You open your mailbox and there’s an IRS letter asking about your crypto tax return. To respond to the audit, what work needs to be done and by who? It can be easy to panic and feel alarmed, but the best thing you can do first is to understand the process and your options.
What To Know If You Get an IRS Letter
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To understand what’s involved, and how best you can respond, I’m going to tell you about the five main activities during an examination of crypto transactions and records.
- Substantiation is the producing of receipts, records, and evidence of any income or expenses under question. It includes gathering all exchange transaction records and off-exchange transactions related to cryptos. Only the taxpayer knows where these records are, so collecting them is their responsibility.
- Accounting involves summarizing taxpayer records into tax reporting categories or forms. It is a taxpayer’s responsibility, but this work can be hired out. An example of this is using a crypto-capital gains calculation service to analyze transaction records to generate a list of gains. It is a complicated activity and critical to documenting the gains for the IRS.
- Reporting involves preparing or amending tax returns to report income and expenses or anti-money laundering forms. During an IRS examination or audit of crypto reporting, this work is done by Crypto Tax Audit at no charge for its subscribers; otherwise, Crypto Tax Audit will provide this at a reasonable fee.
- Representation is the strategizing and responding to tax authorities. It involves communicating with the IRS or tax authorities on the taxpayer’s behalf whether in writing or verbally, on all matters. This includes responding to letters, negotiating fast track mediation or settlement, negotiating with IRS Appeals office, requesting abatement, preparing taxpayer financial statements, applying for Currently Non-Collectable status or preparing Offers-In-Compromise petitions, keeping the taxpayer updated, and performing all other taxpayer dispute and collection options available in the tax code or Internal Revenue Manual.
For crypto-related examinations and audits, Crypto Tax Audit performs these services at no charge for its subscribers; otherwise, Crypto Tax Audit performs these services for a reasonable fee.
- Controversy is the term used to describe when a taxpayer and the IRS disagree on how a matter should be treated under the tax laws and regulations. It is a significant activity because all crypto-related transactions are new and stretch how laws and regulations are interpreted. Controversy work requires legal training because it involves statutory interpretation and analysis of prior court cases, IRS rulings, and commentary from the congressional Joint Committee on Taxation. For crypto-related examinations and audits, Crypto Tax Audit does this work at no charge to its subscribers. This is an area of significant interest and investigation by Crypto Tax Audit to prevent the most persuasive arguments during IRS representation.
- Litigation is needed when all efforts at escalation, appeals, and use of the tax advocate service do not provide a satisfactory result. A case can be taken to US Tax Court or Federal District Courts. A fresh legal case is prepared for arguing the tax controversy before a judge. Less than 4,000 cases per year are heard because the IRS uses its Appeals group to settle cases out of court if possible. While taxpayers can represent themselves at tax court, hiring an experienced tax litigation lawyer will increase the chances of winning. Paying for a lawyer is the taxpayer’s responsibility. Crypto Tax Audit will assist subscribers at no charge on crypto-related litigation efforts.
Read More: Latest Release of IRS Crypto Tax Information – Interview with Brad Kimes on XRP
What Can an IRS Letter Entail?
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Not all matters require all these skill areas. Often the cost is the driving consideration.
If your IRS letter is about collecting on a debt that is not disputed, then representation service is all that a taxpayer needs.
If your IRS letter is questioning the math on a return or the omission of reporting, then usually representation and sometimes reporting services are needed.
If your IRS letter is about a formal examination or audit, then more work may be needed. Substantiation, possibly bookkeeping, reporting, representation, and controversy work are needed.
Learn More: Our Services
Protect Yourself in the Case of an IRS Letter
As a service of Donnelly Tax Law, a Crypto Tax Audit annual subscription can ensure the best protection against crypto tax risks.
It’s the proactive way to have peace of mind and know you’re protected regarding your crypto taxes.
To learn more, visit CryptoTaxAudit.com.
Feature image by Kelly Sikkema on Unsplash
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