How Does the IRS Audit Bitcoin And Other Cryptos?

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All taxpayers fear the dreaded audit — but most are fortunate enough to avoid this complicated process. If, however, you’ve enjoyed unprecedented cryptocurrency success, an audit could be in your future. The better you understand this process, the better you can prepare — and hopefully, avoid triggering an audit altogether. Read on to learn how IRS crypto audits work.

What Triggers a Crypto Audit?

As with any IRS investigation, crypto audits are nearly always triggered by observed inconsistencies between tax returns and other records. Often, this occurs because the information included in tax returns is perceived as incomplete.

Recently, many observed tax return inconsistencies involved Coinbase, which is responsible for brokering exchanges involving top cryptocurrencies. Coinbase attracted negative press in 2018 when it alerted over 13,000 users that it intended to turn over their information to the IRS. Interestingly, this represented a significant departure from the original IRS request, which sought detailed information on all of Coinbase’s users. But while many Coinbase managed to avoid IR headaches, they might not be so fortunate in the future.

How Do Crypto Audits Work?

In many ways, crypto audits resemble standard IRS investigations. It all begins with a letter from the agency, which may announce an increase in taxes, request a scheduled appointment with a tax compliance officer, or, in the worst-case scenario, arrange for a field examination. As with any field exam, a revenue agent will visit you at work or home to get a better sense of your financial situation. Crypto-based audits are just as stressful and time-consuming as typical investigations — any step you can take to avoid this process will ultimately prove worthwhile.

If you have been targeted by the IRS, it is critical that you work with a tax expert who understands cryptocurrency’s role in audits. The Highland Tax Group can help. Contact us today to learn more about our cryptocurrency services.