Have you received a letter from the IRS informing you of a tax audit involving your digital asset holdings? These situations can be emotionally draining. And you don’t want to ignore the issue. Facing the IRS alone can produce devastating results. This is where we can help.
Since the IRS released its initial virtual currency guidance in 2014, we have been monitoring the evolving digital asset environment and assisting digital asset investors, miners, and traders in properly reporting their transactions. We’ve helped them reconstruct their data and take tax return positions that will hold up under audit. And we’ve also helped clients defend themselves in IRS audits.
Things to Know About IRS Digital Asset Audits
1. The IRS is conducting digital asset audits because it suspects that a high percentage of digital asset users have errors in their tax reporting or aren’t reporting taxable digital asset events at all.
The IRS considers digital asset to be property, not money. This means that each use of digital asset typically has tax implications. And the IRS suspects many digital asset owners don’t know the rules and aren’t filing accurate tax returns.
2. If you received a letter (6173, 6174, or 6174-A) from the IRS, you’re now on the IRS’s radar.
In July 2019, the IRS sent 10,000 letters to digital asset account owners. The IRS specifically chose to send these letters to the 10,000 taxpayers with the largest volume and size of digital asset transactions. Although cryptocurrency users have long valued the supposed anonymity that crypto provides, the IRS has won court cases to gain access to the names of certain account holders. That is how the IRS got your name.
According to the IRS, the goal of the letters is to educate crypto account holders about the digital asset tax rules. But consider yourself warned.
The IRS mailed three variations of these letters: Letter 6173, 6174, or 6174-A. If you received a letter, you should take it very seriously. You’ll want to understand how the letter applies to your specific facts and circumstances. And how accurate your prior tax returns were in reporting everything they should have.
3. If you suspect you didn’t report everything properly, help is available.
The good news is that the IRS is giving digital asset users an opportunity to straighten out their situations— at least for a limited time. The IRS understands that its tax rules have been evolving and that the data needed to prepare accurate tax returns can be challenging to track down.
If you received one of the letters (6173, 6174, or 6174-A), it may make sense to work with a tax attorney. If needed, the attorney can set up a “Kovel arrangement” with your tax preparer. Under a Kovel arrangements, the attorney-client privilege extends to your tax preparer. That means your tax preparer can fix your prior returns, and the discussions you have with the tax preparer are covered by attorney-client privilege. We routinely work under Kovel arrangements and can help you.
For IRS digital asset audits, we represent you directly to the IRS. Or, in cases where you require attorney-client privilege, we refer you to an attorney and prepare all your amended filings under that attorney.
As part of our digital asset audit support, we:
- Review the tax returns that triggered the audit
- Recreate transaction records (e.g., airdrops, splits, rewards, tokens, DeFi, loans, mining, swaps, etc.)
- Calculate income, cost basis, gains, and losses
- Determine if foreign asset reporting is required
- Prepare the amended tax returns
- Work with attorneys for “reasonable cause” letters and more serious cases
We have been guiding clients through successful audits for decades. With our long history working with expats and international tax, we specialize in helping taxpayers where tax records are hard to obtain and guidance is not clear. We have applied this experience in reconstructing tax data to assist both international and domestic digital asset owners.
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
Looking for a Nexia International Partner?
We’re an active member of Nexia International, a global network of independent accountancy, tax and business advisors with over 250 firms around the globe.