Preparing For IRS’s Compliance Efforts In Crypto

Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.

“A CPA needs to advise their clients that the IRS is looking into this,” Paul Miller, CPA and managing partner at Queens, N.Y.-based Miller and Company LLP, said in interview. He recalled that one of his clients was recently audited for his crypto transactions going all the way back to 2018.

Miller suggested that the tip off that the agency would be more closely examining taxpayers’ crypto transactions was the simple question added to Form 1040 asking whether the taxpayer engaged in any transactions.

He also suggested that the IRS could be showing some level of leniency for these early taxpayers who are getting their crypto transactions audited.

“The IRS was pretty reasonable with this man,” Miller said. “He wasn’t assessed the fraud penalty. He wasn’t assessed the 25 percent penalty. He just had to amend three or four years of his tax returns for failing to report crypto.”

Miller also pointed out that the IRS gave the taxpayer“the benefit of the doubt,” recognizing both that he might night have thought about the tax ramifications of his crypto transactions as well as recognizing the fact that he was unable to recover transaction data from 2018.

To that end, Miller stressed that it is very important to keep accurate records and to not necessarily rely on transaction platforms for providing that information.

“If you use Coinbase, Coinbase is pretty good because they give you a 1099,” he said, adding that other trading platforms might not provide that information. “Regardless, we tell all our of our clients to keep records, keep track of it” just like they would keep track of information about money in foreign bank accounts.

On the IRS side, Miller suggested that crypto compliance could be a part of the agency’s push to utilizing artificial intelligence as part of the compliance process, noting that with everything else on the agency’s plate, the IRS “literally doesn’t have the manpower.” This could make AI a tool for crypto compliance.

Miller also recommended that CPAs be sure to include very specific questions on crypto in their engagement letters.

“It’s all about getting the client to take responsibility off of me and putting it on them,” he said. “Because at the end of the day, I’m just preparing the tax return.”

He stressed that it does not mean the goal of a CPA is not to give their clients the best advice.

“The goal is that you have a responsibility to pay your taxes,” he said. “You have a responsibility to report the information, If you disagree or if you deviate from that, you have to deal with the consequences, not me.”

By Gregory Twachtman, Washington News Editor