IRS Issues Tax Return Checklist With Key Warning About The Dreaded Notice Letter ZeroHedge

The Internal Revenue Service (IRS) has issued a checklist to make tax preparation smoother in 2023, which features a key cautionary tip on how to avoid getting a dreaded notice or bill from the tax man.

The IRS’ list of “key points to keep in mind” when preparing to file a 2022 tax return, issued on Jan. 31, includes recommendations like choosing a tax professional carefully and filing electronically with direct deposit to receive refunds quickly.

The list also includes a warning to taxpayers that they must report all types of income on their tax returns.

“This is important to avoid receiving a notice or a bill from the IRS,” the agency stated.

The IRS singled out several sources of income for taxpayers not to forget to include in their filings, including sales from goods created and sold on online platforms; investment income; money from part-time or seasonal work, self-employment, or other business activities; and services provided via mobile apps.

It appears that the proliferation of digital assets like cryptocurrencies and tokens has come into sharp focus at the IRS, prompting the agency to highlight the fact that these are considered taxable property and failure to report them can result in penalties and interest–and a potentially upsetting IRS notice letter.

Focus on Digital Asset Reporting

The IRS recently issued a cautionary reminder that taxpayers must report all digital asset-related income and answer a new digital asset question on their 2022 federal income tax returns.

A key change on tax forms this year is that the IRS has replaced the term “virtual currency” with “digital assets,” in addition to some other modifications to the wording.

The “Yes” or “No” question, which was expanded and revised this year to update terminology, reads as follows:

“At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

The question appears at the top of tax forms 1040, Individual Income Tax Return, 1040-SR, U.S. Tax Return for Seniors, and 1040-NR, U.S. Nonresident Alien Income Tax Return.

“All taxpayers must answer the question regardless of whether they engaged in any transactions involving digital assets,” the agency cautioned.

It is a legal requirement to accurately report all income, including income from digital assets, on federal income tax returns. Failure to do so could result in non-compliance with tax laws and possible penalties.

Taxpayers need to check the “Yes” box if they:

Received digital assets as payment for property or services provided; Transferred digital assets for free (without receiving any consideration) as a bona fide gift; Received digital assets resulting from a reward or award; Received new digital assets resulting from mining, staking, and similar activities; Received digital assets resulting from a hard fork (a branching of a cryptocurrency’s blockchain that splits a single cryptocurrency into two); Disposed of digital assets in exchange for property or services; Disposed of a digital asset in exchange or trade for another digital asset; Sold a digital asset; or Otherwise disposed of any other financial interest in a digital asset.

Those who tick the “Yes” box must also report all income related to their digital asset transactions on relevant forms. For instance, an investor who sold cryptocurrency during 2022 would use Form 8949, Sales and other Dispositions of Capital Assets.

Taxpayers should check the “No” box if they merely owned digital assets, but didn’t engage in any transactions involving them in 2022.

They should also tick “No” if they merely transferred digital assets from one wallet or account they own or control to another one that they own or control, and if they bought digital assets using real currency like the U.S. dollar.

IRS Notice

Besides recommending that taxpayers accurately report all income, tax professionals typically urge people to double-check their returns to ensure that the information on them is accurate and matches documentation like W-2 forms if they want to avoid getting a letter from the tax man.

But if for some reason the IRS does send a letter or notice to taxpayers, there are a number of things they should keep in mind.

For starters, when an IRS letter or notice arrives, taxpayers should read it carefully and take appropriate action, such as making a payment or disputing the notice if they disagree with it.

They should keep the letter or notice for their records and watch for scams, as the IRS will not contact taxpayers through social media or text message.

The first contact from the IRS is usually by mail, and taxpayers can view their tax account information on IRS.gov if unsure of the money owed.

“Getting mail from the IRS is not a cause for panic, but it should not be ignored either,” the IRS said in a recent “next steps” list of what to do if someone receives an IRS notice or letter.

Other ‘Key Points’ for Smooth Filing

In its tax-filing checklist, the IRS also recommends that taxpayers gather all necessary documents and records before preparing their tax returns. This includes Social Security numbers, bank information, income forms such as W-2s, 1099s, and 1098s, and any IRS letters regarding tax credits or deductions.

The IRS recommends electronic filing with direct deposit to speed up the refund process.

The agency advises that eligible taxpayers can access free tax-preparation resources through IRS Free File or volunteer programs such as Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE).

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