Of the many adjectives one could use to describe the Internal Revenue Service, “forgiving” is not one of them. Unfortunately, the same is often true for the government’s personnel security apparatus – especially in cases involving a willful violation of rules or laws. Combine tax evasion and a security clearance, and you have a recipe for disaster that typically cooks up just that.
I’ve written before about the dangers of crypto-currency investing for security clearance-holders, but here’s another: this past year, the IRS has been busy winning court battles to force cryptocurrency exchanges to reveal their customers. Two cases in particular stand-out because of their implications for ordinary investors.
Kraken and Circle Summoned for Records
In April, a federal court in Boston forced the crypto payments company Circle and its affiliates, including Poloniex, to comply with an IRS summons for customer records. In May, a different federal court in San Francisco signed off on another IRS subpoena for records to the crypto exchange known as “Kraken.”
The new and highly aggressive efforts by the IRS have to-date targeted only investors with more than $20,000 in transactions in any single calendar year between 2016 and 2020. But that could change in an instant. After all, current law doesn’t require crypto exchanges to report transactions to the IRS like traditional brokerage firms are required to report stock transactions; yet the IRS is winning in court anyway.
This demonstrates that there is little standing in the way of the IRS suddenly deciding that even small-timers dabbling in crypto merit the agency’s scrutiny. The IRS already knows that the current lack of required reporting makes cryptocurrencies attractive to criminals and tax cheats. For a federal government with an insatiable thirst for revenue, what more fertile hunting grounds are there than those that provide the user with a false aura of anonymity?
Certifying During Tax Season
In the meantime, taxpayers are now being required to certify each year on their tax return whether they own or have owned any crypto-currencies. See the potential for a retroactive nightmare?
If you’re starting to break out in cold sweats, the good news is that a proactive amendment to a previously filed tax return, along with paying any “overlooked” taxes due, goes a long way in preventing bigger problems with the IRS. As for how the federal agency that holds your security clearance might view the situation, that depends on how compelling a case you have for inadvertent oversight. That, in turn, depends on how much you short-changed Uncle Sam.
Relatively nominal amounts have a higher probability of being forgiven in light of the newness of the crypto markets and their implications for taxes. Large, glaring underpayments may create the perception of a more sophisticated investor who should have known better.
Either way, be sure to seek out competent tax and legal advice before taking action. A little knowledge can be a dangerous thing.
This article is intended as general information only and should not be construed as legal advice. Consult an attorney regarding your specific situation.