September 13, 2022
If you bought or sold cryptocurrency in the past year or two, then you might have to deal with crypto tax resolution. What exactly does this mean? Tax resolution is the act of working with both a tax professional, as well as the IRS, in order to deal with any discrepancies in your previous tax returns. Basically, if the IRS believes that you didn’t pay enough taxes based on your cryptocurrency transactions, they’ll audit you, and you’ll end up in a tax resolution situation.
What is Tax Resolution, and How Does it Apply to Cryptocurrencies?
Cryptocurrency is still fairly new as far as buying and selling it is concerned. Yes, it’s been around for years, but until the past few years, only those who had the power to mine it were able to spend the coins. Now, it’s on the open market and can be bought and sold just like any other commodity. This makes it something that the IRS has its eyes on because some people who utilize the cryptocurrency markets might not fully understand how to declare those gains and losses on their taxes.
As a result, quite a few people are going through tax resolution as a result of their cryptocurrency transactions. They have had their returns pulled by the IRS and put through an audit process. In order to rectify the situation, it’s important to work with a tax professional in order to ensure that the resolution process goes smoothly. After all, the IRS can sometimes make mistakes, and you don’t want to end up having to pay more taxes than necessary.
Why are IRS Audits with Cryptocurrencies so Common?
The IRS is aware that there’s still some confusion surrounding the ways in which cryptocurrency transactions are reported on tax returns. As a result, the IRS is pulling the returns of many people who have bought and sold cryptocurrencies in order to find issues of potential non-compliance.
After all, every time someone conducts a cryptocurrency transaction, whether it’s to buy, sell, or trade the currency, it’s considered to be a taxable event. When these transactions aren’t reported properly on a tax return, it can lead to an audit.
According to IRS Notice 2014-21, virtual currency is to be treated like property as far as tax purposes are concerned. The currency needs to be reported to the IRS in U.S. dollars, whether you bought and sold it for investment purposes or accepted it as a payment for a good or service. Not following through with these cryptocurrency tax laws can lead to having to pay interest or additional penalties to the IRS.
Why You Might Need Crypto Tax Resolution
If you have misrepresented your cryptocurrency transactions on your tax return, even if by mistake, then you will more than likely need crypto tax resolution. This process can help you come to an agreement with the IRS regarding how much you owe in taxes.
Errors in reporting cryptocurrency transactions can occur in many different ways, for example:
Unreported Transactions
If you mistakenly didn’t report a cryptocurrency transaction on your tax return, then you’ll need to refile your return. The IRS might pull your return for an audit, in which case you’ll have to collaborate with them and a tax professional in order to make any needed adjustments and payments.
Unfiled Tax Returns
In some cases, you may not have filed a tax return for one year or another, whether due to accidental oversight or questions about your crypto transactions that remained unanswered. If this is the case, then you’ll need to see a tax professional who can reach out to the IRS in order to help you rectify the situation.
Missing Transaction Records
Not every company that you can buy and sell crypto through sends you a 1099 at the end of the fiscal year. This doesn’t mean that you don’t need to report those transactions. In fact, you do. It’s up to you to keep track of your transactions for tax purposes, otherwise, you may end up in tax resolution.
IRS Misunderstanding
Believe it or not, sometimes the IRS is wrong. They actually do make mistakes. However, getting them to admit this can be tricky. This is why you’ll need the assistance of a tax professional. They can work with you and act like an intermediary as you come to a mutually agreed upon decision with the IRS.
How to Avoid a Crypto Tax Audit
Thankfully, there are several ways to avoid getting audited due to your cryptocurrency transactions. Wondering what these methods are? Consider the following:
Pay Taxes on Every Cryptocurrency Transaction
You need to pay the appropriate amount of taxes on every single one of your cryptocurrency transactions. Whether you’re buying, selling, or accepting crypto as payment for goods and services, you should be paying these taxes in order to prevent being audited by the IRS.
Keep Good Records
Since you can’t rely on every cryptocurrency site to provide you with a 1099 form at the end of the year, it’s important to keep your own records. Some suggestions include using spreadsheets that you create and update yourself, keeping all of your bank and cryptocurrency statements, and using a special cryptocurrency tax software in order to track every transaction.
File Your Taxes with a CPA Experienced with Cryptocurrencies
If you’re unsure how to report your cryptocurrency transactions on your tax return, reach out to a professional. A CPA who has plenty of experience with cryptocurrency and the taxes involved will be able to fill out your tax return correctly and submit it with the right amount of taxes applied.
How Crypto Tax Resolution Can Help
If you do end up getting audited due to discrepancies with your reported or unreported cryptocurrency transactions, it’s time to see a tax professional. Going through the crypto tax resolution process can help you:
Build a Defense
You might find yourself defending your actions and your tax return to the IRS. If this is the case, you’ll need a defense. A tax professional who is well versed in cryptocurrency can help you put together a defense to present to the IRS.
Evaluate Your Tax Situation
Whether you’re correct or the IRS is, you’ll need to have your tax situation evaluated. If the IRS is incorrect, then they’ll have to drop your audit and admit that your tax return is correct. On the other hand, if you’re the one who’s wrong, then you’ll need to correct your return and come to an agreement with the IRS that is mutually beneficial.
Act as a Mediator
While you could interact with the IRS on your own, it isn’t recommended. Unless you’re an expert on the various tax codes and can answer every single one of their inquiries quickly and with the required details, you may find yourself in a hole that you can’t get out of. This is where a tax professional comes into play. This is someone who can assist you through every part of the tax resolution process, interacting with the IRS on your behalf as a mediator. They will be the ones answering questions because they have your tax and financial records. It’s always a good idea to have someone on your side when you’re interacting with the IRS.
Correct Your Tax Return
If it turns out that your tax return is incorrect, then it will need to be corrected and then resubmitted to the IRS. If you end up owing money to the IRS based on this corrected return, then you’ll obviously need to pay it and any penalties or interest that apply. Thankfully, the IRS is often willing to accept a payment plan or help you build a payment agreement that you both agree on.
Offer a Compromise
In some cases, you may be able to reach a compromise with the IRS. This means that you could pay them a lump sum that is close to the full amount that you owe them, and they’ll cancel the remaining portion that you owe, as long as you make the payment on time and submit correct tax returns from that point forward. A tax professional can help you work with them on this type of compromise.
Correct the Situation
If it turns out that your tax return is incorrect and you did not report your cryptocurrency transactions properly, then the tax resolution process will help you correct the situation. This is the entire point of the process. You’ll need to make these corrections in order to make the IRS happy.
Contact Us Today
If you have cryptocurrency transactions and have questions about declaring them on your tax returns, then reach out to the tax advisors at the Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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