on Cryptocurrency Transactions

The IRS is continuing its efforts to collect taxes from U.S. taxpayers who have failed to report and pay taxes on cryptocurrency transactions. A new court order has allowed the IRS to issue a summons for customer records.

September 26, 2022
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The IRS is continuing its efforts to collect taxes from U.S. taxpayers who have failed to report and pay taxes on cryptocurrency transactions. A new court order has allowed the IRS to issue a summons for customer records.

The U.S. Department of Justice has announced that it will issue a “John Doe summons” requiring M.Y. Safra Bank to turn over crypto transaction data for SFOX, a digital currency prime broker that used the bank.SFOX has more than 175,000 users and has processed over $12 billion in transactions since 2015.

This is not the first time the IRS has summoned records from a cryptocurrency broker, but it is unusual because the broker seems to be relatively small. This signals the possibility that more summonses may be forthcoming, according to Andrew Gordon, tax attorney, CPA and president of Gordon Law Group in Skokie, Illinois.

According to Matt Metras, an enrolled agent and cryptocurrency tax specialist at MDM Financial Services in Rochester, New York, the first summons for crypto tax records triggered IRS letters for unreported income and unpaid taxes, but the response took a few years. Metras said that he is curious to see what will happen with all the data that the IRS is collecting. He noted that the IRS may try to match it with investors' tax returns.

Since 2019, the IRS has been asking taxpayers to disclose their virtual currency activity on their tax returns. This has caused some confusion, as many people are not sure what qualifies as taxable activity.

However, the question of how to answer the question still remains unanswered, according to Yu-Ting Wang, vice chair of the virtual currency task force for the Association of International Certified Professional Accountants.

The organization submitted comments to the IRS about the question in late August, asking for revisions to the query and clearer instructions with examples before the agency finalizes the 2022 tax return. The organization believes that these revisions will help to ensure that taxpayers are able to accurately and effectively report their information on their tax returns.

In 2021, Congress passed the $1.2 trillion bipartisan infrastructure law, which included a provision requiring annual tax reporting from digital currency brokers starting in 2023. This law will help to ensure that digital currency brokers are paying their fair share of taxes and will help to level the playing field for traditional businesses.
The proposed measure could raise nearly $28 billion over a decade, according to a 2021 estimate from the congressional Joint Committee on Taxation.

However, tax professionals are still seeking guidance on the definition of "broker" to know which companies must comply, according to Wang.

Crypto investors must be proactive, regardless of which companies report activity to the IRS. This is according to experts who say that crypto investors need to take responsibility for their own investments. While it is important to know which companies report to the IRS, it is also crucial for investors to be proactive in order to protect their investments.

If you have not reported cryptocurrency income on past tax returns, it may be beneficial to speak with a tax professional who has experience with digital currencies, according to Wang.

According to Gordon, it is much better to come forward and file an amendment than to let the IRS audit you - or potentially even worse, for not reporting crypto.

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