Crypto trading can increase scrutiny at the IRS. However, there are steps you can take to avoid most audits.
to suspicious taxpayers. No letters were sent out in 2021, though that omission likely had more to do with the IRS transitioning to remote work and addressing stimulus-related issues rather than a lack of focus.
Much of these efforts were looking for crypto traders and investors underreporting gains. However, with the market reversal this year the IRS’ focus will likely also include traders over-reporting losses in an effort to lower their tax bill. Additionally, IRS audit efforts are expected to increase with the passage of the Inflation Reduction Act in August. The act allocatedwhich specifically includes “digital asset monitoring and compliance activities”. In the next decade, the agency will invest these funds in tools and personnel focused on audits and tax collections.
In light of these developments, taxpayers may be worried about their exposure to IRS audits when dealing with cryptocurrency. Knowing the ins and outs of IRS audits and how to avoid them could alleviate some of the fears.Correspondence audits are the most common type conducted by the IRS. These represent nearly 75% of the service’s tax investigations, and so far they are the only type of crypto audit initiated by the IRS based on current information.
Therefore, if you receive any tax form from an exchange, the IRS already has a copy of it and you should definitely report it to avoid any correspondence audit.The IRS also relies on information gained through subpoenas to subject crypto holders to audits. For example, in 2018,including taxpayer identification number, name, birth date, address, records of account activity, transaction logs, and all periodic statements of account or invoices pursuant to John Doe summons.
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