What to Do if You’re Under Investigation for Cryptocurrency Tax Evasion

What to Do if You’re Under Investigation for Cryptocurrency Tax Evasion

So you invested in some cryptocurrency and now the IRS wants to talk to you about it. Don’t panic! Lots of folks are finding themselves in this situation as the IRS cracks down on potential cryptocurrency tax evasion. This article will walk you through what to expect if you’re under investigation and give some tips on how to handle it.

Why Is Cryptocurrency Drawing IRS Attention?

In recent years the IRS has really focused in on cryptocurrency – Bitcoin, Ethereum, Dogecoin, whatever you got. Cryptocurrency is decentralized and pseudo-anonymous, meaning it’s easier to hide money and evade taxes compared to regular ol’ cash[1]. No surprise the IRS sees it as a big potential tax gap.

Some stats:

• About 80% of the tax gap in America is from underreported income, usually by wealthy folks hiding money in shady ways[2].
• Less than 1% of tax returns even mentioned cryptocurrency from 2013-2019[4].
• But nearly 16% of Americans have invested in cryptocurrencies[4].

So the IRS is thinking a whole bunch of people aren’t reporting their crypto gains and losses properly. And they want that tax revenue!

The Investigation Process

Okay, so the IRS has flagged your tax return for a potential audit related to cryptocurrency. What now? Here’s what to expect:

1. You’ll get a letter from the IRS saying you’re under audit. This is where they’ll explain the focus of the audit, like your crypto transactions. You’ll have 30 days to respond.
2. Gather all your documentation related to your crypto activity – records of purchases, sales, trades, wallet addresses, etc. Organize it chronologically.
3. The IRS will send info document requests and you’ll have to turn over your documentation. Be thorough!
4. The IRS will review your documentation and determine if you have any additional tax liability.
5. If they decide you underpaid, you’ll get a Notice of Deficiency explaining how much tax you owe. You’ll have 90 days to file a petition if you disagree.
6. If you don’t file a petition, the IRS will assess the liability and start collection efforts.

This process can take many months to wrap up. And if the audit ends up in appeals or tax court, it could take years. So brace yourself for a long ride once you’re under audit.

Avoiding Criminal Charges

Now if the IRS thinks you intentionally evaded crypto taxes, they may pursue criminal charges for tax evasion. This is when things get really serious. You could end up with huge fines and even jail time[3].

So how do you avoid potential criminal prosecution? Be honest and cooperative if you’re under audit. Turn over all relevant documentation. Don’t try to conceal anything. And consider amending past returns if you discover you underreported income or capital gains. This shows good faith.

If the IRS does bring up criminal charges, stop talking and lawyer up immediately. Don’t try to explain anything more to the IRS. You need an experienced white collar criminal defense lawyer to protect your rights.

Strategies to Prepare and Protect Yourself

Whether you’re already under the IRS microscope or just want to avoid it, here are some tips:

• Use crypto tax software to generate your tax forms. It’ll track your cost basis and gains/losses across wallets and exchanges[5].
• Disclose all crypto activity on your tax return. Better to report too much than too little.
• Keep detailed records of your transactions. The IRS can go back 6 years so save everything!
• Consult a tax pro if you have questions or complex crypto activity.
• Respond promptly to all IRS notices and document requests.
• If audited, stay calm and organized. Having your documentation ready shows good faith.
• Don’t try to hide anything during an audit. Come clean about past mistakes.
• Hire legal counsel immediately if criminal charges come up.

Dealing with a cryptocurrency tax audit or investigation is scary. But following these tips will help you get through it as smoothly as possible. Remember to disclose everything and keep immaculate records. With the right evidence on your side, you can show the IRS you made a good faith effort to meet your tax obligations.

Good luck and may the crypto gods smile upon your audit!