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How to Handle an IRS Audit of Your Cryptocurrency Investments: Essential Tips for Navigating the Process

With the rise of cryptocurrency, tax compliance has become a complex area for both individuals and businesses. Cryptocurrency transactions can be tricky to report, and as a result, many people are finding themselves facing IRS audits. If you’ve received a tax notice or been notified that your crypto investments are under audit, don’t panic. While it can be a stressful situation, there are clear steps you can take to manage the process smoothly. In this guide, we’ll break down how to handle an IRS audit of your cryptocurrency transactions, from the initial notice to potential resolutions.

  1. Understand the Nature of the Audit

The first thing to know is that receiving an audit notice from the IRS does not automatically mean you’ve done something wrong. Audits are a routine part of the tax system, and they’re conducted to verify the accuracy of the information reported on tax returns. The IRS has been increasingly focused on cryptocurrency activity in recent years, sending out tax notices and auditing taxpayers with significant digital asset transactions.

When you receive a tax notice or an audit letter, it’s essential to read it carefully. This document will outline several key points:

  • Who the audit is directed to.
  • Which tax year(s) the IRS is reviewing.
  • The specific areas under scrutiny, such as unreported income from crypto exchanges, capital gains, losses, or both.

Reviewing these details helps you understand the scope of the audit and what exactly the IRS is examining.

  1. Take Immediate Action

Once you’ve reviewed the notice, you’ll usually find a deadline for your response. Failing to respond within the specified time can lead to further complications, including additional penalties or increased scrutiny.

If you need more time to gather the required documents, it’s possible to contact the IRS and request an extension. In many cases, the IRS may also request a meeting, either virtually or in person, to review the audit details. This is a sign of a more complex audit, and you should seek professional guidance immediately.

  1. Work with an Experienced Cryptocurrency CPA

One of the most critical steps after receiving an audit notice is to engage an experienced cryptocurrency CPA. Cryptocurrency tax regulations are nuanced, and dealing with an IRS audit requires in-depth knowledge of both crypto transactions and tax law.

A CPA experienced in crypto audits can help you in several ways:

  • Negotiation with the IRS: They can advocate on your behalf, potentially reducing the amount of taxes, interest, or penalties owed.
  • Handling Time and Stress: Dealing with the IRS can be time-consuming and nerve-wracking. A CPA can handle the correspondences and meetings, allowing you to focus on other matters.
  • Accuracy of Reporting: One common issue during crypto audits is discrepancies in transaction reporting. A skilled CPA can review your transactions, identify any errors, and ensure accurate reporting.

If the audit involves complex cryptocurrency transactions, the CPA can work with the IRS to resolve misunderstandings or discrepancies in reported data.

  1. Prepare a Game Plan

Once you’ve engaged a CPA, the next step is to prepare a comprehensive audit strategy. This begins with reviewing the notice in detail, assessing the IRS’s claims, and comparing them with your own tax returns and transaction records.

One of the most important elements is ensuring that all calculations related to your cryptocurrency activity are accurate. This includes capital gains or losses, income from mining or staking, and any other taxable crypto events. Your CPA will help you gather supporting documentation, such as:

  • Transaction history from exchanges.
  • Wallet addresses.
  • Cost basis data for the acquisition of crypto assets.
  • Transfer records between wallets or exchanges.

By comparing your records with what the IRS has on file, your CPA can draft a response to address any discrepancies and begin the negotiation process with the IRS.

  1. Beware of Crypto Accounting Software

While cryptocurrency accounting software can be helpful, it’s far from foolproof. Many taxpayers rely on these platforms to automatically calculate their taxes, only to find out during an audit that the calculations were incorrect. Common issues include:

  • Incorrect cost basis data.
  • Misreporting of transfers between wallets as taxable events.
  • Omission of crypto trades on decentralized exchanges.

This underscores the importance of doing a manual review of your transactions or working with a professional, even if you’ve used software to report your taxes.

  1. Responding to the IRS

When replying to the IRS’s audit inquiries, it’s essential to be clear, concise, and honest. Provide only the information that is requested. If the IRS asks for specific documentation, such as your transaction history or wallet addresses, submit that information. Avoid offering any additional data beyond what is requested.

Your CPA will help you draft a detailed, well-organized response. If there are discrepancies between your records and the IRS’s claims, the goal will be to justify the differences and back them up with solid documentation.

  1. The Importance of Accurate Record Keeping

Good record keeping is the cornerstone of defending against an IRS audit. If your cryptocurrency accounting has been done accurately, with all relevant documentation in place, you’ll be in a much stronger position to contest any claims made by the IRS.

Accurate records can also help minimize the time and costs associated with the audit, as your CPA won’t need to recreate or rework your transaction history. Be sure to keep the following records:

  • Receipts for all cryptocurrency purchases and sales.
  • Records of transfers between wallets.
  • Documentation of any income from staking, mining, or other crypto activities.
  1. The Right to Appeal

If you reach the conclusion of an audit and disagree with the IRS’s findings, you still have the right to appeal. This involves submitting a written protest, where you outline your disagreements with the IRS’s conclusions and provide supporting legal arguments.

An appeal gives you the chance to have your case reviewed by a different team within the IRS, independent of the original audit team. This can be an essential step if you believe that the audit findings are incorrect or unfair.

  1. Final Thoughts

Facing an IRS audit can be daunting, especially when it involves cryptocurrency transactions. However, by taking the right steps, including hiring an experienced crypto CPA and maintaining accurate records, you can navigate the audit process successfully.

If you’ve received a tax notice or are undergoing an audit, don’t hesitate to reach out to a professional team like Camuso CPA. As one of the first firms specializing in cryptocurrency tax matters, we’ve been helping clients with their crypto taxes and audits since 2016. Contact us today to see how we can help you manage your audit and protect your financial interests.

 

About Camuso CPA

At Camuso CPA, we understand the unique challenges faced by digital asset investors and Web3 businesses. Our mission is simple: to save you money, time, and provide peace of mind through effective tax planning strategies, accurate accounting, and proactive advice.

Why Choose Camuso CPA?

Expertise Tailored to Your Needs: Unlike other firms, we specialize in serving digital asset investors and Web3 business owners. Our team has in-depth knowledge of the cryptocurrency industry, enabling us to provide customized solutions that meet your specific requirements.

Pioneers in the Field: Camuso CPA has been at the forefront of the industry, offering cryptocurrency accounting services and tax advisory since its early days. We were also the first CPA firm to accept cryptocurrency as a form of payment for our professional services.

Comprehensive Approach: We go beyond traditional tax compliance and accounting services. Our proactive approach ensures that you benefit from strategic tax planning, minimizing your tax liabilities and maximizing your savings.

Cost Savings: Our expertise in tax planning and compliance for digital assets helps you save thousands, and even cumulatively millions, in taxes. We identify valuable deductions, credits, and exemptions that others might overlook, optimizing your financial outcomes.

Peace of Mind: With Camuso CPA by your side, you can rest easy knowing that your tax obligations are handled accurately and efficiently. We stay up-to-date with the latest developments in tax regulations and provide you with reliable guidance to navigate the ever-changing landscape..

Learn more about us here.

 

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