IRS Coinbase Investigation – Bitcoin & IRS Voluntary Disclosure
IRS Coinbase Investigation – Bitcoin Accounts & IRS Voluntary Disclosure
Things are looking a little more grim for customers of Coinbase who are considered to be US account holders. Coinbase has been ordered to comply with IRS demands for accountholder information.
Coinbase & IRS Subpoenas
Even though Coinbase tried to fight the IRS Subpoena, Coinbase has been ordered to disclose the account information (aka wallet information) for nearly 15,000 individuals who may be considered US account holders and are maintaining their Bitcoin/crypto currency with Coinbase.
Two Main Disclosure Issues
When it comes to Bitcoin, there are two main disclosure and reporting requirements that individuals must keep in mind:
Domestic Bitcoin Tax Issues
First, there is a domestic aspect of the disclosure. Since Bitcoin is not considered currency, but is considered property, there are many aspects to the income tax of Bitcoin.
– If Bitcoin is traded, there may be capital gain; and
– If Bitcoin is being used in lieu of currency (payment for services for example), then the key issue for the IRS is that the recipient must report the currency as income
In either situation, the individual may have capital gain or income tax requirement that would have to be disclosed on the US tax return.
International Tax Issues
When it comes to offshore disclosure, the main issue is whether account or wallet is being held in the United States or in a foreign country, and whether the account is earning passive income (Interest, Dividends, Capital Gains). If it is being held in a foreign country, then the Bitcoin account/wallet may have to disclosed on an FBAR and other Forms.
**Be careful, the IRS information online re: non-reporting requirement for FBARs is for prior years.
Even if your Bitcoin is being held in the US wallet, if you were to transfer the Bitcoin to a foreign account, there are probably some online transfer records, even if you want to believe (read: Wish Hopeful) there are not, that shows some sort of transfer from your U.S. Based Bitcoin Wallet, to an account overseas.
Moreover, if your Bitcoin Wallet is anonymous, then it could lead to bigger issues such as whether you are attempting to avoid detection of your crypto currency. (aka Willfulness)
If you happen to have money in a domestic Bitcoin wallet, and you have some knowledge or concern it was transferred to a foreign account(s), which exceeds more than $10,000 in value, you should speak with an experienced offshore disclosure where to try to get into compliance before the IRS has your information.
Coinbase has grown into one of the top Bitcoin companies worldwide. As anybody with crypto currency/Bitcoin is aware, Coinbase is one of the larger online storage facilities/platforms, which is used to buy, sell, trade, and hold Cryptocurrency.
Typically, if an account/wallet is located within the United States, then there is no reporting requirement for the crypto currency holder.
Example: Matthew has a wallet that contains upwards of $200,000 worth of Bitcoin. If the Wallet is being stored in the United States, then there is no form or offshore aspect to the wallet – and therefore it would typically not be considered a foreign account or require disclosure on your typical offshore disclosure forms (FBAR, FATCA, etc.)
IRS Limits the Subpoena
The IRS’ initial subpoena was over-burdensome and therefore not initially successful in forcing Coinbase’s hand. Thereafter, the IRS went back to the drawing board and limited the scope of the subpoena in order to try to facilitate its enforcement.
The Key Points of the IRS Enforcement Document:
In reviewing the enforcement document filed in November 2017, here are the main takeaways from the IRS’s position:
– Coinbase offers buy/sell trading functionality in 33 countries, with (according to its website) 5.9 million customers served and $6 billion exchanged in bitcoin.. By the end of2015, Coinbase was America’s largest platform for exchanging bitcoin into U.S. dollars, and the fourth largest globally.
– Based upon an IRS search, only 800 to 900 persons electronically filed a Form 8949 that included a property description that is “likely related to bitcoin” in each of theyears 2013 through 2015
IRS Specific Subpoena Requests
Request 1 – Registration Records
Account/wallet/vault registration records for each account/wallet/vault ownedor controlled by the user during the period stated above limited to name, address, tax
identification number, date of birth, account opening records, copies of passport or driver’s license, all wallet addresses, and all public keys for all accounts/wallets/vaults.
Request 2- Due Dilgence
Records of Know-Your-Customer diligence.
Request 3 – 3rd Party Agreements
Agreements or instructions granting a third-party access, control, or transaction approval authority.
Request 4 – Transaction Records
All records of account/wallet/vault activity including transaction logs or other
records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counter parties to the transaction;requests or instructions to send or receive bitcoin; and, where counter parties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.
Request 5 – Correspondence
Correspondence between Coinbase and the user or any third party with accessto the account/wallet/vault pertaining to the account/wallet/vault opening, closing, ortransaction activity.
Request 6- Statements
All periodic statements of account or invoices (or the equivalent)
What This Means for You?
At Golding & Golding, we’re not fear mongers. We do not try to scare people into considering offshore disclosure. But sometimes, in situations such as these — the facts speak for themselves.
Overall, the IRS has a skewered eye towards Bitcoin, due to the initial use being related to illegal websites such as Silk Road and the dark web. Moreover, if you have your Bitcoin in an anonymous wallet and it is being transferred to foreign accounts in which you either on the foreign account or utilized a foreign corporation/nominee company to receive the Bitcoin, chances of the IRS is going to be pursuing the trail of the money.
IRS Voluntary Disclosure
Depending on the facts and circumstances of your situation, you may be able to qualify for the offshore disclosure or domestic disclosure programs. If you only have undisclosed domestic income as a result of utilizing Bitcoin, you may consider entering the domestic voluntary disclosure program.
If you only have offshore related issues, then you may consider entering one of the offshore voluntary disclosure programs. If you have a hybrid of both undisclosed offshore income/disclosure (aka reporting your foreign wallet or account) along with undisclosed US income, you may be able to still apply for the offshore disclosure programs – although restrictions apply as to the application involving the domestic portion of the nondisclosure.
With more than 300,000 foreign financial institutions reporting millions of US account holders, the IRS computers are continually being populated with account holder information. If the IRS already has your information than you are prevented from entering the offshore disclosure program (and they will typically deny preclearance letter)
Contact one of our experienced attorneys today to schedule a reduced fee consultation and learn your different options.
Learn More About Offshore Voluntary Disclosure
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
5 IRS Methods for Offshore Compliance
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property (reduced by any outstanding mortgage) would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
4. Reasonable Cause
Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.
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