IRS tracking down 10,000 cryptocurrency owners for back-taxes

Laura Davison and Lynnley Browning
Bloomberg News

The Internal Revenue Service is warning more than 10,000 holders of cryptocurrency that they may be subject to penalties for skirting taxes on their virtual investments.

The IRS has begun sending letters to taxpayers who potentially failed to report income and pay taxes on cryptocurrency transactions, the agency said Friday. The IRS said it obtained the names of the taxpayers through “various ongoing IRS compliance efforts.”

This Feb. 13, 2019, file photo shows multiple forms printed from the Internal Revenue Service web page that are used for 2018 U.S. federal tax returns in Zelienople, Pa. IRS data released Thursday, April 25, shows that while the average refund fell, the tax filing season was largely unchanged by the massive tax overhaul.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Charles Rettig said in a statement Friday.

The letters, which the agency began sending last week, represent one of the IRS’s broadest attempts to-date to rein in tax avoidance on virtual currency transactions. The IRS has struggled to enforce tax laws on digital currencies in recent years as crypto investments have gained popularity and value.

Last year, the IRS’s audit division identified cryptocurrencies as one of five areas where taxpayers could easily avoid taxes. IRS Criminal Investigations head Don Fort has said the agency will soon announce criminal tax evasion cases involving digital currencies.

Taxpayers who receive the letters “generally won’t be eligible” for an IRS voluntary disclosure program, where taxpayers can come forward with undisclosed financial accounts in exchange for the potential to reduce penalties or avoid criminal prosecution, said Zhanna Ziering, a tax lawyer at law firm Caplin & Drysdale.

However, taxpayers who haven’t been notified by the IRS and may have underpaid or avoided taxes for cryptocurrency transactions still could seek some relief by coming forward before the IRS finds them, she said. The IRS said all letters will be sent by the end of August.

The IRS in 2014 classified all virtual currencies as property for tax purposes, meaning the assets – much like a home – can be sold at a profit and trigger tax implications. The agency served a summons against digital currency exchange Coinbase, seeking details about customers who traded digital currencies from 2013 to 2015.

Treasury Secretary Steven Mnuchin said on Wednesday that U.S. regulators are likely to soon issue new regulations on cryptocurrencies, so they don’t negatively impact the financial system.