Individuals who the IRS pressed for details on their cryptocurrency holdings aren’t finding it too difficult to get their tax positions approved—as long as they can provide supporting documentation.
The IRS over the summer contacted more than 10,000 crypto investors as part of the agency’s increased focus on compliance. Recent acceptance letters issued to some taxpayers reinforce the agency’s message that it is more concerned about individuals who aren’t disclosing digital transactions at all, rather than those who try to comply but miss the mark.
The IRS declined to comment on the letters, but practitioners said, in some instances, the IRS is issuing refunds to taxpayers who could defend the positions they took.
“I personally worked with a user where the IRS was saying that they owed thousands of dollars on a CP2000 notice,” said Chandan Lodha, co-founder of CoinTracker. “And then after they presented their full transaction history, the user actually ended up with a refund.”
Taxpayer responses were required on two types of letters the IRS sent out this summer. Letter 6173 informed users that the agency suspects that they may have skirted taxes on their cryptocurrency transactions. Some individuals received a CP2000 notice informing them that information the agency had on file didn’t match what they reported on their tax return.
Lisa Zarlenga, a partner at Steptoe & Johnson LLP and a former Treasury official, said the responses taxpayers are getting back from the IRS so far might be automated because there hasn’t been a lot of time for the agency to conduct a substantive review.
Hundreds of people who received letters from the IRS over the summer turned to CoinTracker for assistance, Lodha said. The company, which helps people calculate taxes from cryptocurrency transactions, generated tax reports and provided users with template responses to give to the agency, he said.
Most of the taxpayers who are seeing quick responses from the IRS reported information on their tax returns that didn’t align with information the agency got from third parties on Form 1099-K, Lodha said.
Form 1099-K is used by third-party processors to report certain payment transactions to the IRS and to recipients of those payments in an effort to improve tax compliance.
Dashiell C. Shapiro, tax counsel at Shartsis Friese LLP in San Francisco, said he too has clients who have had their returns cleared by the IRS.
In most cases the agency will OK returns if taxpayers back up their positions with information such as bank balances and exchange account balances, and promise to give full details upon request, Shapiro said.
“It can’t hurt to provide as much detail as possible, but for taxpayers with extremely voluminous histories of crypto trades, the IRS can be reasonable in my experience in accepting summary information” plus corroboration, he said in an email.