Dealing with IRS Penalties for Late Tax Filings Due to Crypto Earnings

Filing taxes can be a complex and daunting process, especially when it involves income from cryptocurrencies. In this blog post, we will address a specific situation where an individual has failed to file their taxes on time, resulting in substantial penalties. They are seeking relief through the IRS's First-Time Abate (FTA) policy, but are unsure if their reason – difficulty finding an accountant knowledgeable about crypto earnings – will be sufficient to secure approval.

Understanding the IRS FTA Policy

The IRS's First-Time Abate (FTA) policy is designed to provide relief to taxpayers who have a clean compliance history but have incurred penalties for filing late. Under this policy, the IRS may grant penalty abatement to first-time offenders who meet certain criteria. However, it's important to note that the FTA policy does not apply to all types of penalties, and not all late filers will qualify.

Eligibility for the FTA Policy

To determine whether your situation qualifies for FTA relief, it's crucial to consider the following factors:

1. Clean Compliance History: To be eligible for the FTA policy, you must have a "clean compliance history." This means that you have not incurred any significant tax penalties in the three years before the tax year in question.
2. Reasonable Cause: The IRS will consider whether your failure to file on time was due to "reasonable cause" and not willful neglect. While having a tax professional who is well-versed in crypto earnings is certainly beneficial, it may not automatically qualify as a "reasonable cause."

The Role of a Knowledgeable Tax Professional

In cases involving cryptocurrencies, having a tax professional who understands the intricacies of crypto tax laws is invaluable. Cryptocurrencies have introduced new challenges to the tax landscape, and their tax treatment can be complex. A tax advisor experienced in handling crypto earnings can help ensure that you accurately report your transactions and calculate your tax liability.

However, it's crucial to recognize that not finding a suitable tax professional might not, in and of itself, qualify as "reasonable cause" for penalty abatement under the FTA policy. The IRS considers "reasonable cause" to be something beyond your control that prevented you from filing your taxes on time.

While a lack of expertise in crypto tax matters may contribute to the late filing, the IRS may still expect you to make a reasonable effort to find a knowledgeable professional or educate yourself on the matter. Therefore, it is essential to consult a tax advisor and, potentially, a tax attorney to assess your specific situation.

Submitting Form 843

If you believe that you meet the criteria for FTA relief, the IRS has advised you to submit Form 843 to request penalty abatement. In this form, you will need to provide a detailed explanation of your "reasonable cause" for filing late, along with any supporting documentation. Be thorough and honest in your submission, as the IRS will carefully review your case.

Conclusion

Dealing with IRS penalties for late tax filings related to crypto earnings can be a challenging and intimidating process. While it is beneficial to have a tax professional who is well-versed in crypto tax laws, it might not automatically qualify as "reasonable cause" for penalty abatement under the FTA policy. To increase your chances of success, it's crucial to consult with a knowledgeable tax advisor or tax attorney who can assess your specific situation and guide you through the process.

Remember that the IRS's decision regarding penalty abatement is discretionary, and they will evaluate each case individually. Seeking professional advice and being honest and thorough in your submission will put you in the best position to secure the relief you need.