Fast Facts: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance
How can the IRS ensure that people pay relevant taxes as virtual currencies such as bitcoin gain popularity?
The IRS addressed some taxpayer concerns in its virtual currency guidance issued in 2014 and 2019. For example, according to the direction, using virtual currency can result in taxable capital gains.
However, the IRS could do more to assist taxpayers in complying. For example, financial institutions already report information about investment sales to the IRS and taxpayers to inform both of any taxable income. In addition, some virtual currency transactions are reported, but not all of them. Our suggestions would improve reporting and much more.
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Highlights of the GAO’s Findings
Taxpayers remain required to report and pay taxes on income generated by virtual currency use. But the Internal Revenue Service (IRS) takes limited data on tax compliance for virtual currencies. Tax forms, including information returns filed by third parties.
Such as financial institutions, generally do not need filers to indicate whether the income or transactions they report involve virtual currency.
The IRS has also addressed virtual currency compliance risks, including launching a virtual currency compliance campaign in 2018 and collaborating with other agencies on criminal investigations. In addition, in July 2019, the IRS began sending out more than 10,000 letters informing taxpayers with virtual currency activity about their potential tax obligations.
The IRS’s virtual currency guidance, issued in 2014 and 2019, answers some questions raised by taxpayers and practitioners. It states, for example, that virtual currency is taxed as property and that using it can result in taxable capital gains. However, because it stand not published in the Internal Revenue Bulletin, a portion of the 2019 guidance is not authoritative (IRB). According to the IRS, only guidance issued in the IRB represents the IRS’s classic interpretation of the law. The IRS failed to inform taxpayers that this guidance section is not traditional and is subject to change.
Why Did GAO Conduct This Research?
Bitcoin and other virtual currencies have full-grown in popularity in recent years. Individuals and businesses invest in virtual money and use them to purchase goods and services. As a result, the GAO stood asked to review the IRS’s efforts to ensure [virtual currency] tax compliance.
This report looks at
(1) what is identified about [virtual currency] tax compliance;
(2) what the IRS has done to address [virtual currency] tax compliance risks;
(3) how well the IRS’s [virtual currency] guidance sees taxpayer desires; and
(4) whether additional information record on [virtual currency] income might help the IRS ensure compliance.
GAO reviewed IRS forms and guidance, interviewed IRS, FinCEN, and other federal agency officials, and tax and [virtual currency] stakeholders.
The GAO recommends that the IRS clarify that some of the 2019 guidance is not authoritative and take steps to increase information reporting. FinCEN and the IRS also address virtual currency’s foreign asset reporting laws. The IRS agreed with the recommendation on information reporting but disagreed with the other two, claiming that a disclaimer report is unnecessary and that addressing [virtual currency] foreign reporting is premature. GAO believes that a disclaimer would increase transparency and that the IRS could clarify foreign reporting without waiting for future industry developments. FinCEN accepted the GAO’s recommendation.
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