The IRS is making a few changes as of late. Some of the most prominent ones involve increased efforts in collecting unpaid taxes. While the IRS is always working to find ways to increase its tax collection efforts, two recent trends focus on asking taxpayers to report income from cryptocurrencies and increasing audits.
What Is a Cryptocurrency?
Cryptocurrency is a type of currency that is secured and protected with the use of cryptography. The most popular cryptocurrency is bitcoin.
There are several features that most cryptocurrencies share, including:
- Not being tied to any real assets, such as gold, securities or cash.
- Use of blockchain technology.
- Lack of centralized currency control.
Many cryptocurrencies are highly speculative, which means there are opportunities for investors to make (or lose) large amounts of money very quickly. Another key trait of many cryptocurrencies is that the transactions can be very hard to trace.
How Does the IRS View Cryptocurrencies?
In 2014, the IRS declared that it would treat cryptocurrencies as property. Therefore, they would be subject to tax on any capital gains. But many taxpayers who were lucky enough to make money off of cryptocurrency have not been reporting their gains to the IRS.
In 2019, the IRS started asking taxpayers about ant transactions they may have had in virtual currencies, which includes cryptocurrencies. However, the IRS asked this question on a form that many taxpayers did not use or even know about.
There are reports that for 2020, the IRS will ask this question on the 1040 tax form. This will then force taxpayers involved with cryptocurrencies to either lie on their taxes or admit to what they’re doing. Then they will either pay taxes on their capital gains or explain why they owe no taxes on their cryptocurrency transactions.
More Audits Are Coming
Over the past few years, the IRS has been spending more time auditing lower-income individuals. There are several reasons why this is the case.
First, one of the more common mistakes on taxes relates to the Earned Income Tax Credit (EITC). But the EITC isn’t available to wealthy taxpayers.
Second, the IRS has been suffering from budget cuts and the reduced ability to handle complex tax audits. And because wealthier individuals tend to have more complex tax returns, it means any audit of a wealthy taxpayer’s tax return is likely to be more expensive for the IRS, in both time and money.
This greater focus on the less wealthy is logical, but it has understandably produced a fair amount of criticism. In response, the IRS has directed more money to be spent on audits of higher-income taxpayers.
One area of focus will be the examination of high-income tax returns where the taxpayer has a connection with a pass-through entity or private foundation. To work as efficiently as possible, the IRS will use data analytics allowing it to make the most of its limited auditing resources.
The IRS is always looking for cost-efficient ways to improve its ability to collect taxes. It looks like in the foreseeable future, they have settled on putting more pressure on cryptocurrency traders and the very wealthy. If you think either of these changes in tax enforcement efforts might affect you, it’s probably a good idea to meet with your tax professional as soon as possible.