Tag: Cryptocurrency

Are Crypto Currencies Safe from the IRS

I represent taxpayers in Gainesville and the state of Florida who has tax issues with the IRS.

IRS Levies

At this point in time, I don’t see how the IRS could levy a cryptocurrency account. The owner has the key codes. Absent these codes, it’s not likely the IRS could break the encryption. But there is a much bigger danger to crypto owners.

The Real Danger

That danger is JAIL TIME. Signing a tax return means you understand that the information is to the best of your knowledge under the penalty of perjury. The first question on the form 1040 for the last few years has been “did you receive, sell, exchange, or otherwise dispose of any financial interest in a virtual currency?” Answer no when you have one of these accounts makes it an easy referral for criminal prosecution when the IRS later determines that you do have such an account.

How it Works

The IRS successfully summoned the records of Coinbase for 2013-2015. The summons was upheld in court. Subsequently, the IRS has been negotiating with other virtual currency companies to gather more information about their users.

Here is the kicker to keep in mind. You sign a form 1040 in the current year and deny that you have any virtual currency. Three years later the IRS is finally able to crack the management of the company that provides you with access to your account. They feed the new data into their computers and then do a search for unreported transactions along with the negative answer on question number 1. Outcomes your name and the computer’s guess at the underreported tax. There is no statute of limitations on fraud. Worse, your defense attorney has next to nothing to work with other than some lame excuse about forgetfulness.

How Big a Risk?

Think this unlikely? The 2021 New England Tax Representation Conference included IRS statistics. Criminal referrals are up over 80% and most of that is related to the Coinbase summons. The idea that in the world of connected data servers that your information cannot be obtained by some government entity forever and ever is a pipe dream.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Have you heard about the Virtual Currency Trap?

The first question on the 2020 1040 was “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” A lot of people are tempted to answer No when they know they answer Yes. If, for no other reason, they consider this to be none of the government’s business. Particularly since virtual currency is thought to be a highly encrypted secret.

How the Trap Works

Here is the trap. The IRS has issued John Doe Summons for information about American investors to companies like Coinbase. These companies make it easy for non-tech people to invest and use virtual currencies. The IRS summons allowed them to get the names of people who have accounts with them. How well the IRS can track individual transactions is a question, but they certainly have enough information to catch a lot of people who answered the virtual question the wrong way.

This is a significant trap. The criminal division is actively looking through their records of Form 433s filed to find people who answered no of the form. Form 433 is used to report financial information for people looking for a payment plan, offer-in-compromise, or trying to get the IRS to give them some room before making payments. People who signed these forms with the wrong answer are setting themselves up for criminal prosecution for perjury.

How do you want to bet?

Here is one thought to keep in mind. Even if you think the IRS cannot get these records today, what about a year from now, or two, or three years? Fraud does not have a statute of limitations and I would certainly not like to bet against the government’s abilities to get hold of these records at some time in the future.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.