IRS crypto tax audit letter / notice

[arandon]

I'm surprised this hasn't made it on the forum when it was posted on Reddit in Feb.

IRS Crypto tax AUDIT notice probes deep - original Reddit thread

Provide the following for all virtual currency transactions during the time period 01/01/2017-12/31/2017

• Detailed records for the acquisition and disposition of any virtual currency (domestic or international), including but not limited to:
  
  • Emails, screen prints, hardcopy prints, and transaction receipts maintained by the taxpayer or provided by any third-party such as an exchange, broker, or peer-to-peer facilitator (e.g. Paxful, Localbitcoins.com)
  • Wire transfer or direct deposit records, including automated clearing house (ACH) and electronic funds transfer (EFT) records.
  • List of all virtual currency kiosk (i.e., BTM or cryptocurrency kiosk or ATM) locations used along with copies of any transaction receipts or acknowledgements whether provided electronically or in paper.
  • A detailed list of cryptocurrency transactions involving cash including dates, input/output counterparties involved in the transaction, and the cryptocurrency involved
  • All correspondence (I.e., emails, texts, tweets, etc.) with all counterparties to any virtual currency transactions
  • List of all virtual currency received from hard forks, faucets, tipping, or any other method where a sale, buy, or exchange was not initiated by the receiver of cryptocurrency (commonly called airdrops), including date, type, and amount of virtual currency received with the date of sale, or other disposition, including amounts and description of what was received
  • Explanation of the method used to compute basis relating to the sale or other disposition of virtual currency
  • Records reflecting the valuation of any sale or other disposition of virtual currency at the time of acquisition and disposition
• Records relating to any expenses paid or items purchased (whether domestic or international) using virtual currency
• List of all blockchain addresses owned or controlled by taxpayer
• Records of all transactions relating to lending of virtual currency or use of virtual currency as collateral for loan, including, but not limited to, loan agreements, promissory notes, ledgers, transaction receipts, pledge, security, or collateralization agreements
• List of all digital currency exchanges (DCE) and peer-to-peer (P2P) facilitators (e.g., Coinbase, Paxful or Localbitcoins.com) (foreign and domestic) with associated user Ids, email addresses, IP addresses, and account numbers relating to those platforms
• List of all counterparties for any P2P virtual currency transactions (identifying the on-chain and off-chain transactions), email address, user IDs transactions.

This is not an all-inclusive list. Requests for additional information may be made if considered necessary.

Some people in that thread think the letter is fake because it uses two fonts and some other details. What do you guys think?

[1714695051]

1714695051

[HeRetiK]

I was going to call bullshit because of its reference to airdrops but little did I know that the IRS already published a ruling last year [1]. Now it seems a bit more plausible to me. Nonetheless it still seems rather fishy, as I'd expect more people to report receiving similarily detailed IRS audits. If true though, this redditor said it best:

That’s not an audit, it’s a colonoscopy.

[1] https://www.irs.gov/pub/irs-drop/rr-19-24.pdf

[figmentofmyass]

Some people in that thread think the letter is fake because it uses two fonts and some other details. What do you guys think?

it does feel suspicious for that reason. i've gotten a couple letters from the IRS in my day and it was always 100% times new roman---none of that arial font.

the taxpayer burden according to that letter is brutal, but i would expect that of any IRS audit tbh.

Nonetheless it still seems rather fishy, as I'd expect more people to report receiving similarily detailed IRS audits.

same. this is in the "possible but likely bullshit" category until we see more corroboration.

[CryptoSites]

I saw that circulated when it was posted but I have not personally seen any clients hit with an IRS crypto audit.  The IRS recently put out an RFP for assistance in calculating basis so I think they are a ways away from mass audits of individual taxpayers.  The audits I have seen in this space were entities.  Based on discussions with IRS and Treasury officials this list would seem overly detailed for their capabilities and current enforcement targets.

[arandon]

I have not personally seen any clients hit with an IRS crypto audit.  The IRS recently put out an RFP for assistance in calculating basis so I think they are a ways away from mass audits of individual taxpayers.  The audits I have seen in this space were entities.  Based on discussions with IRS and Treasury officials this list would seem overly detailed for their capabilities and current enforcement targets.

Is this the RFP you're mentioning? Seems to refer to only 22,000 accounts from 2017.

Nonetheless it still seems rather fishy, as I'd expect more people to report receiving similarily detailed IRS audits.

same. this is in the "possible but likely bullshit" category until we see more corroboration.

I'm not surprised there's been only one report of this letter so far, for a few reasons:
1. IRS has only recently started auditing individuals who filed crypto gains. That checkbox has been there for the 2019 returns.
2. It's Covid, and they're operating at lower capacity.
3. How many crypto earners reported their crypto? I remember watching an interview with the COO of Cointracking,info, who said that only 1% had reported their crypto gains. (Can't find the video, not sure what year, I assume 2019?)
3. Out of the people who filed crypto earnings, how many get audited? 1%?
4. Out of those, how many post on reddit, or bother to create an account? 1%? 10%?
5. Out of those, how many go through the trouble of posting the letter? I think the overall estimate for #4 and #5 is reasonable at 1% again

So 1% of 1% of 1% reported crypto taxes, got audited, and posted. That computes to 1 million to payers who filed crypto gains. More than plausible.

I wonder why someone would come up with a fake crypto audit letter going into great plausible detail about what's requested, but then make a silly mistake and not just use one font throughout.

[figmentofmyass]

I saw that circulated when it was posted but I have not personally seen any clients hit with an IRS crypto audit.  The IRS recently put out an RFP for assistance in calculating basis so I think they are a ways away from mass audits of individual taxpayers.  The audits I have seen in this space were entities.  Based on discussions with IRS and Treasury officials this list would seem overly detailed for their capabilities and current enforcement targets.

are you a CPA? do you have a considerable number of clients investing in crypto?

re "they are a ways away from mass audits" i tend to agree. the document published by CryptoTrader.Tax indicates they are still way behind the curve, and still need to figure out how to make crypto audits even remotely affordable.

the 2019 tax return check box and mass letter campaigns were probably just scare tactics intended to deter noncompliance in the meantime.

[CryptoSites]

Is this the RFP you're mentioning? Seems to refer to only 22,000 accounts from 2017.

Yes. Cryptotrader.tax released that because they did not have the capabilities to perform the requested calculations. There is only one software provider out that that can meet those specifications. My accounting firm received the same RFP from the IRS but we declined due to potential conflicts of interest, and the fact that we are not a software company so it would be too labor intensive. It was foolish to release that letter as they burnt that connection with the IRS. I regularly speak with the IRS officials that sent that out and as a professional courtesy do not discuss those private conversations, which i find very valuable.

The sample language in the RFP is just an example. The IRS intends to look at all open tax years.

I wonder why someone would come up with a fake crypto audit letter going into great plausible detail about what's requested, but then make a silly mistake and not just use one font throughout.

I think it is more likely that this is a field agent of the IRS that stumbled upon a crypto audit. This does not look like a standardized initial document request approved by the national office.

are you a CPA? do you have a considerable number of clients investing in crypto?

I'm a tax attorney at one of the top, non-Big 4, accounting firms and lead the digital asset tax practice. We represent the whole spectrum of the industry from investors, traders, miners, tokens, exchanges, etc.

[arandon]

Would this be corroborating evidence?

Zietzke v. United States, January 2020

In its request number two, the IRS seeks:

All customer identification program records (such as Know Your Customer (KYC) or Customer Due Diligence (CDD) records) relating
the Taxpayer and Covered Accounts, including, but not limited to, identifying information such as date-of-birth, physical address, social security number or other tax-identification number, passport, driver's licenses or other government-issued identification, Taxpayer photographs, income/employment information, customer explanation of activity information, third-party identification verification reports, and any other information used to verify or confirm identity.

Request No. 6 requests:
[a]ll account history information . . . for transactions or events relating to any Covered Accounts, including, but not limited to the type of transaction . . ., party and counter party names, digital wallet information, blockchain addresses, transaction ids, and any other information related to the identity or location of the parties involved.

(Dkt. No. 1-2 (Request No. 6).) Request No. 8 requests:
[a]ll contact information for individuals or entities . . . associated with any transactions involving any Covered Accounts, including, but not limited to, name, user name, address, telephone number, transaction id, and identification information.

(Dkt. No. 1-2 (Request No. 8).) Request No. 9 requests:
[a]ll documents and information relating to any payment or transfer to or from any Covered Accounts, including, but not limited to, counterparty name, account, user name, physical mailing address, email address, website, checks, wires, electronic transfer information, ACH, PayPal, money orders, prepaid card information, or any other form of payment information.

We previously issued Information Document Requests for information pertaining to virtual currency holdings as follows:

• The Information Document Request #1 requested "Virtual Currency activity statement for the period of 1/01/2016 through 12/31/2016, if available. If no virtual currency activity statement is available, please make available your spreadsheets, schedules, ledgers or other records used to track your virtual currency balance, transactions, etc."

• The Information Document Request #2 requested "Print out the block chain transactions for all wallet addresses owned with the explanation of all the transactions for the period under exam."

Furthermore, held phone conferences on the following dates as well to resolve this tax matter: 10/15/2018, 11/15/2018, 12/17/2018, 2/15/2019, 2/28/2019.

The IRS apparently used Chainalysis to identify where Zeitke moved bitcoins:

We have reviewed the information provided by [Petitioner] with respect to his Bitcoin transactions during 2016. Based on the information and his explanation during our telephone conference, there are still some uncertainties with respect to his activities during the 2016 tax year. For example, [Petitioner] indicated that all of his Bitcoin holdings were essentially split between the coins held in his personal wallets managed through the Armory software and the coins that he acquired through Coinbase and disposed of through Coinbase or Purse.io.

[Petitioner] explained that the none of the coins held through the Armory wallet were disposed of during 2016 and that all of the coins disposed of during 2016 came from acquisitions made through Coinbase. This is not true. Based on the transaction ids provided with the Purse.io information, we were able to locate those transactions on the Bitcoin blockchain and the address from which the coins were sent to Purse.io are not related to Coinbase. We were able to link some of those addresses with wallets associate with both Bitstamp and BTC-e, which are/were cryptocurrency exchange platforms similar, but unrelated, to Coinbase.

I can't seem to find the summons that the IRS sent to Coinbase, or Revenue Agent Snow's declaration. Are those attached or linked somewhere? Though what can be seen in Casetext alone is already very close to the same type of information as in that Reddit letter.

[Harlot]

I don't think this kind of requirement is true coming from the IRS. If you think about there requirements you will feel like earning or starting your own business will be easier at this point with all the requirements you need to dig in for 2017 which for me will be impossible now if I'm a citizen in the US. I mean screenshots, text messages, tweets? Are this things even real? Since I don't think the IRS will scroll down and search even non-money related things all for documentations and requirements for your taxes. With this type of requirement it might be discouraging crypto hodlers more on filing their true crypto earnings rather than showing everything as the requirements will be too much for them just to file a report.

[figmentofmyass]

Would this be corroborating evidence?

Zietzke v. United States, January 2020

what does it corroborate exactly? they're requesting all account info/history linked to his identity from coinbase, right? to confirm whether his accounting is legitimate and whether he is hiding other accounts.

i guess that still doesn't tell us exactly what an audit entails on the taxpayer side.

here is one important lesson---don't report a shitload of bitcoin capital gains, then later amend your tax return to remove those capital gains and claim a refund. it's gonna look fishy as hell and land you on the IRS's radar. i dunno what this guy was thinking:

Petitioner and his wife filed a joint 2016 federal income tax return, reporting a tax liability of $36,594, which they paid in full. (Dkt. No. 10-1 (Declaration of Amanda Snow), ¶ 10). Petitioner and his wife then filed an amended 2016 federal income return, showing a reduced tax liability of $21,119 and claiming a refund of $15,475. (Id., ¶ 11). In their original tax return, Petitioner and his wife reported long-term capital gains from seven transactions involving the sale or disposition of bitcoin. In their amended return, they removed the two largest of these transactions, reducing Petitioner's long-term capital gains from $104,482 to $410. (Id., ¶¶ 12, 14.) This reduction in reported their long-term capital gain is the sole basis for their claimed refund. (Id., ¶ 14).

Petitioner's amended return and requested refund spurred the IRS's investigation into Petitioner's 2016 tax liability and his bitcoin transactions. In connection with its investigation, the IRS issued the disputed Summons to Coinbase.

[arandon]

I agree that the petitioner was a bit of an idiot. I mean if you ask for a refund **from crypto gains** then you refuse to provide documentation, what do you expect.

Question is, what does a regular crypto audit from the IRS look like?