IRS Cryptocurrency Audit: How to Defend the Examination

Cryptocurrency examinations create problems that ordinary IRS audits often do not. A taxpayer may have thousands of transactions across several exchanges and wallets, incomplete cost-basis records, transfers misclassified as sales, staking income, DeFi activity, and years of records that do not line up neatly with an information return. For cryptocurrency tax controversy representation, Chase Counsel accepts selected digital-asset disputes.

The reporting environment has also changed. For transactions subject to broker reporting, Form 1099-DA gross-proceeds reporting began with dispositions effected on or after January 1, 2025. Mandatory basis reporting generally begins with sales after 2025 only for digital assets that qualify as covered securities. The result is a recurring asymmetry: the IRS may receive reliable proceeds information without receiving the basis needed to compute the taxpayer's actual gain.

Form 1099-DA Does Not Eliminate the Basis Problem

For tax year 2025, most Forms 1099-DA report gross proceeds without basis. The IRS has expressly told taxpayers that they may have to calculate basis themselves to determine gain or loss.

Authority: IRS Tax Tip 2026-07, Reminders for taxpayers about digital assets

For sales after 2025, mandatory basis reporting generally applies only to covered digital assets. Under the 2026 Form 1099-DA instructions, a digital asset generally is covered only if it was acquired after 2025 in an account for which the broker provided custodial services and remained in that account until the broker effected the disposition. Assets acquired before 2026, assets transferred into the broker, and assets the broker did not custody when acquired are generally noncovered. A broker may voluntarily report basis for noncovered assets, but it is not generally required to do so.

Authority: 2026 Instructions for Form 1099-DA

That distinction matters in a controversy. A Form 1099-DA can establish what the broker reported as proceeds without establishing what the taxpayer paid for the asset years earlier. The defense often turns on reconstructing that missing history.

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A Crypto Dispute May Begin with a CP2000 Notice

The first IRS contact may be an Automated Underreporter notice rather than a traditional examination. The IRS compares third-party information returns with the filed return and may issue a CP2000 proposing an adjustment when the information does not match. A CP2000 is a proposed change, not a bill, and the taxpayer may disagree and submit documentation.

Authority: IRS, Understanding Your CP2000 Series Notice

Form 1099-DA creates an obvious setting for mismatches because reported proceeds may appear without basis. Before agreeing to a proposed adjustment, reconcile the notice to the underlying transactions. A response may need a basis schedule, proof of wallet-to-wallet transfers, and records connecting exchange activity to the return.

If a dispute reaches court, an information return is not always enough by itself. Under I.R.C. § 6201(d), when a taxpayer reasonably disputes an item of income reported on a third-party information return and fully cooperates with the IRS, the government must produce reasonable and probative information concerning the deficiency in addition to the information return. The rule applies in a court proceeding; it does not eliminate the taxpayer's separate burden to establish basis and other facts needed to compute the correct tax.

Authority: I.R.C. § 6201(d)

Before IRS Contact: Consider a Qualified Amended Return

A taxpayer who discovers a cryptocurrency reporting error before the IRS begins an examination should determine promptly whether a qualified amended return remains available. Under Treas. Reg. § 1.6664-2(c), additional tax reported on a qualified amended return is generally treated as tax shown on the original return for purposes of computing the underpayment used in the accuracy-related penalty rules. A qualified amended return does not prevent the IRS from examining the year, collecting additional tax and interest, or asserting penalties that remain otherwise applicable.

The timing rules are stricter than simply filing before a personal audit notice arrives. A qualified amended return must be filed before the earliest of several regulatory cutoff events, including first IRS examination contact. Another cutoff can arise when the IRS serves a qualifying John Doe summons under § 7609(f) relating to an activity for which the taxpayer claimed a tax benefit on the return, directly or indirectly. Whether that cutoff applies therefore depends on both the summons and the position taken on the taxpayer's return. Because cryptocurrency compliance has repeatedly involved John Doe summonses to exchanges, the availability of this procedure should be evaluated before assuming the correction window remains open.

Authority: Treas. Reg. § 1.6664-2(c)(2)-(3)

The Tax Rules Begin with Property, Not Currency

The IRS treats cryptocurrency and other digital assets as property for federal income tax purposes. Selling cryptocurrency for dollars is a disposition. Trading one digital asset for another generally is also a disposition. Using digital assets to buy goods or services can produce gain or loss. Digital assets received for services can generate ordinary income, and mining or staking can create income before the assets are later sold.

Authority: Notice 2014-21, 2014-16 I.R.B. 938; Rev. Rul. 2023-14, 2023-33 I.R.B. 484

A cryptocurrency controversy should therefore be broken into discrete questions rather than treated as one large spreadsheet problem:

• Which transactions were taxable dispositions and which were transfers?
• What basis and holding period apply to each material disposition?
• Were staking, mining, rewards, airdrops, or compensation included in income when required?
• Does business or self-employment tax apply?
• Was the digital-asset question on the return answered correctly?
• Do penalties, fraud issues, or criminal-tax concerns change the way the case should be handled?

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Hard Forks Remain an Unsettled Area

Revenue Ruling 2019-24 provides that a taxpayer does not recognize gross income from a hard fork if the taxpayer does not receive units of a new cryptocurrency. When a hard fork is followed by receipt of new cryptocurrency over which the taxpayer has dominion and control, however, the IRS treats the fair market value of the new units as ordinary income.

That position is being tested in Rogovy v. Commissioner, Docket No. 17513-24. The IRS determined substantial deficiencies arising in part from nine Bitcoin hard forks in 2017 and 2018. The taxpayers contend that they did not have a taxable accession to wealth because, among other things, they did not take the technical steps necessary to access several of the forked assets and lacked practical dominion over them. In a March 18, 2026 order, Judge Ronald L. Buch denied partial summary judgment because material factual questions remained. The case remained pending after the parties submitted opening briefs in July and August 2026.

The eventual decision may clarify when the existence of forked tokens becomes taxable income, particularly where the taxpayer has theoretical blockchain entitlement but limited practical ability to access or control the new assets.

Authority: Rev. Rul. 2019-24; Rogovy v. Commissioner, Docket No. 17513-24.

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Start with the Information the IRS Already Has

Before responding substantively, determine what appears to have triggered the contact. The government may possess a Form 1099-DA, an earlier information return, exchange records obtained by summons, information supplied by another taxpayer, or data developed in another examination or investigation. That evidence may show that a transaction occurred. It does not necessarily establish its tax character or the taxpayer's basis.

Exchange records are platform-specific. They may show assets arriving at or leaving an exchange without establishing what happened before arrival or after withdrawal. A defensible response starts with a transaction-level reconciliation among the taxpayer's exchange records, blockchain history, bank records, prior returns, and the information apparently available to the IRS.

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Build the Transaction Record Before Responding

Sending isolated exchange statements before understanding how the transactions fit together is usually a poor way to begin. Build a unified ledger first. Depending on the activity, that work may require:

• Exchange histories and downloadable account records.
• Wallet addresses and transaction hashes.
• Blockchain records tracing transfers between wallets.
• Bank records showing fiat deposits and withdrawals.
• Forms 1099-DA and other information returns.
• Records from closed, merged, or inaccessible platforms.
• DeFi and self-hosted wallet records.
• Staking, mining, reward, compensation, gift, and inheritance records.

The reconstruction should identify both adverse and favorable adjustments. It may reveal omitted gains, but it can also reveal duplicated taxable events, unclaimed losses, incorrect basis, and transaction costs that reduce the correct liability.

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Wallet Transfers Can Create False Gain if They Are Not Traced

A transfer between wallets, accounts, or addresses owned by the same taxpayer is a nontaxable event. The record should nevertheless connect the sending and receiving wallets so the IRS can see that ownership did not change.

Authority: IRS Digital Asset FAQ 81

Transaction fees require separate analysis. If digital assets are used or withheld to pay for transaction services, the taxpayer has disposed of those assets and may recognize gain or loss. The IRS states that rule in FAQ 97. Separately, FAQ 53 defines "digital asset transaction costs," while FAQs 52, 55, and 56 address how qualifying costs can affect amount realized or basis in particular purchase and sale transactions. Fees paid merely to transfer assets between the taxpayer's own wallets are not treated as "digital asset transaction costs" under FAQ 53, even though the digital assets used to pay the transfer service may themselves be disposed of under FAQ 97.

Authority: IRS Digital Asset FAQs 52-56, 81, and 97

Basis Is Often the Central Issue

If a taxpayer bought digital assets for $400,000 and later sold them for $450,000, the gain is generally $50,000 before applicable transaction costs and other adjustments, not $450,000 of reported gross proceeds.

Older assets may have moved through several platforms and wallets before disposition. If the broker reporting the sale never possessed the acquisition information, the taxpayer may need to reconstruct basis from exchange records, bank transfers, wallet history, blockchain data, prior returns, purchase confirmations, and other credible evidence. Missing basis on an information return is not the same thing as zero basis.

Reconstruction matters because the taxpayer ordinarily bears the burden of substantiating basis. If the taxpayer cannot establish basis with credible evidence, the IRS and a court may determine gain using a zero basis. I.R.C. § 7491(a) can shift the burden of proof on a factual issue to the government, but only if the taxpayer introduces credible evidence and satisfies the statute's substantiation, recordkeeping, and cooperation requirements.

Authority: I.R.C. § 7491(a)

Exact records are preferable, but their absence does not invariably require a zero basis. The Tax Court has recognized that Cohan principles may be used to estimate basis when the record provides a reasonable evidentiary foundation. See Illinois Tool Works Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2018-121, slip op. at 72-73; Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930). But Cohan cannot substitute for the taxpayer's burden of proof. Where the evidence does not permit a reasonable estimate, the court may determine basis to be zero. See Coloman v. Commissioner, 540 F.2d 427, 431-32 (9th Cir. 1976).

Authorities: Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930); Illinois Tool Works Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2018-121, slip op. at 72-73; Coloman v. Commissioner, 540 F.2d 427, 431-32 (9th Cir. 1976)

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Favorable Adjustments: Losses and Wash-Sale Corrections

Reconstruction can identify favorable items as well as omitted income. A theft loss connected with a transaction entered into for profit may be deductible under I.R.C. § 165(c)(2), depending on basis, the year the loss is sustained or discovered, and the taxpayer's reasonable prospects for recovery. IRS Chief Counsel Advice 202511015 applied that framework to several scams, including a cryptocurrency investment scam. Personal casualty and theft losses are subject to the separate limitations in § 165(h)(5), as amended. Losses arising from exchange insolvency, worthlessness, or business failure require separate characterization and should not automatically be treated as theft losses.

Authorities: I.R.C. § 165; CCA 202511015

The wash-sale rule is another potential reconstruction issue. I.R.C. § 1091 applies to stock or securities, not to a digital asset merely because it is digital. A cryptocurrency position that is not stock or a security therefore generally falls outside § 1091, while tokenized securities or other digital assets that themselves qualify as stock or securities require separate analysis.

Authority: I.R.C. § 1091

Specific Identification: 2025 Had Transitional Rules

When units of the same digital asset were acquired at different times or prices, lot identification can change the tax result. For broker-custodied units sold, disposed of, or transferred during 2025, Notice 2025-7 provided temporary relief. An eligible taxpayer could make an adequate identification through contemporaneous books and records, including a qualifying standing order, without communicating that identification to the broker. Current IRS FAQ 84 describes that 2025 relief. For transactions after December 31, 2025, broker-held units are subject to the post-transition identification rules described in FAQ 85.

Authority: Notice 2025-7, 2025-5 I.R.B. 524; IRS Digital Asset FAQs 84 and 85

The rules are different for assets not held in the custody of a broker. Under Treas. Reg. § 1.1012-1(j), a taxpayer using an unhosted wallet or other nonbroker wallet must make any specific identification in the taxpayer's books and records no later than the date and time of the sale, disposition, or transfer. If no valid specific identification is made, FIFO applies within that wallet, based on the acquisition dates of the units rather than the dates on which they were moved into the wallet.

Authority: Treas. Reg. § 1.1012-1(j)

Revenue Procedure 2024-28 separately created a transitional safe harbor for allocating unused basis among wallets or accounts as of January 1, 2025. The safe harbor was conditional and required taxpayers to follow its allocation and recordkeeping rules within the prescribed transition period. A taxpayer should not assume that a later reconstruction qualifies for the safe harbor merely because it produces a plausible wallet-level allocation.

Authority: Rev. Proc. 2024-28, 2024-31 I.R.B. 326

DeFi Creates a Different Information-Reporting Problem

Congress used the Congressional Review Act in 2025 to disapprove Treasury's rule imposing broker-reporting obligations on certain noncustodial DeFi participants. Treasury and the IRS then removed T.D. 10021 from the regulations, effective July 11, 2025.

Authority: Revocation of T.D. 10021, 2025-31 I.R.B. 264

The IRS has also stated that DeFi brokers and some foreign brokers are not required to file Form 1099-DA. The absence of a Form 1099-DA does not eliminate the taxpayer's reporting obligation. It means the audit record may depend more heavily on wallet data, protocol records, and the taxpayer's own reconstruction.

Authority: IRS Fact Sheet FS-2025-06

The reporting exception should not be confused with a substantive nonrecognition rule. Notice 2024-57 expressly states that its reporting relief does not determine whether identified transactions are sales. Wrapping and unwrapping, liquidity-provider transactions, staking arrangements, and transactions described by market participants as digital-asset lending therefore can present characterization issues apart from whether a Form 1099-DA is issued.

Authority: Notice 2024-57, 2024-29 I.R.B. 67

Foreign Platforms Can Create Separate Reporting Problems

A foreign cryptocurrency platform can create reporting questions apart from whether the platform issues Form 1099-DA. Form 8938 may be required when a taxpayer holds specified foreign financial assets exceeding the applicable thresholds; whether a particular foreign-platform relationship is a reportable asset depends on the character of the account or interest and the governing Form 8938 rules.

FBAR treatment is different. FinCEN Notice 2020-2 states that an account holding only virtual currency is not currently reportable on the FBAR solely because it holds virtual currency, unless the account otherwise contains reportable assets. FinCEN has stated that it intends to amend the regulations. Foreign accounts that also hold fiat currency or other reportable financial assets require separate analysis.

Failure to provide information required under I.R.C. § 6038D can also affect the assessment period. Section 6501(c)(8) generally keeps the period open for tax related to the information-reporting failure until three years after the required information is furnished, subject to the statute's reasonable-cause limitation.

Authorities: IRS, Form 8938 and Instructions; FinCEN Notice 2020-2; I.R.C. § 6501(c)(8)

Staking Can Produce Income Before a Later Sale

Revenue Ruling 2023-14 concludes that a cash-method taxpayer recognizes income when staking rewards are received and the taxpayer has dominion and control over them. The amount included is their fair market value at that time.

Authority: Rev. Rul. 2023-14, 2023-33 I.R.B. 484

In Paschall v. Commissioner, T.C. Memo. 2026-46, the Tax Court held that Cardano staking rewards credited to the taxpayers' account and subject to their dominion and control were includable in gross income when received. A later disposition of the rewarded assets can create a second tax event, with gain or loss measured from the asset's basis after the income inclusion.

Paschall is a Tax Court memorandum opinion rather than a precedential division opinion. It therefore does not bind the Tax Court in later cases, although it is significant authority on how the court has applied the dominion-and-control analysis to staking rewards.

Authority: Paschall v. Commissioner, T.C. Memo. 2026-46 (June 4, 2026) - U.S. Tax Court opinion search

Responding to Information Document Requests

Cryptocurrency examinations can generate broad Information Document Requests for exchange statements, wallet information, bank records, spreadsheets, and explanations of particular transfers. The production should be complete, but it should also be intelligible. Thousands of pages of unexplained blockchain data can obscure rather than resolve the issue.

Where the IRS believes a transfer was a sale, a useful reconciliation identifies the transaction hash, originating wallet, destination wallet, ownership of both wallets, amount transferred, and later disposition. Give the examiner a record that can be followed.

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Forensic Specialists and Privilege

Large crypto examinations may require a forensic accountant or blockchain analyst. If counsel needs that specialist to understand the facts and render legal advice, the engagement should be structured before the specialist begins the legal-support work.

Under United States v. Kovel, communications involving a nonlawyer specialist can fall within the attorney-client privilege when the specialist is assisting counsel in providing legal advice. But ordinary accounting, return-preparation, or consulting work does not become privileged merely because counsel retained the professional. Where privilege is important, using a forensic specialist separate from the taxpayer's existing return preparer can make the roles easier to distinguish; prior return-preparation work and prior communications do not become privileged retroactively.

Authority: United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)

The separate privilege in I.R.C. § 7525 is narrower and applies only in noncriminal tax matters before the IRS and noncriminal federal tax proceedings. Potential criminal exposure is therefore a reason to address privilege and work-product issues before assigning technical reconstruction.

Authority: I.R.C. § 7525

The Taxpayer Interview

A taxpayer should not guess about transactions that occurred years earlier, adopt the examiner's terminology without understanding it, or speculate about records that have not been reconstructed. The distinction between correcting an erroneous return and making a false statement during an examination is fundamental.

In a civil examination, I.R.C. § 7521 provides important interview protections. With advance notice, the taxpayer may audio-record an in-person interview. A taxpayer who clearly requests consultation with an authorized representative generally is entitled to have the interview suspended for that purpose, and a properly authorized representative may conduct the interview without the taxpayer's personal attendance unless the IRS issues an administrative summons. Section 7521 does not apply to criminal investigations.

Authority: I.R.C. § 7521

If the facts include substantial unreported activity, concealed wallets, fabricated records, nominees, destruction of records, or other evidence suggesting willfulness, the case should be evaluated for criminal-tax exposure before substantive communications continue.

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Third-Party Contacts and Exchange Summonses

Exchange records can also reach the IRS through third-party contacts and summonses. I.R.C. § 7602(c) generally requires advance notice that the IRS intends to contact third parties during a specified period, subject to statutory exceptions. If the IRS serves a third-party summons covered by I.R.C. § 7609, a person entitled to notice generally may petition to quash the summons within 20 days after notice is given. Important exceptions apply, including to certain summonses issued in aid of collection and John Doe summonses, so the notice and the statute must be reviewed immediately rather than assuming a right to quash exists.

Authorities: I.R.C. § 7602(c); I.R.C. § 7609

Penalties Are a Separate Controversy Issue

Even when an underlying adjustment is correct, the penalty may not be. I.R.C. § 6662 generally imposes a 20 percent accuracy-related penalty on portions of an underpayment attributable to specified grounds, including negligence and substantial understatement. For an individual, a substantial understatement generally exists when the understatement exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000, subject to special statutory rules. Reasonable cause and good faith can provide relief in appropriate cases, but software use or professional preparation does not establish reasonable cause if the taxpayer supplied incomplete or inaccurate information.

Authority: IRS, Penalty relief for reasonable cause

Counsel should also test whether a proposed penalty satisfies I.R.C. § 6751(b) and Treas. Reg. § 301.6751(b)-1, but the current regulation permits supervisory approval later than older Tax Court cases sometimes required. For penalties subject to pre-assessment Tax Court review, written approval generally is timely if obtained on or before the date the notice creating Tax Court jurisdiction is mailed. For penalties not subject to pre-assessment Tax Court review, approval generally may occur before assessment. The regulation also excludes specified penalties and penalties automatically calculated through electronic means, although a penalty can cease to qualify as automatically calculated if an IRS employee considers a taxpayer's challenge before assessment or a deficiency notice.

Authority: Treas. Reg. § 301.6751(b)-1

At the more serious end of the civil spectrum, I.R.C. § 6663 imposes a 75 percent civil fraud penalty on the portion of an underpayment attributable to fraud. Civil fraud is distinct from both an ordinary accuracy-related penalty and a criminal referral. In Tax Court, the IRS bears the burden of proving fraud, and Tax Court Rule 142(b) requires clear and convincing evidence.

Authorities: I.R.C. § 6663; I.R.C. § 7454(a); Tax Court Rule 142(b)

Statute of Limitations and Form 872

The ordinary assessment period is generally three years. Under I.R.C. § 6501(e), the period can extend to six years when the taxpayer omits more than 25 percent of gross income stated on the return. For a disposition of investment property, gross income for this purpose generally means gain rather than gross proceeds; for a trade or business selling goods or services, § 6501(e)(1)(B)(i) uses gross receipts before reduction by cost of goods sold. For purposes of the six-year rule, an understatement of gross income caused by an overstatement of unrecovered cost or other basis is treated as an omission from gross income. I.R.C. § 6501(e)(1)(B)(ii).

Authority: I.R.C. § 6501, including § 6501(e)(1)(B)(ii)

Section 6501(e)(1)(B)(iii) also contains an adequate-disclosure exception for certain omitted amounts disclosed on the return or an attached statement in a manner sufficient to apprise the IRS of the item's nature and amount. That exception expressly does not apply to an omission resulting from an overstatement of unrecovered cost or other basis. In a basis-driven cryptocurrency dispute, disclosure of gross proceeds therefore does not by itself eliminate the potential six-year period.

Authority: I.R.C. § 6501(e)(1)(B)(iii)

Other provisions can leave the assessment period open indefinitely. Section 6501(c)(1) applies to a false or fraudulent return filed with intent to evade tax, and § 6501(c)(3) applies when no return is filed.

Authority: I.R.C. § 6501(c)(1), (3)

As the assessment deadline approaches, the IRS may ask the taxpayer to extend the period. Form 872 is a fixed-date consent. Form 872-A is an open-ended consent that generally remains in effect until a terminating event, including 90 days after the IRS receives a taxpayer's Form 872-T or 90 days after the IRS mails Form 872-T. Do not sign either form simply because the examiner requests it. Determine what issues remain open, why additional time is requested, how much time is sought, and whether a restricted consent is appropriate. The IRS recognizes the taxpayer's right to refuse an extension or negotiate its scope.

Authority: IRS, Extension of Assessment Statute of Limitations by Consent

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The Digital-Asset Question on Form 1040 Still Matters

For tax year 2025, individual taxpayers had to answer the digital-asset question on Form 1040. Holding digital assets, buying them with U.S. dollars, or moving them between the taxpayer's own wallets does not by itself require a "Yes" answer. Transactions involving specified receipts, sales, exchanges, or other dispositions can require a different answer.

Authority: IRS, Determine how to answer the digital asset question

An incorrect answer does not establish the amount of a deficiency. In a case involving substantial unreported activity, however, the return and the taxpayer's explanation can become part of the IRS's analysis of negligence, intent, or willfulness.

Form 1040 is signed under penalties of perjury. A knowingly false answer to the digital-asset question can therefore become relevant to a criminal-tax analysis when the answer is material and the other elements of I.R.C. § 7206(1) are satisfied. An incorrect checkbox, standing alone, does not establish a § 7206(1) offense.

Authority: I.R.C. § 7206(1)

When Criminal Exposure Changes the Strategy

Most digital-asset reporting errors remain civil matters. A different analysis is required when the facts suggest deliberate concealment, false statements, fabricated records, nominees, destruction of records, or other intentional conduct.

In United States v. Ahlgren, No. 1:24-cr-00031-RP (W.D. Tex.), Ahlgren pleaded guilty to filing a false 2017 federal income tax return after substantially overstating Bitcoin basis and failing to report other cryptocurrency sales. DOJ also described his use of multiple wallets, cryptocurrency mixers, and cash transactions to conceal activity. He was sentenced to two years in prison and ordered to pay more than $1 million in restitution. The case illustrates the distinction between a difficult basis reconstruction and affirmative conduct intended to conceal taxable gain.

The IRS Criminal Investigation Voluntary Disclosure Practice is designed for taxpayers whose prior noncompliance was willful and who face potential criminal exposure. Timing is strict. The IRS states that a disclosure is timely only if received before the IRS has begun a civil examination or criminal investigation, before it receives certain third-party information alerting it to the noncompliance, and before it acquires information directly related to the noncompliance from a criminal enforcement action. A taxpayer who has already received an examination notice should not assume the VDP remains available.

Authority: IRS Criminal Investigation Voluntary Disclosure Practice

Appeals and Judicial Review

If the taxpayer disputes proposed adjustments, administrative review may be available through the IRS Independent Office of Appeals. If the dispute proceeds to a statutory notice of deficiency, the taxpayer generally may petition the United States Tax Court without first paying the asserted deficiency.

Develop the factual record during Examination rather than saving critical evidence for Appeals. The Independent Office of Appeals may return or refer new information to the originating IRS function for review, which can delay resolution and weaken the practical benefit of Appeals as an independent settlement forum.

Authority: IRS, What to expect from the Independent Office of Appeals

Treat the petition deadline as absolute. Section 6213(a) generally provides 90 days after the notice of deficiency is mailed, or 150 days if the notice is addressed to a person outside the United States. The Tax Court continues to regard the deadline as jurisdictional under Hallmark Research Collective. The Second Circuit in Buller, the Third Circuit in Culp, the Sixth Circuit in Oquendo, and the Eighth Circuit in Maniktala have held that the deadline is nonjurisdictional and may be subject to equitable tolling in appropriate circumstances. The First Circuit in Kyick Holdings also held the deadline nonjurisdictional but concluded that it is mandatory and not subject to equitable tolling. The governing rule can therefore depend on appellate venue. Section 6213(a) separately provides that a petition filed on or before the last filing date stated by the IRS on the notice is treated as timely.

Authority: I.R.C. § 6213(a)

Cases: Hallmark Research Collective v. Commissioner, 159 T.C. 126 (2022); Buller v. Commissioner, No. 24-1557 (2d Cir. Aug. 14, 2025); Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023); Oquendo v. Commissioner, No. 24-1205 (6th Cir. Aug. 25, 2025); Maniktala v. Commissioner, No. 25-1366 (8th Cir. Aug. 11, 2026); Kyick Holdings, LLC v. Commissioner, No. 25-1429 (1st Cir. Aug. 17, 2026)

Tax Court Is Not the Only Judicial Forum

A deficiency case involving $50,000 or less for a taxable year may qualify for the Tax Court's simplified small-tax-case procedure. The procedures are less formal, but an S-case decision cannot be appealed. A taxpayer who qualifies is not required to elect the small-case procedure.

A taxpayer also can pursue a refund route rather than deficiency litigation. In general, the taxpayer files a timely administrative claim for refund and, after disallowance or six months without IRS action, may sue in a U.S. district court or the U.S. Court of Federal Claims. Under Flora, an income-tax taxpayer generally must fully pay the assessed tax before bringing a refund action, although divisible taxes and penalties can be subject to different rules.

A refund suit also places the amount of the taxpayer's overpayment in issue. Under Lewis v. Reynolds, the government may raise other issues for the same tax period to reduce or defeat the claimed refund even where a new assessment on those issues would otherwise be time-barred. Forum selection can affect procedure, appellate law, cost, and litigation strategy.

Authorities: U.S. Tax Court, Case Procedure Information; IRS Publication 556; Flora v. United States, 362 U.S. 145 (1960); Lewis v. Reynolds, 284 U.S. 281 (1932)

A Practical Defense Sequence

For a substantial cryptocurrency examination or CP2000 dispute, the work should proceed in a disciplined order:

1. Preserve the records. Download exchange histories, wallet data, account statements, and information returns before platforms change or records disappear.
2. Map the transactions. Separate taxable dispositions from transfers and identify every relevant wallet, exchange, and tax year.
3. Reconstruct basis and holding periods. Apply the identification rules that governed the transaction year, including the 2025 transition rules and the separate wallet-by-wallet rules for assets not held by a broker.
4. Reconcile third-party reporting. Tie Forms 1099-DA and other information returns to the reconstructed ledger instead of treating the information return as the tax computation.
5. Identify ordinary-income events and favorable adjustments. Review staking, mining, rewards, compensation, losses, transaction costs, and duplicated events.
6. Analyze procedure before conceding anything. Review burdens of proof, penalties, the assessment statute, Forms 872 and 872-A, interview and summons rights, privilege, and any fraud or criminal-tax concerns.
7. Present a coherent record. Give the IRS a reconciliation and supporting documents that allow the examiner, Appeals officer, or court to follow the transaction history.

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Frequently Asked Questions

Is transferring cryptocurrency between my own wallets taxable?

The transfer itself is not taxable when both wallets belong to the same taxpayer. Digital assets used or withheld to pay transaction services can create a separate disposition, so the fee leg still must be analyzed.

What if Form 1099-DA shows proceeds but no basis?

Reconstruct the basis. That is common for 2025 Forms 1099-DA and can continue with noncovered assets after 2025. Missing basis on the form does not convert gross proceeds into gain, but the taxpayer still needs credible records or other evidence to establish basis. Where exact records no longer exist, a court may estimate only if the evidence provides a reasonable foundation for doing so; the court is not required to estimate.

Can the IRS examine crypto transactions from more than three years ago?

Yes. Section 6501 contains several longer periods and exceptions. A basis overstatement that understates gross income is treated as an omission for purposes of the six-year rule, and the adequate-disclosure exception does not apply to that kind of basis overstatement. Fraudulent returns and failure to file can leave the assessment period open indefinitely.

Should I speak with the examiner before reconstructing the transactions?

Understand the transaction history first. An interview conducted before the records are reconciled increases the risk of inaccurate explanations, especially where penalties, fraud, or criminal exposure may be in issue.

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Facing an IRS Cryptocurrency Audit or CP2000 Notice?

A digital-asset tax controversy can turn on facts the information return does not show: historical basis, wallet ownership, lot identification, transaction fees, staking receipts, and the procedural posture of the examination. Those issues should be resolved before the taxpayer agrees to a proposed adjustment or gives a substantive explanation that cannot easily be taken back.

Taxpayers facing a substantial cryptocurrency examination, CP2000 notice, or potential criminal-tax issue should consider obtaining federal tax controversy counsel before responding to the IRS.

Selected Authorities and IRS Guidance

• Notice 2014-21, 2014-16 I.R.B. 938
• Rev. Rul. 2019-24
• Rev. Rul. 2023-14, 2023-33 I.R.B. 484
• Rev. Proc. 2024-28, 2024-31 I.R.B. 326
• Notice 2025-7, 2025-5 I.R.B. 524
• Revocation of T.D. 10021, 2025-31 I.R.B. 264
• IRS Tax Tip 2026-07, Reminders for taxpayers about digital assets
• 2026 Instructions for Form 1099-DA
• IRS Frequently Asked Questions on Digital Asset Transactions
• IRS Fact Sheet FS-2025-06
• IRS Understanding Your CP2000 Series Notice
• I.R.C. § 6201(d)
• I.R.C. § 7491(a)
• Treas. Reg. § 1.1012-1(j)
• Notice 2024-57, 2024-29 I.R.B. 67
• Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930)
• Coloman v. Commissioner, 540 F.2d 427, 431-32 (9th Cir. 1976)
• Illinois Tool Works Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2018-121, slip op. at 72-73
• I.R.C. § 165
• CCA 202511015
• I.R.C. § 1091
• IRS, Form 8938 and Instructions
• FinCEN Notice 2020-2
• I.R.C. § 6501(c)(8)
• Paschall v. Commissioner, T.C. Memo. 2026-46 (June 4, 2026) - Tax Court opinion search
• Rogovy v. Commissioner, Docket No. 17513-24
• United States v. Ahlgren, No. 1:24-cr-00031-RP (W.D. Tex.)
• I.R.C. § 6213(a)
• I.R.C. § 6501
• I.R.C. § 6662
• I.R.C. § 6663
• I.R.C. § 7454(a)
• Tax Court Rule 142(b)
• I.R.C. § 6751(b)
• Treas. Reg. § 301.6751(b)-1
• Treas. Reg. § 1.6664-2(c)(2)-(3)
• I.R.C. § 7525
• I.R.C. § 7206(1)
• I.R.C. § 7521
• I.R.C. § 7602(c)
• I.R.C. § 7609
• United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)
• Hallmark Research Collective v. Commissioner, 159 T.C. 126 (2022)
• Buller v. Commissioner, No. 24-1557 (2d Cir. Aug. 14, 2025)
• Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023)
• Oquendo v. Commissioner, No. 24-1205 (6th Cir. Aug. 25, 2025)
• Maniktala v. Commissioner, No. 25-1366 (8th Cir. Aug. 11, 2026)
• Kyick Holdings, LLC v. Commissioner, No. 25-1429 (1st Cir. Aug. 17, 2026)
• IRS Criminal Investigation Voluntary Disclosure Practice
• IRS, What to expect from the Independent Office of Appeals
• IRS, Extension of Assessment Statute of Limitations by Consent
• U.S. Tax Court, Case Procedure Information
• IRS Publication 556

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This article provides general information concerning federal tax law and procedure. It does not constitute legal advice and does not create an attorney-client relationship. Tax consequences depend on the facts and law applicable to a particular taxpayer and tax year.