How the IRS learns about digital assets
The main individual income tax return now asks a direct question about digital assets, and an answer that conflicts with other information can draw attention. Exchanges and other brokers have begun issuing information returns reporting digital asset sales, which gives the IRS data it previously had to gather in other ways. For earlier years, the IRS has also used court-approved summonses to obtain customer records from exchanges. Some taxpayers first hear about it through an educational or compliance letter rather than an audit, and those letters vary: some simply encourage a review, while others ask for a signed response. Treating any of them as junk mail is a mistake, because the next step is usually less flexible.
Answering a letter versus an examination
A compliance letter is not the same as an examination, but what you say in response becomes part of your file. If your returns were correct, the response may simply explain that and attach support. If they were not, the question becomes how to correct them, which often means amended returns and a clear explanation of how the figures were computed. In a full examination, the examiner will usually ask for wallet addresses, exchange statements, and records of transfers between your own accounts, and may ask about activity you did not think was taxable, such as staking rewards or swaps from one token to another. Statements to the IRS should be accurate and complete, because knowingly false answers create a far larger problem than the original tax.
Sizing up exposure by year
We start by reading the letter or notice to see which years are involved and what information the IRS appears to have. Then we compare that with your returns and with the exchange and wallet records you can still obtain, including from platforms that have closed or changed hands. If income was left off a return, we look at whether the circumstances raise any willfulness concern, because that affects how a correction should be approached and whether a formal disclosure path is worth considering. Where the reports the IRS received are wrong, such as proceeds shown without cost basis, we work on documenting the real figures. The goal of the first meeting is a clear picture of exposure for each year and a plan for responding within the time the letter allows.
