Few things are as nerve-inducing as a tax audit. Even if you’re certain that you’ve done everything by the book, a tax audit can be a stressful and intrusive experience, as tax agencies have widespread authority to investigate your income, businesses, and documents in your accountant’s possession.
A tax audit can wind up being expensive if the tax agency decides to reassess any of your previous years’ income tax returns and if they determine that you owe more than you initially paid. An audit can even lead to a tax investigation if they have reason to suspect fraud or evasion.
If you invest in cryptocurrency or NFTs, you may be more likely to attract the attention of tax auditors, especially if you are a high-income trader. Tax auditors are increasingly scrutinizing cryptocurrency investors around the world.
If you are contacted about a tax audit, or you are concerned that you could be targeted with a tax audit because of your cryptocurrency investing, these are some of the steps you can take to protect your finances.
1. Hire a Crypto Tax Expert
When you’re dealing with an audit, it’s no time to go it alone. You need crypto tax audit assistance from an expert who can provide both legal and financial advice. A tax lawyer and chartered accountant will help you with all forms of communication with tax auditors and make sure you avoid any mistakes that can cost you money or lead to a tax investigation.
It’s also imperative that you find someone who understands the cryptocurrency market. There are crypto tax lawyers out there who have an enthusiasm for technology and extensive knowledge of cryptocurrency, blockchain, and NFTs.
Cryptocurrency is a relatively new type of asset, and you need an expert who understands how existing tax laws apply, as well as how tax agencies treat case-by-case rules.
2. Prevent Penalties and Allegations
Throughout the process of a tax audit, there is always the concern that it could turn into a tax investigation if tax auditors believe there is any evidence of fraud or tax evasion. This can lead to unnecessary penalties or even tax prosecution.
Make sure you avoid common mistakes during the auditing process, like providing misinformation to auditors.
3. Provide All Necessary Documentation
Tax auditors have the authority to take a large number of documents related to your income, business, and investments. They can be taken from your home, your workplace, or even your accountant’s office.
It is your responsibility to maintain tax documentation for six years from the date you file your taxes. You should provide all of these documents when you’re audited.
4. Avoid an Unfavorable Audit with Voluntary Disclosure
If you are concerned that you may be targeted for a tax audit because of your cryptocurrency investments, and that you may get an unfavorable result, you may be able to pursue the Voluntary Disclosure Program.
This is a way to correct your taxes from previous years without facing an audit or any additional penalties that come with a tax audit. You will have to be prepared to pay any extra taxes that you owe, but it can avoid much harsher penalties.
If you are concerned that you are at risk for a tax audit due to cryptocurrency trading, contact a tax lawyer with knowledge of the field.
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