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How Virtual Money Can Cause Real Tax Damage: What to Know About Bitcoin Taxes

October 10, 2018

What You Need to Know About Bitcoin Taxes

Only 802 tax returns of the 132 million tax returns filed electronically in 2016 reported cryptocurrency. Have you reported your bitcoins?

Check for these five qualities to make sure your tax pro is qualified and the best for you.

Bitcoins: they’re so hot right now. You’ve heard all about this type of cryptocurrency (or virtual money) investment. People are raving about how much Bitcoin value has grown since its start. They can’t stop talking about how this interesting cryptocurrency phenomenon could be changing our economic landscape. Amidst all the sensationalized information about Bitcoin, there’s one thing that has gone unspoken for too long: Bitcoin taxes. Here’s what you need to know about these wild digital coins and what implications they could have for your taxes.

What is a bitcoin?

Bitcoins are a virtual currency, which means there are no physical bitcoins. You can use bitcoins to pay for goods or services or to hold as an investment. Bitcoins operate on a peer-to-peer exchange system. This involves using computers to track and log details of every transaction. Like any cryptocurrency, bitcoins are not issued or backed by any banks or governments, so transactions allow users to remain anonymous. Even though it’s not legal tender per se, Bitcoin has seen huge surges of popularity and sparked the creation of other forms of cryptocurrency.

How much is a bitcoin worth?

When bitcoins first came out in 2009, they were worth next to nothing. The first price increase happened in 2010 when bitcoins jumped from $0.0008 to $0.08 for a single bitcoin. Since then, its price and trading history have been very volatile. Most recently, it has seen a high of $17,900 per bitcoin in Dec. 2017, which was followed by a quick, dramatic decrease to $5,900 in Feb. 2018. Upon publishing this blog post, bitcoins are at about $6,500. The current price can be found here.

So why does the IRS care about bitcoins?

Bitcoin’s burst in popularity has lead to an explosion of billions of dollars in wealth. And the federal government is concerned that they’re not getting their cut. So in 2014 after a huge Bitcoin value hike, the IRS announced that they view bitcoins as property, which means that any tax rules that apply to property transactions also apply to transactions involving Bitcoins.

Interestingly enough, only 802 tax returns of the 132 million filed electronically in 2016 reported cryptocurrency income. So there are many people dabbling in bitcoin who are not reporting these transactions to the IRS. The federal government is not pleased and is determined to regain any Bitcoin taxes.

Why should I care about Bitcoin taxes?

In 2017, the IRS went after Coinbase, Inc., a large “digital wallet” company that allows users to buy, sell, and transfer Bitcoin. The court ruled that the IRS could gather data on all 14,355 Coinbase, Inc. customers. Since only 802 electronically filed tax returns in 2016 reported cryptocurrency, the majority of those 14,355 customers didn’t report their bitcoins. With this data in hand, the IRS will be following up with any Coinbase customers.

What could happen if I haven’t paid taxes on my bitcoins?

If you were a Coinbase customer and you haven’t paid taxes on your bitcoins, you should expect a letter in the mail from the IRS (if you haven’t gotten one already). This letter could be a notice of deficiency, to inform you that you haven’t paid enough on your taxes because of your bitcoins.

The IRS wants what they’re due. Besides looking to regain any Bitcoin taxes, they are also trying to find intent to prove tax evasion in people who didn’t report their bitcoins. And if they find you guilty of tax evasion, you could end up in jail. And while Bitcoin may be trendy right now, prison stripes are never cool. So make sure you pay back the IRS what they’re owed and continue to correctly report your bitcoins and other cryptocurrencies.

The moral of the Bitcoin taxes story

Just because your money is virtual doesn’t mean it’s free from taxes – or from the eyes of the IRS. The federal government wants more compliance but may run into issues taxing all bitcoin gains since lots of trading is done on overseas exchanges. Still, reporting on your cryptocurrency isn’t optional. There may not be the same regulation around reporting on bitcoins as there is around reporting stock sales, but it’s still the same concept. It’s still income and as such, the IRS needs to know about it.

If Bitcoin taxes have you scratching your head, you can always consult a tax professional who has experience with cryptocurrency to help you figure out the next steps.

How to Make IRS Payments for Your Taxes

August 17, 2018

How to Make IRS Payments for Your Taxes: Credit Cards

When you owe after filing returns or have tax liability from previous years, you to have to pay the IRS with actual money, but how?

Check for these five qualities to make sure your tax pro is qualified and the best for you.

The 4 easiest ways to make IRS payments

It’s 2018, but the IRS won’t accept your Bitcoin, 3-D printed money, or Venmo. When you owe after filing returns or have tax liability from previous years, you to have to pay the IRS with actual money, but how?

The IRS makes a way for you to do it. Electronic payments are the most popular and preferred, used for 89 percent of returns in 2018, but many taxpayers prefer to pay offline. Review these methods to figure out how to make IRS payments that work for your financial situation.

1. Use IRS Direct Pay

For making payments to the IRS as an average taxpayer, one easy method is IRS Direct Pay. It can be used for filing individual tax bills or making estimated tax payments directly from your bank account (checking or savings) to the IRS. This feature has the added advantage of being free of charge. To use Direct Pay, you need to have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN).

As soon as you make a payment using Direct Pay, you get a confirmation notification that it has been submitted. The bank account information you provide is not stored in the IRS systems.

2. Electronic Federal Tax Payment System® (EFTPS)

Another secure payment method offered by the government is the EFTPS. Both businesses and individual taxpayers can use EFTPS to pay their taxes. To access the EFTPS website, you must have a secure Internet browser with 128-bit encryption. To log on, you must have the following three items:

  1. EIN or SSN
  2. EFTPS Personal Identification Number
  3. Internet Password

Using EFTPS, you can make income tax payments, employment tax payments, and estimated and excise tax payments. The site is available 24/7 and can be accessed via computer or smart phone. Additionally, you can schedule payments for up to 365 days in advance.

3. Payment by Check or Money Order

If you choose to pay via mail, then you can make your check, money order or cashier’s check payable to the U.S. Treasury. Include your name, address, SSN, daytime phone number, tax period and the tax notice or form number on your method of payment. Remember not to affix your check or money order to other documents.

4. Payment by Debit or Credit Card

To process payments made by debit or credit cards, the IRS uses standard service providers and business/commercial card networks. A processing fee is charged, which may be tax deductible. The fee varies depending on the service provider used. The IRS does not charge any fee for the transfer or the processing of the payment.

If you aren’t able to make your payment for whatever reason, contact a tax professional who can help you find the best solution for your situation.

The Top 5 Ways to Pay IRS Tax Debt in Full

July 20, 2018

Mail box full of tax letters

When you owe Uncle Sam money, it can make a ding on your finances and everyday life. That's why if you owe, you must pay IRS tax debt ASAP.

Check for these five qualities to make sure your tax pro is qualified and the best for you.

Taxes are a sure thing if you live in the U.S. And when you owe Uncle Sam money, it can make a ding on your finances – and everyday life. That’s why if you owe, you must pay IRS tax debt ASAP.

Thankfully, the IRS offers several programs and services that help taxpayers that owe them money. The method you choose will depend on your specific situation with the IRS. Knowing what to do isn’t always easy. First, analyze your situation and organize all of your financial documents. From there, you can determine if one of these payment methods applies to your situation.

The top 5 methods to find a way to pay IRS tax debt:

1. Repay the full tax debt amount

The fastest and most efficient way to repay the debt you owe to the IRS is to pay the complete amount you owe. This is not an option for many who owe the IRS, which is why the IRS provides other programs and services to make paying your debt possible. Speak with a tax professional to see which IRS payment agreements you may qualify for.

2. Sell your assets (before the IRS takes them)

You may have to say goodbye to your yacht or untouchable sports car if you owe the IRS. By selling assets, you can apply the funds to pay IRS tax debt. Do this as soon as possible before the IRS issues a lien. A lien will make it more difficult to sell your property if you wait too long.

3. Withdrawal from your investment accounts

Do you have any investment accounts like a pension or 401k? If so, you could make an early withdrawal to pay off your debt. If you opt for this route, make sure you pay taxes on the withdrawn money or you could owe the IRS all over again.

4. Dip into property equity

Depending on the housing market, it may be difficult to take out a home equity loan or to refinance. If it makes sense for your situation and the market climate, applying home equity funds can be a viable method for paying your tax debt.

5. Use a credit card or bank loans

Using credit cards or bank loans may seem like merely trading one debt for another. However, the interest rate on credit cards and bank loans tend to be less than IRS interest and penalties.

Don’t wait until the letters pile up

When the IRS sends you a notice to demand federal payment, it’s time to kick it into gear. The IRS wants you to fully pay the debt within 10 days of the notification. This is doable via any of the five methods above to repay your tax liability. If you’re unable to use these resources or have a tax debt amount that you know you can’t pay, a tax professional can negotiate with the IRS on your behalf to reach an agreement. Don’t wait until your next notice letter hits the mailbox to pay IRS tax debt in full!

Form 433-A: How the IRS Determines Your Ability to Pay

July 15, 2018

IRS Form 433-A - money airplane

If you can't afford your tax debt, the IRS has to decide if - and how - you'll be able to pay.

Check for these five qualities to make sure your tax pro is qualified and the best for you.

Tax debt is nothing to brush off, especially when you owe an outrageous amount. If you can’t afford your tax debt, the IRS has to decide if – and how – you’ll be able to pay. This post will tell you how the IRS uses Form 433-A to determine if an agreement is in your future.

When you apply for a payment plan such an installment agreement, Offer in Compromise, or Currently Not Collectible status, The IRS asks you for a financial statement with Form 433-A. This form provides information about your total income and assets. The IRS uses this information to determine your ability to pay.

What the IRS considers for your payment ability

  • Any assets that you can take a loan against (e.g. home),
  • Any asset such as your car, boat, or house that you can sell to pay the tax debt, and
  • Property that is yours but is held by someone else, such as funds in bank accounts, retirement accounts, etc.

Information to include on Form 433-A

  • Your checking, savings, online (e.g. PayPal) financial accounts
  • Your stored value cards (e.g. payroll card, child benefit card)
  • Stock, bonds, mutual funds, and other investments
  • Available credit on credit cards
  • Your gross monthly wages and/or salaries without deductions, or net business income
  • Any real estate, vehicles, and personal assets
  • Current market value of your assets

If you’re self-employed, you must disclose your business bank accounts and business assets with the IRS.

Allowable Living Expenses

Though the IRS has to leave you enough money to live (per the allowable living expenses), the agency will review your specific financial needs. There is a place on Form 433-A for you to include necessary total living expenses, including:

  • Food, clothing and miscellaneous
  • Housing and utilities
  • Vehicle ownership and operation
  • Public transportation
  • Health insurance
  • Out-of-pocket health care costs
  • Court ordered payments
  • Current year taxes
  • Secured debts
  • Other expenses such as student loans, unsecured debts, and tuition fee.

Fresh Start Program

Based on your financial statement, the IRS determines your ability to pay and decides whether to approve your application for a payment plan or not. Under the Fresh Start Program, the IRS may not ask for a financial statement if you owe $50,000 or less in tax debt and apply for an Installment Agreement. For tax debts that are greater than $50,000, and to request a tax debt reduction, you will need to provide the IRS with a financial statement (Form 433-F).

If you’re unsure if you qualify for any IRS debt repayment programs or forgiveness programs, our licensed tax professionals can review your specific situation to see if you qualify. We work with the IRS on your behalf, so you don’t have to navigate the complex tax laws alone.

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