IRS Sending Out Cryptocurrency Warning Letters

According to the IRS, cryptocurrency like Bitcoin is treated as property, not money. Notice 2014-21. Therefore, taxpayers who use it buy things or convert it to dollars are treated as having sold it, and have to recognize gain or loss based on what they receive when the dispose of it compared to what they paid for it.

In 2016, only 802 individual income tax returns reported cryptocurrency transactions out of the 132 million filed electronically. The IRS is clearly concerned about a lack of knowledge and/or intentional lack of compliance in this area. Late last month, it announced it is sending 10,000 warning letters to taxpayers it suspects of having owned cryptocurrency and not reporting.

The letters are of three variations, Letter 6173, 6174, and 6174-A.  The 6173 will require a response from the taxpayer - either the filing of returns (delinquent or amended) reporting cryptocurrency transactions, or providing a statement to the IRS that he or she has fully complied with such reporting. Taxpayers are warned that if they ignore the letter, they may be subject to examination activity. The other two forms do not require a specific response, but warn about potential enforcement activity in the future. Taxpayers who receive the letter will likely have more difficulty in asserting an “ignorance” defense if future penalties for cryptocurrency transactions are ever imposed on them.

IR-2019-132, July 26, 2019

Update: Appellate Court Upholds Denial of Charitable Deduction for Reporting Omission

Back in 2017, I discussed the case of Reri Holdings I, LLC here. There, the Tax Court denied a charitable deduction of over $33 million since the taxpayer did not include the adjusted basis information for the property in its Form 8283 filing. The Tax Court concluded that the substantial compliance doctrine could not be used by the taxpayer to salvage the deduction since the reporting of the basis, while not directly relevant to a charitable deduction, would have assisted the IRS in evaluating the contribution without an audit since a large disparity between basis and the value of the deduction would alert the IRS to potential issues.

The case was affirmed by the D.C. Court of Appeals in May of this year.

RERI Holdings I, LLC, 149 TC 1 (2017), aff’d, D.C. Court of Appeals, No. 17-1266 (May 24, 2019)

Employers Can Truncate Employee Social Security Numbers on Forms W-2

In an effort to reduce identity theft, the IRS has issued final regulations that permit employers to truncate the social security numbers of employees on Forms W-2. Thus, the employer can elect to report the number in the format of XXX-XX-1234 or ***-**-1234 instead of providing the whole number. It is not a mandatory provision – the employer can choose to do it if it wants.

Full taxpayer identification numbers are still required on the copies of the Forms W-2 that are filed with the Social Security Administration, and on those of payers of third-party sick pay to employers.

The regulations are effective for items filed or furnished after December 31, 2020.

TD 9861