Triggers Initiating Tax Examinations for Small Enterprises
Small businesses dealing with cryptocurrency transactions need to be aware of potential audit triggers from the Internal Revenue Service (IRS). Here are some common audit triggers and compliance steps to minimize audit risk.
The IRS is particularly interested in cryptocurrency transactions, especially those dealing in digital assets and those with money stashed outside of the U.S. One of the main audit triggers is a mismatch between reported income and exchange data (Form 1099-DA). The IRS cross-checks business-reported crypto income against data received from crypto exchanges, and discrepancies often trigger audits.
Another audit trigger is failure to report cryptocurrency activities accurately. Missing, inconsistent, or incomplete reporting of crypto transactions on tax returns, especially when the taxpayer does not answer the digital asset question on Form 1040 correctly, can lead to scrutiny.
Large or suspicious transactions are also red flags. Businesses receiving crypto payments exceeding $10,000 in a single or related transactions must file Form 8300, and failure to comply raises red flags.
Poor documentation, unclear cost basis tracking, or difficulty valuing obscure cryptocurrencies complicate compliance and increase audit risk. Frequent taxable events without clear documentation also raise flags.
The IRS uses data-matching and algorithms that flag taxpayers based on mismatches or unusual crypto activity patterns, initiating audits even without prior warnings.
To minimize audit risk, small businesses should prioritize transparent, consistent reporting and robust documentation. This includes meticulous record-keeping of all crypto transactions with fair market values, timely and accurate reporting of income, capital gains, and receipt of digital assets, filing required forms such as 1099-DA and 8300, and consulting tax professionals familiar with crypto taxation.
In addition, using a tax software system can provide a layer of protection and automatically check for accuracy and errors. Contacting a CRI advisor can offer a professional tax planner and help withstand an IRS audit.
The IRS has set up teams to work on crypto-related audits and has issued warning letters to those who own virtual currency accounts. It's crucial for small businesses handling crypto to stay informed and compliant to avoid audit triggers linked to discrepancies, underreporting, or noncompliance with new IRS crypto reporting standards.
The Internal Revenue Service (IRS) closely scrutinizes businesses dealing in cryptocurrency transactions, with a particular focus on those with discrepancies between reported income and exchange data (Form 1099-DA) and those not adhering to reporting cryptocurrency activities accurately. To lessen audit risk, it's essential for small businesses to maintain transparent, consistent reporting, robust documentation, and comply with necessary forms like 1099-DA and 8300, along with seeking advice from tax professionals knowledgeable in crypto taxation.
