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Avoiding the IRS crackdown

All American crypto traders should know that the IRS is gearing up for large compliance campaign (read crackdown) on crypto traders.[1]

The IRS commission said in November 2018, “You think the IRS doesn’t know [who the cryptotraders are]? The IRS will have more information about them than you can possibly imagine.”[2]

Clinton Donnelly has written a book to show traders how to protect themselves. He is a Enrolled Agent with a law degree experienced in defending taxpayers from the IRS at examinations, audits, and appeals.

How does the IRS know who all the American crypto traders are?

During the run-up of prices in 2017, many traders chose not to even report their gains on their tax returns. Others reported some but not all. How much risk do non-reporters and under-reporters face? The short answer is that the IRS pretty much knows who all the U.S. cryptotraders are. I will explain if you sign up for more information.

How will the IRS compliance campaign happen?

We can have a good idea of how it will be done from their past campaigns and official pronouncement. They will be using data analytics. This technique enabled the IRS to bring in 10 times more money in 2018, than in 2017. “We prioritized the use of data in our investigations in fiscal 2018,” said Don Fort, Chief of [IRS Criminal Investigation]. “The future for CI must involve leveraging the vast amount of data we have to help drive case selection and make us more efficient in the critical work that we do. Data analytics is a powerful tool for identifying areas of tax non-compliance.”[3]

Must crypto traders submit anti-money laundering reports?

The law requires taxpayers to submit various reports annually when engaged in financial transaction with non-US persons. Since exchanges anonymously match buyers and seller, the taxpayer must assume the counterparty to his trade is a foreign person.  Barely any crypto traders filed these anti-money laundering reports. The exposure is massive. The IRS knows it. The penalty for non-reporting starts at $10,000.

Can past returns be corrected to protect against the IRS compliance campaign?

There are several tax amnesty procedures available that eliminate penalties when correcting past filing mistakes. However, these options go away once the IRS issues the first letter challenging your past returns. So the time to act is now. The process is surprisingly easy and affordable.

Why hasn’t the IRS begun the crackdown already?

Why doesn’t the IRS not worry about the statute of limitations? It is because under-reporting and non-reporting crypto suspends the statute of limitation protections. They can take as long as they want.

What if I would owe the IRS more money than I have?

This real fear can be mitigated several ways including using like-kind exchange (up until 2018), claiming losses from scams and failed exchanges, reporting mining income and all expenses, amending past returns, structuring multi-year payment plans, or offering a compromise to the IRS.

What can you do?

Sign up now to receive several emails explaining the above topics. It is urgent for all American crypto traders to be prepared for the IRS compliance crackdown. The information you receive with these emails will inform you greatly how to protect yourself

Clinton Donnelly, LLM
@CryptoTaxFixer
DonnellyTaxLaw.com

Footnotes

[1] https://www.irs.gov/businesses/irs-announces-the-identification-and-selection-of-five-large-business-and-international-compliance-campaigns

[2] https://www.thetaxadviser.com/issues/2019/feb/irs-commissioner-aicpa-national-tax-conference.html

[3] https://www.irs.gov/newsroom/irs-criminal-investigation-releases-fiscal-year-2018-annual-report

Just What Is Block Chain

You don’t need to know how the blockchain works to use it, but having a basic knowledge allows you to see why it’s considered revolutionary. The blockchain is a digital ledger that can be programmed to record not only financial transactions, but also virtually everything of value.

Information on a blockchain exists as a shared and continually reconciled database. A blockchain database isn’t stored in any single location—the records it keeps are public and easily verifiable. There’s no centralized version for a hacker to corrupt, but it’s accessible to anyone on the internet because it’s hosted on millions of computers simultaneously.

By storing blocks of information that are identical across its network, the blockchain cannot:

  • Be controlled by any single entity.
  • Have any single point of failure.

Blockchain guarantees the validity of a transaction by recording it not only on a main register, but also on a distributed system of registers, all connected through a secure validation mechanism.

This is true because the blockchain network automatically checks in with itself every 10 minutes: a kind of self-auditing ecosystem of digital value. Each group of transactions is referred to as a block. A network of computing nodes makes up the blockchain—each is an administrator, making the network decentralized.

Blockchain’s initial purpose was the development of cryptocurrencies such as Bitcoin—a secure and consistent financial system not under control of any government’s central bank. But that’s only the first of many potential applications. There are a range of other potential adaptations of the blockchain concept that are active or in development.

Anything that happens on the blockchain is a function of the whole network. Some important implications stem from this:

  • A new way to verify transactions, making traditional commerce unnecessary.
  • Stock market trades become almost simultaneous.
  • Types of recordkeeping, like a land registry, could become fully public.

As an example, Bitcoin has no central authority—it’s managed by the network. The forms of mass collaboration this makes possible are just beginning to be investigated:

  • How about international remittances? The World Bank estimates that more than $430 billion in money transfers were sent in 2015.
  • The blockchain potentially cuts out the middleman for these transactions.
  • Transactions online are connected to identity verification. It’s easy to imagine how the blockchain will transform other types of identity management.

And by storing data across its network, the blockchain eliminates the risks that come with data being held centrally. There are no centralized points of vulnerability that computer hackers can exploit.

With the internet, we all rely on the username and password system to protect our identity and assets online. Blockchain’s security methods consist of public and private keys. A public key is a long, randomly generated string of numbers that becomes your user address on the blockchain. Bitcoins sent across the network are recorded to that address. The private key is like a password that gives the owner access to Bitcoin or other digital assets.

The promise is that if you store your data on the blockchain, it’s incorruptible as long as you safeguard your private key. The blockchain gives internet users the ability to create value and authenticate digital information, and the expectation is that it will transform not just financial services, but also many other businesses and industries.

We’re seeing just the beginning.

Key Guidance on Sec. 199 A Deductions

Key Guidance on Sec. 199A Deductions

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The new QBI deduction, created by the 2017 tax reform law, allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.

The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

The guidance, released today, includes:

  • A set of regulations, finalizing proposed regulations issued last summer, A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies.
  • A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes,
  • A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction
     

The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met. Taxpayers can rely on this safe harbor until a final revenue procedure is issued.

The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.

The QBI deduction is not available for wage income or for business income earned by a C corporation.

As with many IRS provisions, although the basics look clear, the devil is in the details. Be sure to keep in touch with us to see how these rules and guidance apply to your situation.