Cryptocurrency Audit Help | The Original Crypto Tax Lawyer (2024)

Are you facing a cryptocurrency audit? Turn to the original crypto tax lawyers to guide you through!

The experienced tax attorneys at Gordon Law Group have been working in crypto tax law since 2014, and we've helped countless clients through the audit process.

Get the most experienced cryptocurrency audit lawyers on your side. Call today for a confidential consultation!

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3 Easy Steps to Conquer Your Cryptocurrency Audit

  1. Schedule a confidential consultation with our extremely knowledgeable cryptocurrency tax attorneys
  2. Provide your records so we can create your custom audit plan
  3. We represent you to the audit examiner and negotiate on your behalf; you don’t have to speak to the IRS at all!

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Did you receive notice of a cryptocurrency audit? Worried you could get in trouble because you haven’t fully reported your crypto in past years? We’re here to help.

A crypto tax audit is similar to any other type of IRS audit—except your local IRS examiner may not know the first thing about cryptocurrency.

Virtual currency is taxed differently than fiat and requires painstaking calculations to report correctly. The IRS views crypto as property, not currency, which means that mining, selling, exchanging, or spending your coins are all taxable events that you need to report. Read up on how cryptocurrency and Bitcoin taxes work if you need a refresher.

Here are the most important things to know if you’re undergoing a cryptocurrency audit.

How a cryptocurrency audit works

Whether you’re being audited because of your crypto, or your investments are simply complicating the process, the goal is to prove that you filed your tax returns correctly and paid the correct amount.

Here’s how the cryptocurrency audit process works:

  • The IRS will request records to support the information on your tax returns. This can include paychecks, bank statements, and receipts for any expenses you claimed.
  • In the case of a cryptocurrency audit, you will also need a detailed report of your trading history for the years in question.
  • The audit examiner’s primary goal is to determine whether you reported correctly and paid the right amount in taxes.
  • At the end of your audit, they will assess the amount owed. Collections won’t begin right away, and you do have the option to appeal.
  • If, during your crypto audit, the IRS finds reason to believe you intentionally tried to hide funds or otherwise commit a tax crime, they may refer the case to the Criminal Investigations Division or the Department of Justice for criminal prosecution.

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Why was I selected for a crypto tax audit?

Like many audits, cryptocurrency audits typically occur because the IRS has reason to believe you didn’t report all your taxable income, and therefore didn’t pay enough taxes. Some audits are also conducted randomly.

In any case, you’ll have to either prove that the tax returns in question were correct, or you’ll have to correct them and pay the IRS the taxes due. The burden is on you, as the taxpayer, to prove your tax return is correct.

The IRS has crypto records from US exchanges

Nearly all cryptocurrency exchanges based in the US now send the IRS a 1099-K each year reporting sales data for users who meet a certain trade threshold. And in 2017, Coinbase was forced to send the IRS historical data(covering 2013 to 2015) on over 14,000 users.Some foreign exchanges now send information to the IRS, as well.

If the IRS has your records from an exchange and you haven’t reported crypto on your tax returns—or if what you reported doesn’t match the IRS’s records—this could trigger a cryptocurrency audit or worse.

On the other hand, the IRS may audit you for an unrelated reason, such as unusually high deductions, but your cryptocurrency trades can throw a wrench in the process.

How far back will my cryptocurrency audit go?

A standard audit covers your last 3 years of tax returns. However, during the audit process, if the IRS finds reason to believe you’ve underreported by at least 25%, they can go back 6 years.

If you’ve had crypto for several years and haven’t always reported it properly, there’s a good chance of this happening to you.

For example, let’s say you’re going through a crypto audit covering the years of 2017, 2018, and 2019. When the IRS examiner looks at your records for 2017, they notice that some coins were sold. They ask when you first acquired those coins, and you tell them you bought the coins in 2014.

If you didn’t report any cryptocurrency before 2017, the IRS examiner may now have reason to believe that you’ve significantly underreported your taxable income. The years of 2014, 2015, and 2016 may then be opened up to an audit, as well.

If the IRS believes you’ve committed tax fraud, there is no statute of limitations for the audit. They can go back as far as they want in that case.

Why you need an experienced professional for your cryptocurrency audit

As we mentioned above, most IRS examiners don’t even know what Bitcoin is—let alone how it should be reported. You need a tax lawyer on your side who:

  • Knows how to navigate the audit process
  • Can build an accurate crypto tax report (even when you may have lost keys or if you used a now-defunct exchange)
  • Knows crypto tax law inside and out to defend your reporting methods

A crypto tax report is a detailed accounting of every single trade—including timestamps of when you bought and sold, the initial amount you spent on the coin, and how much you sold it for. This information is used to calculate your capital gain or loss for each transaction.

There are other factors to consider, too: Long-term gains and short-term gains are taxed at different rates. Some crypto is counted as income and must be reported separately.

Building a proper crypto tax report can be a painstaking, time consuming process. Do not assume the IRS will put in the work to calculate the correct amount owed for you!

We’ve helped hundreds of clients create crypto tax reports for past years, even if they don’t have complete records or have lost access to old wallets. We know the law inside and out, so we can create crypto tax reports that hold up to the most stringent IRS examination.

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After the audit: Paying your crypto tax bill

Many of our crypto clients haven’t reported because they’re afraid they won’t be able to pay the taxes they owe on crypto gains.

What most people don’t realize is that the audit process is only concerned with calculating the amount you owe. You do not have to pay your full tax bill immediately after the cryptocurrency audit is complete.

You cancreate a payment plan with the IRS. There’s virtually always a payment plan or resolution option that works for our clientsandsatisfies the IRS.

You can even appeal your crypto audit results! Our tax attorneys are licensed in US Tax Court, so we can appeal your audit decision to the highest levels.

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Cryptocurrency Audit Help | The Original Crypto Tax Lawyer (2024)

FAQs

How far back can the IRS audit for crypto? ›

How far back will my cryptocurrency audit go? A standard audit covers your last 3 years of tax returns. However, during the audit process, if the IRS finds reason to believe you've underreported by at least 25%, they can go back 6 years.

What triggers a crypto tax audit? ›

Crypto-specific activity that might trigger an audit includes: Failure to accurately report crypto transactions and income. Large transactions or significant gains. Inconsistencies or discrepancies.

What are the odds of getting audited in crypto? ›

What are the odds of a crypto tax audit? In general, the odds of an audit are relatively low. It was estimated that 0.63% of tax returns in 2023 were selected for an audit.

Has anyone been audited for crypto? ›

The IRS has made one thing clear in recent years - they're cracking down on crypto and IRS crypto audits are on the rise. So if you're one of the many investors who has received a notice or an audit request, don't panic.

Is there a statute of limitations on crypto taxes? ›

The Short Answer. According to the IRS, you need to keep your cryptocurrency tax records for at least 3 years after you file your tax return reporting the transactions. However, if you underreport income by more than 25%, the statute of limitations extends to 6 years.

How long does a crypto audit take? ›

Generally, an audit team can complete a detailed report within a few days. However, larger applications may take longer to audit. Allowing time for a full security audit is essential to the success of your blockchain application.

Does IRS monitor crypto? ›

Cryptocurrency transactions are traceable, requiring exchanges to report to the IRS, necessitating diligent reporting by users. The IRS uses advanced methods to monitor crypto transactions, ensuring tax compliance.

How does IRS know if you own crypto? ›

More recently crypto exchanges must issue 1099-K and 1099-B forms if you have more than $20,000 in proceeds and 200 or more transactions on an exchange the exchange needs to submit that information to the IRS.

How does IRS know if I have crypto? ›

Here's what you need to know: Blockchain transactions are recorded on a public, distributed ledger. This makes all transactions open to the public - and any interested government agency. Centralized crypto exchanges share customer data - including wallet addresses and personal data - with the IRS and other agencies.

How much does a crypto audit cost? ›

The cost for auditing these types of contracts typically ranges from $5,000 to $15,000. The increase in cost is attributed to the additional time and expertise required to assess the contract's unique functionalities and to ensure that all possible security vulnerabilities are addressed.

How do I not get audited for crypto? ›

Keep thorough records. Knowing that audit activity is increasing, being proactive about an audit is the best early defense strategy. By keeping accurate transaction records, you minimize your exposure to paying back taxes, penalties, and interest on the taxable value of your crypto holdings.

Will I get caught not reporting crypto? ›

The IRS is perfectly clear crypto is taxed and failure to report crypto on your taxes may result in steep penalties. The punishments the IRS can levy against crypto tax evaders are steep as both tax evasion and tax fraud are federal offenses.

Will the IRS know if I don't report crypto? ›

The IRS can audit you if they have reason to believe that you are underreporting your taxable income from cryptocurrency. Typically, the limit for conducting an audit is three years after a taxpayer has filed their tax return.

What happens if you don t report crypto to IRS? ›

Failure to file can result in an initial fine of $10,000. That's why it's beneficial to seek the help of a professional, like the CPAs for American expatriates at US Tax Help. Otherwise, you might face a steep fine from the IRS for failure to report your cryptocurrency gains.

Can the IRS track decentralized exchanges? ›

Certain cryptocurrency exchanges and apps do not report user transactions to the IRS. These include decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms that do not have reporting obligations under US tax law.

Will IRS audit me for crypto? ›

The IRS can audit you if they have reason to believe that you are underreporting your taxable income from cryptocurrency. Typically, the limit for conducting an audit is three years after a taxpayer has filed their tax return.

How does the IRS know if you have cryptocurrency? ›

More recently crypto exchanges must issue 1099-K and 1099-B forms if you have more than $20,000 in proceeds and 200 or more transactions on an exchange the exchange needs to submit that information to the IRS.

Does the IRS investigate crypto? ›

Yes, the IRS can track cryptocurrency, including Bitcoin, Ether, and a huge variety of other cryptocurrencies. The IRS does this by collecting KYC data from centralized exchanges.

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