More than 10,000 cryptocurrency investors face a decision as they open letters from the Internal Revenue Service informing them that they may owe taxes on their digital holdings.

Should they quickly file amended tax returns correcting prior omissions or mistakes and hope that’s enough to avert an audit? Should big-time dodgers come forward and acknowledge their actions -- all while risking that the IRS might audit them or charge them with criminal tax evasion?

What about investors who didn’t get a letter, but think they might have failed to report some cryptocurrency investments? Should they quickly sneak in an amended or delinquent return?

“For 90% of people it’s not worth the time or the effort to fight or hide from the IRS,” said James Creech, a tax lawyer in San Francisco. “Amend the returns, take the lumps, pay the tax and penalties and consider yourself lucky to have crypto gains instead of crypto losses.”

Eugene Aono, a spokesperson for BMEX bitcoin exchange, demonstrates usage of the company's Robocoin-branded automated teller machine (ATM) at The Pink Cow restaurant and bar in Tokyo, Japan, on Wednesday, June 18, 2014. Photographer: Yuriko Nakao/Bloomberg

The warning letters, which the IRS started sending in late July, represent a new front in the agency’s attempts to curb tax evasion involving virtual-currency transactions. The IRS has been slow to stay abreast of the evolving industry as it has exploded in size and value.

Top Priority

But cryptocurrency tax compliance is now a priority. IRS criminal chief Don Fort has described digital and virtual currencies as a “significant threat” to tax collection and said the agency will soon announce criminal tax evasion cases involving them. In 2017, the IRS won a lawsuit that required digital currency exchange Coinbase to hand over data on customers who bought or sold at least $20,000 in cryptocurrency during any year from 2013 to 2015.

It’s unclear how much in unpaid taxes is owed by crypto investors. The $11.1 billion collected from more than 56,000 Americans who voluntarily confessed to dodging taxes through offshore bank accounts over the previous decade “is one analogy, which I don’t think is a crazy one,” said Robert Wood, a tax lawyer in San Francisco.

The agency’s likely goal is to force crypto tax evaders into compliance rather than prosecute them, said Guinevere Moore, a tax litigator at Johnson Moore in Chicago. But future criminal cases could be levied against some of the 10,000 letter recipients.

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