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Relatedly: DO NOT CHEAT ON YOUR TAXES. If you have any BTC profits and do not report them to the IRS this month, they are reasonably likely to catch you and make an example of you.



YOU ARE WRONG. The IRS is .1% in the business of audits and 99.9% in the business of scaring people about the possibility of an audit. Like you just did.


I'm being audited right now (over a $2,500 student loan interest deduction, of all things) and it's totally automated. It seems like they have an internal process that goes "Taxpayer claimed deduction, IRS doesn't have paperwork matching payment activity, ergo send letter asking taxpayer to pony up".

If Coinbase is going to report earnings to the IRS, it's a good idea to match what they report or you might trigger the algorithm.


What you are describing is not an audit. The automated system is a separate process. An audit involves an actual IRS agent manually reviewing your entire tax history for the given year.


At least at the state level (MA), the automated system is considered an audit. I recently received notice that an "audit" (their word) of my state tax return detected a discrepancy with my federal return. When I called, I was told that it was caught automatically.

So I think the manual and automatic processes are considered to be two forms of the broader term "audit".


The IRS does not work for the state of Massachusetts.


We know this. I was explaining to you what the word means by example.


Read this:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...

"An audit may be conducted by mail or through an in-person interview and review of the taxpayer's records."

"You will be provided with a written request for specific documents needed."

"An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is accurate."

Consquently by my interpretation (and actual experience over many years) your last sentence is not correct.


Could we just say that it's not what people usually think of when they say "IRS audit"? Getting a letter in the mail asking for some paperwork isn't really scary.


I'd imagine a letter in the mail asking for some paperwork is pretty terrifying if you have been cheating on your taxes. :)


I think it's actually something that will raise your anxiety level even if you are "pretty honest".

Also there are some borderline issues with taxes (and/or self employment or small corp) that can give you problems.[1] (One for example is deducting for a home office, another might be charitable deductions, another might be writing off some auto usage).

Think in terms of what happens when you see the flashing lights of a police officer in back of you. Even if you haven't been speeding you don't automatically think "no problem I didn't do anything wrong" you get anxious thinking there might have been some mistake that you have made.

[1] See the typical business owner isn't Zuck and doesn't have an army of knowledgeable advisers to handle all the details. You are essentially on your own with your accountant.


I should have phrased that better. You're right, it is a bit frightening. But not on the same level as what we would think of as a real audit (I imagine, haven't had one).


But they should be scared. Why? Because it could be the tip of the iceberg. If you are able to sufficiently answer the inquiry they are generally done with you. Otoh, depending on the inquiry, if you are not you then possibly open yourself up to further scrutiny in the current year or future years.


What you are describing is a compliance audit. The parent either is responding to an automated quasi-audit request (which have different rules) or a traditional correspondence audit, which occurs through phone/mail and is generally confined to specific areas of a return.


That would be 1 in 1,000 people. If a million people in the US have used bitcoin, then that would mean 1,000 of them are going to be audited. That's quite a lot of audits.

And sure, 1 in 1,000 is nice odds, but you're still breaking the law. And some people care about not breaking the law on principle.

Also, if you do something the government doesn't like, then they can retroactively investigate you and bring the full force of the law down on you for tax evasion, which carries harsh penalties.


I have no bitcoin, but I've been audited. Unless your intent is to avoid taxation and you don't mind the risk, you should definitely pay tax on any bitcoins you've mined.


The IRS is 100% in the business of noticing when your tax filing doesn't jive with the numbers others reported to them about you. To have low risk of getting caught with unreported Bitcoin gains, you'd need to sell anonymously.


Keep in mind that they don't have to do this this year - they have 7 years to catch you evading tax in 2013.




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