An expanded reporting section and detailed instructions for reporting virtual currency are among the changes in a revised version of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, the IRS released Tuesday.
Taxpayers file the form to make a preclearance request for the IRS to determine their eligibility to use the voluntary disclosure practice, a set of procedures by which they may avoid criminal prosecution for willful violation of tax laws by full and timely disclosure to IRS Criminal Investigations. Voluntary disclosure also requires approved taxpayers to cooperate in determining their correct tax liability and to make good-faith arrangements with the IRS to pay their full tax liabilities plus any interest and applicable penalties.
A voluntary disclosure does not guarantee immunity from criminal prosecution, but it can result in the IRS's not recommending it. A disclosure must be made before the IRS has begun a civil examination or criminal investigation and before it has learned of tax noncompliance from a third party or acquired specific information through a search warrant, grand jury subpoena, or similar source.
The revised Form 14457, like the previous version, includes a checkbox in Part I, line 2, for "Virtual Currency Issues." However, the form now also features, in addition to a space for identifying financial accounts (line 12), a new "Schedule of virtual currency" as line 13. For each type of virtual currency, taxpayers must disclose its name, identifying number or other designation, date acquired, date disposed of, account holders, and whether it was held domestically or offshore.
The form's instructions warn that the term virtual currency "encompasses assets beyond what many define as virtual currencies," and they refer taxpayers to the IRS's online Frequently Asked Questions on Virtual Currency Transactions for more information. The IRS generally uses the term virtual currency to mean a digital representation of value that functions as a unit of account, store of value, or medium of exchange other than digital representations of the U.S. dollar or foreign currency.
Taxpayers are instructed to list and provide details about all domestic and foreign "noncompliant" virtual currency they owned, controlled, or were the beneficial owner of, either directly or indirectly through an entity or other intermediary, during the disclosure period covered by the form. The IRS defines a noncompliant virtual currency for this purpose as an asset that should have been reported on a federal income tax return or other required federal information return but was not so reported.
If taxpayers used a "mixer" or "tumbler" in connection with a virtual currency or any transaction involving it, they must identify the mixer or tumbler and explain why they used it. A tumbler or mixer is a service offered to allow cryptoasset holders to mix them with other funds in a way that can obscure the cryptoassets' origin.
In Part II, line 7c, taxpayers whose preclearance application in Part I has been approved must write a "Non-compliance narrative." In the case of virtual currency, this may require describing any exchange, host wallet, or private wallet in which it is held, also how the virtual currency was obtained, the form's instructions state. Specific identifiers, including user ID, internal customer ID, and account number should also be given. The narrative should also provide estimates of total virtual currency transactions by year.
Other updates and additions to Form 14457 include a penalty structure for employment tax and estate and gift issues and a checkbox for inability to pay in full. In addition, taxpayers may now sign the form by photocopy, fax, or scan of their signatures, and the form may be faxed. Previously, Part II could only be mailed.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.