The IRS has become increasingly aggressive in trying to hunt down undeclared funds to fight tax evasion. In addition to going after accountholders with offshore holdings, the IRS has also begun to look hard at transactions involving Bitcoin and other virtual currencies.
Bitcoin is supposed to be an untraceable currency, but the IRS knows that many people are not reporting Bitcoin transactions and they are aggressively going after those who are not reporting their gains.
In fact, a court has ruled that a coin exchange must provide the IRS with the identities of all users who conducted at least one Bitcoin transaction between 2012 and 2015 if that transaction was equivalent in value to at least $20,000. IRS investigations are likely to continue, and the IRS is likely to end up getting a substantial amount of information from their efforts.
For those who have made money off Bitcoin but who have not declared it, there is a risk the IRS will soon learn of the undeclared gains. Those with current Bitcoin holdings may also find themselves in jeopardy of owing money after an IRS investigation. Talking with a Washington DC tax attorney about the risks may be advisable because the penalties for not reporting could be substantial.
Many taxpayers with Bitcoin holdings are likely waiting to see if the IRS offers any type of amnesty program similar to the program that was put in place to encourage taxpayers to come forward and voluntarily report offshore accounts. The success of that amnesty program, the Offshore Voluntary Disclosure Program, could incentivize the IRS to set up a similar process for Bitcoin holders to come forward on their own and report their Bitcoin in exchange for lesser penalties.
Will There Be a Bitcoin Amnesty Program?
The IRS has had success in going after people with offshore bank accounts by prosecuting foreign banks that helped Americans evade taxes, by imposing new reporting requirements on foreign banks with U.S. accountholders, and by prosecuting alleged tax evaders and obtaining substantial penalties. As part of its strategy to find offshore funds, the IRS also provided reduced penalties for those who reported their offshore accounts through the Offshore Voluntary Disclosure Program. The IRS reportedly collected around $10 billion for those efforts.
The IRS appears to be attempting to use a similar process to find people who have undeclared Bitcoin, including going to court to get a court order that Coinbase must turn over the tax ID numbers of 14,355 accountholders. Coinbase is also being required to turn over transaction logs, just as Swiss banks had to provide details about transactions. And this is likely just the start of the IRS efforts to obtain accountholder data.
Taxpayers who are at risk of having their information turned over may want to resolve their tax issues with undeclared Bitcoin before the IRS comes after them and imposes significant penalties or even potentially threatens criminal prosecution. An amnesty program for Bitcoin could create a strong incentive for accountholders to take action, allowing the IRS to collect a lot of revenue from people who voluntarily report even if the penalties they pay are less than they would be if the IRS had found them on its own.
A Washington DC tax attorney can provide insight into whether the IRS does set up an amnesty program for declaring Bitcoin, and can help those with Bitcoin to understand their reporting obligations so they do not find themselves in trouble with the IRS. Contact attorney Kevin Thorn today to find out more.