Taxes are complex. There are times when one may make innocent tax mistakes and can be excused with no penalties. Willful and non-willful tax mistakes are quite different. Whenever penalties are involved, the non-willful is significantly lower than the willful. In a criminal tax case, the dichotomy can mean a difference between freedom or incarceration and innocence or guilt.
Nevertheless, penalties in civil cases can be quite severe and most tax cases are civil. Notably, to the US Internal Revenue Service (IRS) bad intent may not be considered bad at all if it was non-willful.
In the case of cryptocurrencies, the IRS has confirmed that it is increasing the penalties and tax brackets. It says that it will investigate both poor compliance and tax evasion. It is worth stating that any interaction with the IRS will normally involve some form of penalty.
In most cases, the IRS turns to threats of penalties to promote payments. However, the regulator pursues penalties with a vengeance in other cases. An excellent example is the case of offshore accounts that feature strong parallels to the crypto-tax compliance challenges. Both non-willful and willful failures to report these offshore accounts can be severely penalized.
The civil penalties for the proven non-willful violations range up to $10,000 per account yearly. On the other hand, if the IRS believes that the violation was willful, the penalty can go up to $100,000 of even 50% of the amount in the affected account. That applies to all civil cases that are imposed in the context of normal IRS audits including those that come via the mail.
If the IRS believes that the tax evasion was willful and demands big penalties, the affected individual can pay them or push back for a lenient outcome via the IRS Appeals Division. This Division is the best place where the taxpayers and the IRS settle these types of disputes.
However, sometimes stalemates arise with some courts stating that willfulness is a resolution to disobey the law. But one can be inferred by conduct with taxpayers advised to watch out for conduct that aims to hide.
Nonetheless, very few can avoid paying taxes knowingly. The IRS punishes for willful recklessness and blindness. The watchdog commonly refers to Section 6672 of the tax code, which involves payroll taxes. All employers must withhold taxes and instantly send the money to the IRS.
If no taxes are paid, Section 6672 allows the government collects it from directors, officers, and check-signers. Also, all ‘responsible’ persons who willfully fail to pay employment taxes are not spared.
Willful favors the government and taxpayers are readily put in that category if they should have known that there was a risk attached to withholding taxes. Also, those in a position to find out that withholding taxes is illegal but did not do so are categorized in the ‘willful’ bracket. The IRS often wins these payroll tax cases. Hence, willful means very little in this context.
IRS Squeezes Cryptocurrency
Over 10,000 crypto investors are now answering letters sent by the IRS over their digital assets investments. The agency gave them an option to pay the accrued penalties and fines then update tax forms to avoid auditing.
While the investors are involved in opening their letters from the IRS, one question still lingers. Will it be adequate to pay fines and make amendments to all their tax returns? The challenge is even greater for the larger investors since paying the fines could get them into the IRS’ radar. Furthermore, the agency may not just audit them but can also charge them with criminal tax evasion.
There are still large numbers of investors who may have invested in virtual currencies but are yet to receive a letter yet. They also should think about whether they can quickly make amendments to their tax returns or sneak away undetected.
According to one San Francisco lawyer, James Creech, it is not worth the effort or time involved in the hiding from the IRS or fighting with it for up to 90% of the people. He explained:
“Amend the returns, take the lumps, pay the tax and penalties and consider yourself lucky to have crypto gains instead of crypto losses.”
The United States Internal Revenue Service is currently trying to crack down more extensively on crypto tax evaders. Starting in July, the Agency has continuously sent letters to potential candidates to ensure that all taxes are paid accordingly.
Don Fort, the IRS criminal head stated that virtual currencies are a ‘major threat’ to tax collection. He confirmed that the Agency will work relentlessly to ensure that crypto tax compliance is adhered to accordingly. The IRS plans to announce criminal tax evasion cases that are related to cryptos.
What the Future Holds
For now, it may be too soon to determine how all this will work out. Possibly many taxpayers encountering willful penalties may end up working with compassionate IRS agents who will go for non-willful penalties. It all depends on the explanation the taxpayer gives and the type of behaviour involved since some of the cases appear reasonable.
Currently, the willfulness tax evasion net is growing rapidly as the government aims to increase its tax collection amounts. Thus, taxpayers need to have credible explanations to justify their misunderstanding or mistake in their particular circumstances to avoid hefty penalties.
Many people believe that IRS penalties are becoming harsher than before. On its part, the Agency states that the stringent measures are meant to encourage every individual to comply with all their tax payment obligations. Currently, the worst-hit area seems to be the offshore account arena.
Nowadays, the IRS has lots of documentation and information about offshore accounts almost everywhere. Thus, the government easily identify anyone who tries to evade taxes using such accounts. Also, it makes any small infraction riskier than most other tax non-compliance issues.
Nevertheless, if the IRS’ forceful drive for penalties continues, cases of strict liability for tax problems may arise. But for now, it is advisable to always act cautiously when tackling penalty notices and disputing penalty findings at all levels.