45% of Americans use Turbo Tax and other tax software packages.
As this number continues to grow significantly, and we truly enter into a crypto age, the real question 45% of Americans should be asking is, will these various software packages protect me from getting an IRS crypto audit?
And the answer is a bit dodgy.
TurboTax and others tout they have an “audit guarantee” feature, which says if you get audited by the IRS, they will defend you against any calculation errors.
Wow, that sounds fantastic!
But, is it?
Most crypto Americans are very unaware of how this TurboTax type guarantee works.
Does TurboTax And Other Tax Software Packages Protect Crypto Traders From A Crypto Tax Audit?
The answer is no.
TurboTax and other tax software packages protect themselves first, and they protect you second when it comes to a crypto audit.
In an interview with Charlie Shrem on his podcast, Untold Stories in February 2020, Shrem and I discussed how TurboTax and tax software packages do not protect crypto traders from an audit.
Shrem pointed out that these audit guarantees are “stupid because anytime you do anything that can be answered by a “Yes” or “No” question, that audit guarantee goes away.”
And hey, those tax software packages are cool.
I’ve used them in my younger years, and they’re easy to find.
But the thing is, it’s what they don’t do is what is important.
TurboTax and other tax software packages don’t ask questions that they don’t want to deal with.
So they don’t protect you from those complex situations that they avoid with their “audit guarantee.”
They don’t ask you about complicated things.
Have you heard of Ponzi scams?
Suppose you are a victim of a financial scam. There’s a whole tax treatment where you can get a break on a scam like that.
Guess what? TurboTax, TaxAct, they do not touch it.
They don’t know how to ask the questions correctly to generate the right results to keep their audit guarantee safe.
And so as a result, they don’t mention anything about it.
“Once your crypto return starts to get complex, and trust me, all crypto traders have a complex return, TurboTax is not there for you, just not there.” – Clinton Donnelly.
And another thing.
Many of the lower-end professional tax software used by most tax preparers do not support the FBAR form; they don’t support it.
Shrem reminded me again, “So that’s what I mean; if you have anything related to complication or crypto, a lot of that audit guarantee goes away with TurboTax or other tax software programs.”
I am coming out with a video course, in light of all this, which is coming soon on my tax academy website.
“This video course on Donnelly Tax Law Academy will show you how to take TurboTax and hack it by adding in additional forms and typing in data so that you could use TurboTax to create what I’d characterize as a great crypto tax return.” – Clinton Donnelly
It will also show you how to file an FBAR form manually and to do Form 8938.
You have to take TurboTax and then slightly unscrew the covers and slam in some extra forms and print things out and mail it in.
As Shrem would say, “You have to be hacky with it, yeah?”
The answer is, Yeah. You do have to get a bit hacky with it.
You can sign up here to get on the tax academy mailing list.
I created this TurboTax hack video because not enough people can afford a white-glove tax service.
If you’re a small trader, maybe even a medium trader, you might be looking for alternatives to a white-glove crypto tax service.
The truth is that are not enough people with the crypto tax and law combination that I have to help Crypto Traders, and I’m baffled at why that is.
So, I’ve created crypto tax tools that I can put in the hands of individuals to do an excellent job in a way that they can afford.
Filing these forms isn’t a straightforward process, but I’m putting tools into people’s hands to help as many people as possible.
Are You Worried About The IRS Auditing Your TurboTax Crypto Returns?
Are you worried about the IRS auditing your crypto returns? Then you should have CryptoTaxAudit. They provide an IRS audit defense designed for the crypto owner. – Charlie Shrem, Untold Stories
If a crypto trader goes to their accountant and the trader is dishonest with their accountant, and the accountant files the return, the accountant’s not on the hook. The crypto trader is on the hook.
Why Are A Lot Of Accountants Afraid To Touch Crypto Returns Or To Sign Off On Your Crypto TurboTax Return?
2019 was an interesting year because of the schedule 1 question, “Did you have cryptocurrencies?”.
One year later, in 2020, the IRS has just released a draft version of the new Form 1040 for reporting personal income taxes. In this draft, the IRS has moved their enforcement of cryptocurrency taxation to the most prominent position possible in the form.
They will move this crypto question from Schedule 1, a form that is not required by all.
It will move from Schedule 1 to the most prominent form, called Form 1040.
It will be in the most prominent place on Form 1040, where nobody in the 2020 tax season will escape answering “yes” or “no” to having cryptocurrencies next tax season.
Accountants now have to ask this crypto question.
And when they ask it, the accountant is on the hook to tell you.
Guess what? Most of them don’t know what they’re doing.
So yeah, it is a scary time for doing your crypto tax returns because tax preparers have a few similar reactions to receiving them:
One, they check “No” and never bring up the topic.
Two, they check “Yes” or maybe dump you if you checked “Yes,” and they won’t even touch the return.
Three, they put the entire burden on you to tell them what they have to file.
Tax preparers are scared of crypto tax returns, and there’s going to be a lot of errors, and the IRS will have a field day. – Clinton Donnelly
The IRS is the US government’s moneymaking arm if you think about it as a business, and they’re losing money at a trillion dollars a year.
The new commissioner of the IRS has said he’s going to ramp up enforcement.
Everybody needs to educate themselves.
“We already have so many negative stigmas in our (crypto) industry; we don’t need the stigma that we don’t pay our taxes. We don’t need that.” – Charlie Shrem, Untold Stories
Who Will The IRS Go After?
What’ll happen is the IRS will go after some Bitcoin Whales, and they will use fear to drive the smaller traders into compliance.
Shrem agreed, “The IRS will go after someone who has a hundred million dollars or a fifty million dollar situation, and it will be a person that hid their taxes. That’s what I’m feeling too”.
It’s true. The IRS will go after the crypto whales, the big guys.
But the big guys will have negotiated settlements, and you won’t know about them, but they’ll go after some middle-sized crypto traders because they can create the fear of “Oh my gosh, the IRS came after somebody with just $100,000 of crypto.”
All the small traders, the vast majority of traders, will go running for cover, fix their returns, and start mailing cash to the IRS.
Like-kind Exchange Can Help Crypto Traders Fix Past Returns That May Have Gone Through TurboTax Or A Bad Tax Preparer In The Past
I do something called like-kind exchange reporting for most traders who we’re trading before 2018.
Many traders thought that because you had crypto-to-crypto trades, you didn’t have to report them because you didn’t take any money out.
That was true, but you had to file a form reporting all those trades.
If you didn’t file that form reporting all your trades, you don’t get that treatment.
So my firm does the like-kind exchange sheet, and hardly anybody does that.
We do a white-glove service on like-kind exchange.
Anybody who’s a crypto whale, a medium to a large crypto trader, can go to my website at donnelleytaxlaw.com, hit the schedule a consultation button, and we can go through your situation.
No crypto tax return is too complicated for Donnelly Tax Law.
I’ve had traders making 160,000 trades in a year, people with millions and millions of dollars of income and taxes to be owed, and we go after getting the best deal we can.
We get these big crypto traders the tax return that will help them sleep at night.
My goal is to take their crypto tax return and turn it into an armadillo that nobody can get into it.
How Can Crypto Whales Get Compliant On Back Taxes?
Charlie Shrem used himself as an example because of his felony, which makes him hypersensitive, and says he knows that he is on every list possible.
Shrem says, “in a situation where someone is worried that they look at my story, they look at me, and they say, “Well, I was very involved in crypto very early on; maybe I broke the law by mistake?
And then they’re worried that in the course of them filing their tax returns, that could be uncovered, even if it’s by mistake or not on purpose.
And they are worried that their accountant now must report a crime. Is that the case?
Shrem added, “Even failing to file your return is a felony. So now someone’s coming to you and saying, “Hey, I broke the law, I committed a felony, I didn’t file.” And you probably get a lot of people like that every day. You probably get people saying, “I haven’t filed for five years.” So what happens now?
So, I told Charlie Shrem, and I’ll tell you too, the good news is the IRS loves money.
If you fix your tax returns and come forward and send them some cash, they will be very nice to you.
I have done over 900 tax amnesty returns to help medium to large crypto traders, and I’ve had a 100% success rate.
The IRS is happy to have people come into compliance.
So everybody wins.
I talked to a guy who would be a well-known person in the crypto space, and he told me that he hadn’t filed his tax returns in several years.
He thought that the tax system was a fraud, and the IRS had no right tax and cryptos. That was his attitude.
Now he’s worried because he’s a celebrity.
And here’s the problem.
Once you take that attitude, it’s hard to go back; it’s hard to come back and do it the next year.
It’s hard to get current because you got so much that you haven’t done before.
And this is the problem every trader will have who hasn’t been even reporting his cryptos. Because that schedule one question says, did you do anything with cryptos?
They’ll come right after you.