Cryptocurrency, the thrilling world of innovation and financial opportunities, holds a hidden challenge—tax obligations. As the Internal Revenue Service (IRS) sharpens its focus due to a staggering 75% non-compliance rate in cryptocurrency reporting, investors and enthusiasts find themselves navigating treacherous waters. In this guide, we unveil the complexities of tax notices, offering insights and steps to ensure your compliance and peace of mind.
Understanding the Landscape of Cryptocurrency Tax Notices
Cryptocurrency tax notices revolve around underreporting or non-reporting assets. The three main notices—6173, 6174, and 6174A—each carry unique implications, requiring different responses.
1. 6173 Notice and 6174A Notice
These notices are primarily informational, informing you of on-chain cryptocurrency transactions. No immediate action is needed; they suggest filing amended returns if discrepancies arise.
2. 6174 Notice
Unlike the informational notices, a 6174 notice demands a timely response. Failure to address it promptly may lead to escalated tax notices, emphasizing the need for a careful review.
Step-by-Step Instructions to Responding Effectively to Cryptocurrency Tax Notices
When faced with a tax notice, take these steps to navigate the complexities and ensure compliance:
1. Contact Your CPA
Upon receiving a tax notice, your first move is to reach out to a Certified Public Accountant (CPA) experienced in cryptocurrency taxes. They guide you through the necessary steps.
2. Detailed Review with Your CPA
Collaborate with your CPA to review the notice thoroughly. Identify the type of notice and determine the appropriate response based on your circumstances.
3. Update Cryptocurrency Accounting
Adjust your cryptocurrency accounting based on the notice. Work closely with your CPA for accuracy, proper documentation, and diligence in reporting.
4. Amend Prior Year Tax Returns
After analyzing the notice, amend prior year tax returns or file delinquent returns. Bringing filings up to date is crucial to rectify any omissions related to cryptocurrency transactions.
5. Craft a Thoughtful Response
If a response is necessary, work with your CPA to craft a tailored and thoughtful reply. Responses vary based on circumstances, ensuring a professional and effective response.
The Educational Nature of Tax Notices
Not all tax notices are punitive; some serve an educational purpose. The IRS aims to increase overall tax compliance, sending letters to both compliant and potentially non-compliant taxpayers, and educating them about reporting obligations in the cryptocurrency space.