I just made throwaway account for obvious reasons but I'm a regular poster here.I actually have first hand experience with these "letter writing campaigns" from the IRS side. I worked for the IRS and helped them with a different "letter writing campaign" as they call them a few years ago. These are broad and very error-prone fishing expeditions on their part. They do these for a few reasons. First is they simply don't have the resources to go after everybody and instead do a letter writing campaign to try and scare as many people possible into paying more voluntarily so they don't have to do anything. Second is they're not really sure if you owe more money or not since they have really bad data. They are almost certainly joining up some of their internal tax filing database tables with external datasets (probably coinbase) and trying to estimate how much they think you owe. For example the coinbase data might have shown that you sold $20K worth of BTC in 2014 but your tax filings only show that you paid taxes on approximately $5K. And that could be because you had a $15K loss on Bitfinex but the IRS doesn't know that because they don't have any Bitfinex data and you didn't make this clear on your taxes. Or maybe you reported the transactions with the loss as "crypto" and they only joined the data with a clause searching for "BTC" or "bitcoin". It just *appears* from their incomplete picture that you might owe more than they see that you've paid. For the people that actually didn't pay or underpaid, they're trying to scare you into paying what you actually do owe. Based on my experience with the IRS, that's a best case scenario on their part. Whatever they're actually doing is probably much more error-prone and dirty. Their own internal taxpayer database tables have horrific data quality problems.It strikes me that this letter writing campaign in particular is very unethical, as they're blindly scaring thousands of people shitless who very well may have done absolutely nothing wrong. Many of these people will seek legal or professional tax help at a large cost to them, and the IRS won't be responsible for picking up the bills of innocent taxpayers that they unjustly threaten. In a fair world they'd face a class action lawsuit for for this predatory behavior.What they will most likely do is create a prioritized list of everybody who they sent letters to, and only pursue audits of a small minority at the top of the list who does not end up paying what the IRS is estimating (guessing) they still owe. They're looking for return on investment. They have a small team dedicated to this campaign (maybe 5 people part time) and are looking to generate more revenue from voluntary payments from the letter campaign then they spend on the staff running it. The small minority at the top of the list that they refer to the audit teams works the same way. Audits are resource intensive for the IRS and they are very short staffed. They can only afford to go after the biggest fish. Unless you have egregiously not been paying your crypto taxes, you won't be referred to the audit team, and you will most likely get forgotten about.If you got one of these letters and know you reported correctly, I wouldn't worry about it.
Submitted July 28, 2019 at 08:14PM
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