Cryptocurrency Audit Help | The Original Crypto Tax Lawyer (2024)

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2. Provide your records so we can create your custom audit plan
3. We represent you to the audit examiner and negotiate on your behalf; you don’t have to speak to the IRS at all!

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Did you receive notice of a cryptocurrency audit? Worried you could get in trouble because you haven’t fully reported your crypto in past years? We’re here to help.

A crypto tax audit is similar to any other type of IRS audit—except your local IRS examiner may not know the first thing about cryptocurrency.

Virtual currency is taxed differently than fiat and requires painstaking calculations to report correctly. The IRS views crypto as property, not currency, which means that mining, selling, exchanging, or spending your coins are all taxable events that you need to report. Read up on how cryptocurrency and Bitcoin taxes work if you need a refresher.

Here are the most important things to know if you’re undergoing a cryptocurrency audit.

Whether you’re being audited because of your crypto, or your investments are simply complicating the process, the goal is to prove that you filed your tax returns correctly and paid the correct amount.

Here’s how the cryptocurrency audit process works:

• The IRS will request records to support the information on your tax returns. This can include paychecks, bank statements, and receipts for any expenses you claimed.
• In the case of a cryptocurrency audit, you will also need a detailed report of your trading history for the years in question.
• The audit examiner’s primary goal is to determine whether you reported correctly and paid the right amount in taxes.
• At the end of your audit, they will assess the amount owed. Collections won’t begin right away, and you do have the option to appeal.
• If, during your crypto audit, the IRS finds reason to believe you intentionally tried to hide funds or otherwise commit a tax crime, they may refer the case to the Criminal Investigations Division or the Department of Justice for criminal prosecution.

Like many audits, cryptocurrency audits typically occur because the IRS has reason to believe you didn’t report all your taxable income, and therefore didn’t pay enough taxes. Some audits are also conducted randomly.

In any case, you’ll have to either prove that the tax returns in question were correct, or you’ll have to correct them and pay the IRS the taxes due. The burden is on you, as the taxpayer, to prove your tax return is correct.

Nearly all cryptocurrency exchanges based in the US now send the IRS a 1099-K each year reporting sales data for users who meet a certain trade threshold. And in 2017, Coinbase was forced to send the IRS historical data(covering 2013 to 2015) on over 14,000 users.Some foreign exchanges now send information to the IRS, as well.

If the IRS has your records from an exchange and you haven’t reported crypto on your tax returns—or if what you reported doesn’t match the IRS’s records—this could trigger a cryptocurrency audit or worse.

On the other hand, the IRS may audit you for an unrelated reason, such as unusually high deductions, but your cryptocurrency trades can throw a wrench in the process.

A standard audit covers your last 3 years of tax returns. However, during the audit process, if the IRS finds reason to believe you’ve underreported by at least 25%, they can go back 6 years.

If you’ve had crypto for several years and haven’t always reported it properly, there’s a good chance of this happening to you.

For example, let’s say you’re going through a crypto audit covering the years of 2017, 2018, and 2019. When the IRS examiner looks at your records for 2017, they notice that some coins were sold. They ask when you first acquired those coins, and you tell them you bought the coins in 2014.

If you didn’t report any cryptocurrency before 2017, the IRS examiner may now have reason to believe that you’ve significantly underreported your taxable income. The years of 2014, 2015, and 2016 may then be opened up to an audit, as well.

If the IRS believes you’ve committed tax fraud, there is no statute of limitations for the audit. They can go back as far as they want in that case.

As we mentioned above, most IRS examiners don’t even know what Bitcoin is—let alone how it should be reported. You need a tax lawyer on your side who:

• Knows how to navigate the audit process
• Can build an accurate crypto tax report (even when you may have lost keys or if you used a now-defunct exchange)
• Knows crypto tax law inside and out to defend your reporting methods

A crypto tax report is a detailed accounting of every single trade—including timestamps of when you bought and sold, the initial amount you spent on the coin, and how much you sold it for. This information is used to calculate your capital gain or loss for each transaction.

There are other factors to consider, too: Long-term gains and short-term gains are taxed at different rates. Some crypto is counted as income and must be reported separately.

Building a proper crypto tax report can be a painstaking, time consuming process. Do not assume the IRS will put in the work to calculate the correct amount owed for you!

We’ve helped hundreds of clients create crypto tax reports for past years, even if they don’t have complete records or have lost access to old wallets. We know the law inside and out, so we can create crypto tax reports that hold up to the most stringent IRS examination.

Many of our crypto clients haven’t reported because they’re afraid they won’t be able to pay the taxes they owe on crypto gains.

What most people don’t realize is that the audit process is only concerned with calculating the amount you owe. You do not have to pay your full tax bill immediately after the cryptocurrency audit is complete.

You cancreate a payment plan with the IRS. There’s virtually always a payment plan or resolution option that works for our clientsandsatisfies the IRS.

You can even appeal your crypto audit results! Our tax attorneys are licensed in US Tax Court, so we can appeal your audit decision to the highest levels.

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