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IRS Provides Important Clarifications of Tax Rules for Cryptocurrency

If you use or hold cryptocurrency, also called virtual currency, you need to exercise special care. Challenges arise from the fact that the IRS classifies all virtual currencies as property, not as currency in the usual sense. As a result, any transaction involving cryptocurrency might involve a capital gain or loss that must be reported to the IRS.

Potentially taxable cryptocurrency transactions include:

  • Exchanging virtual currency for real currency (for example, trading Bitcoin for US dollars)
  • Receiving cryptocurrency as payment for work or services performed
  • Selling property and accepting cryptocurrency as payment
  • Using cryptocurrency to purchase goods or property
  • Any transaction in which you use cryptocurrency that you originally received as a gift

In order to calculate the amount of your gain or loss in a virtual currency transaction, you need to know your basis in the virtual currency. If the value you receive when you dispose of the virtual currency is higher than your basis, you must report a capital gain; if the value you receive is lower than your basis, you may be able to claim a deductible capital loss.

The IRS recently issued a number of clarifications on how to determine your basis, including:

  • If you use real currency to purchase cryptocurrency (for example, using U.S. dollars to purchase Bitcoin), your basis is usually the amount you paid.
  • If you receive cryptocurrency in exchange for goods or services, your basis is usually the fair-market value (FMV) of the cryptocurrency at the time you received it.
  • If the FMV of virtual currency you receive is not known (for example, if the virtual currency is not publicly traded), then your basis is usually the FMV of whatever property or work you traded for the cryptocurrency.
  • If you receive virtual currency as a gift and later dispose of it at a gain, then your basis is equal to the gift donor’s basis, plus any tax the donor paid on the gift.
  • If you receive virtual currency as a gift and later dispose of it as a loss, then your basis is the lesser of the donor’s basis and the FMV of the virtual currency when you received it.

Failure to keep detailed records of your cryptocurrency transactions can be costly. For example, if you receive virtual currency as a gift but cannot document the donor’s basis, your basis is zero. Therefore, the full value of any transaction involving that virtual currency may be taxable.

Remember also that short-term capital gains (those that occur within a year of your receipt of the cryptocurrency) are taxed as ordinary income, whereas long-term capital gains are taxed at lower rates. Therefore, it is often advantageous to hold virtual currency for more than a year before disposing of it in any fashion.

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IRS Withholding Calculator Helps Retirees, Self-Employed, and Others with Multiple Income Sources

The IRS Withholding Estimator webpage helps taxpayers with employee wages make sure that the correct amount of tax is being withheld from their paychecks. Ordinarily, tax withholding only takes into account the tax implications of income from a particular job. If you have multiple jobs or receive other taxable income, the amount withheld might be too low. Insufficient withholding throughout the year can mean an unexpectedly large spring tax bill, perhaps even one that includes IRS penalties.

Getting your withholding right to avoid such surprises can be particularly tricky if you receive non-employee income. The Withholding Estimator tool is therefore especially useful if you:

Receive Social Security retirement benefits but also work part-time or have a pension.
Earn any self-employment income, which includes “side hustles” and “gig economy” income, such as driving for Uber or Lyft.
Have unearned income such as stock dividends, interest, alimony, or distributions from a traditional (not Roth) IRA.
Use scholarship or grant funds for expenses other than tuition and school fees (such as incidental living expenses).
In order to get the most accurate results from the Tax Withholding Estimator, you will need to know your income amounts from these sources, as well as the wages and tax withholding shown on your paychecks. The tool will also ask for your filing status and number of dependents.

If you find that not enough tax has been withheld from your 2019 paychecks, it is not too late to take action. Here are three ways to lower your spring tax bill and reduce or eliminate any IRS penalties:

Fill out a new W-4 Form (Employee’s Withholding Allowance Certificate) and submit it to your employer, requesting that an additional amount be withheld from your paychecks.
Complete Form W-4V (Voluntary Withholding Request) to request that tax be withheld from your Social Security checks; submit the form to the Social Security Administration.
Make a fourth-quarter Estimated Tax Payment for 2019. The due date for such a payment is January 15, 2020.

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New IRS impersonation email scam

The Internal Revenue Service and its Security Summit partners warned taxpayers and tax professionals about a new IRS impersonation scam campaign spreading nationally via email.

Remember: the IRS does not send unsolicited emails and never emails taxpayers about the status of refunds.

The email subject line may vary, but recent examples use the phrase “Automatic Income Tax Reminder” or “Electronic Tax Return Reminder.”

The emails have links that show an IRS.gov-like website with details pretending to be about the taxpayer’s refund, electronic return or tax account. The emails contain a “temporary password” or “one-time password” to “access” the files to submit the refund. But when taxpayers try to access these, it turns out to be a malicious file.

“The IRS does not send emails about your tax refund or sensitive financial information,” said IRS Commissioner Chuck Rettig. “This latest scheme is yet another reminder that tax scams are a year-round business for thieves. We urge you to be on-guard at all times.”

This new scam uses dozens of compromised websites and web addresses that pose as IRS.gov, making it a challenge to shut down. By infecting computers with malware, these imposters may gain control of the taxpayer’s computer or secretly download software that tracks every keystroke, eventually giving them passwords to sensitive accounts, such as financial accounts.

The IRS doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.

The IRS also doesn’t call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. See Report Phishing and Online Scams for more details.

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Automated IRS System Helps College-Bound Students with Financial Aid Application Process

College-bound students and their parents typically want to make every dollar and every minute of the college experience count including money spent on tuition and time spent on the college financial aid application process. The Internal Revenue Service is helping minimize the time spent on the completion of the Free Application for Federal Student Aid (FAFSA) form by automating access to federal tax returns with the IRS Data Retrieval Tool. This tool provides the opportunity for applicants to automatically transfer the required tax data onto the FAFSA form.

Here are some tips on using the IRS Data Retrieval Tool:

  • Benefits The IRS Data Retrieval tool is an easy and secure way to access and transfer tax return information directly onto the FAFSA form, saving time and improving accuracy. Also, the increased accuracy reduces the likelihood of being selected for verification by the school’s financial aid office.
  • Eligibility Criteria Taxpayers who wish to use the tool to complete their 2012 FAFSA form must:
    • have filed a 2011 tax return;
    • possess a valid Social Security Number;
    • have a Federal Student Aid PIN (individuals who don’t have a PIN, will be given the option to apply for one through the FAFSA application process);
      have not changed marital status since Dec. 31, 2011.
  • Exceptions If any of the following conditions apply to the student or parents, the IRS Data Retrieval Tool can not be used for the 2012 FAFSA application:
    • an amended tax return was filed for 2011;
    • no federal tax return for 2011 has been filed ;
    • the federal tax filing status on the 2011 return is married filing separately;
      a Puerto Rican or other foreign tax return has been filed.
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IRS Announces More Flexible Offer-in-Compromise Terms

The Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.

“This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” said IRS Commissioner Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”

This announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

In certain circumstances, the changes announced today include:

  • Revising the calculation for the taxpayer’s future income.
  • Allowing taxpayers to repay their student loans.
  • Allowing taxpayers to pay state and local delinquent taxes.
  • Expanding the Allowable Living Expense allowance category and amount.

In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses

The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.

The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

This is another in a series of steps to help struggling taxpayers under the Fresh Start initiative.

In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made changes to lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. And, earlier this year, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.

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