The Internal Revenue Service (IRS) set forth a Strategic Plan for fiscal years 2018 through 2022. One of the six strategic goals within the plan is to: “Advance Data Access, Usability and Analytics to Inform Decision-Making and Improve Operational Outcomes.” The overall intent of the goal is to use data analytics to become more efficient and to improve taxpayer services, enforcement efforts, and internal operations.
The IRS recently used data analytics to uncover noncompliant taxpayers who own virtual currencies. Chainalysis, an independent company used by the IRS, was able to retrieve tax information from customers of Coinbase, which was a possible source that led to 10,000 letters from the IRS being sent to crypto account holders. Three types of letters were delivered (Letter 6173, 6174, or 6174-A) indicating that the taxpayer must review their tax returns for virtual currency transactions and ensure that their reporting was completed properly. The letters indicate that amended or late tax returns should be filed if the taxpayer filed incorrectly or neglected to file.
Letter 6173 is the most severe of the three letters. It requires a response from the taxpayer and indicates that the taxpayer either neglected to file a return or filed a return that did not include their virtual currency transactions. Letters 6174 and 6174-A do not require responses by the taxpayer and are more educational in nature. Letter 6174 provides information regarding how to properly record crypto currency transactions and informs the taxpayer to review their filings, while Letter 6174-A specifically indicates that the taxpayer “may not have properly reported” their crypto currency transactions. Letter 6174-A would be provided if a taxpayer disclosed their crpyto currency transactions but did not disclose them in the proper way.
Data analytics will continue to be used by the IRS in relation to noncompliant crypto taxpayers. The use of data analytics and the expansion into tools such as artificial intelligence, blockchain, and crpyto trade accounting programs will allow the IRS to more effectively and efficiently detect fraud and noncompliance. The IRS has already started making great strides in achieving their goals and following through with their strategic plan initiative related to data analytics.
If you have questions about effectively accounting for cryptocurrency holdings or transactions, contact the Schneider Downs tax specialists.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.