This is not a post about whether you should or should not pay taxes. I don’t care. This is also not a post on HOW to pay taxes. I don’t know.
This is a post on my experience with having tax problems, in case it sheds light for someone else. I have been dealing with an ongoing tax matter for several years and thought my experience may help clear up some misconceptions. Obviously, all of this is my experience only and not meant as any kind of general legal advice.
Background: Several years ago, I got into a business problem that was very bad from a tax standpoint. This was not related to crypto. I won’t go into the details of what happened, but suffice it to say it was not an innocent mistake, nor was it based on lack of knowledge. Instead, it was the least bad choice of several bad choices at the time, because sometimes life just happens. If I had it to do over again today, I’d do things 90% the same way.
I was waiting for the IRS call and it did eventually come. And for 3 years now, I have been straightening everything out with them tax-wise. Here are some things I’ve realized that may help you if ever end up tangled with the IRS.
The IRS is just a big bureaucracy like any other bureaucracy. That means your biggest fight will be against the system itself, not against anyone within it. Dealing with tax problems mostly means being drowned in paperwork. You’ll get letters non-stop. First they will send you a letter letting you know you’re about to receive a letter. Then you’ll receive a letter. Then a letter confirming that you were sent a letter. Every step of the grueling process will require filing forms you’ve already filed, submitting paperwork you’ve already submitted and having to explain your situation to yet another government bureaucrat. There is a common misconception that once you get tracked by the IRS, someone will be on your case obsessively. Not true. Your biggest challenge will be holding someone’s attention long enough to actually get something done.
You will not go to jail. Ok, maybe you are some kind of big-time drug trafficker. Or perhaps you are committing tax fraud at a Wesley Snipes level. In that case, all bets are off. But for everyone else, relax. No form of incarceration is going to be on the table for you for any run-of-the-mill tax bullshit you’ve pulled. Putting you in jail does not get them what they want, which is the money you owe them. That’s all.
The IRS is not a James Bond agency. When you think of IRS agents, you might be picturing the cast of CSI: Miami or something similar. That’s wrong. Have you ever been to the DMV or the unemployment office or someplace like that? You know those ladies that work there? That’s who you should be picturing. Tonya and Miss Keisha. And they are not tracking you down with binoculars. They are not staking out your home or tapping your phone. They are paid to send you letters. And then another letter stating that they’ve sent you a letter. That’s all. They’re more Parks and Recreation than CSI: Miami.
We live in a democracy; their powers are limited. They do do things like send letters threatening wage garnishment and so forth. But at almost every step, there are chances for appeal and about a half-dozen ways to stop bad things from happening. They work more by attrition than by force. They annoy you to the point where it’s easier to comply than to keep putting up with all their letters. But at least in my experience, they will rarely take any dramatic measures like pulling money out of your bank account. Even though they claim they will.
Inconclusiveness will not get you off the hook. I’ve seen people here assert that since the IRS can’t prove where XYZ came from or can’t prove that you made such-and-such income, that means you’re off the hook for it. No. They don’t have to prove anything, they just have to ask you about it. And unless you’re prepared to lie (in which case, you’re on your own), you will have to tell them how much money you made, where it came from, etc.
Having said that, they will take your word for things. I was surprised how often they simply relied on my self-reporting to determine what to do with my situation. They rely on records that you yourself provide. If you say you don’t have something, they take your word for it. They double-check very little. Personally, I didn’t lie about anything because why risk that? But I could have if I wanted to. Could you lie about your crypto holdings? Sure. Would you get away with it? I don’t know, probably? But then don’t get mad when Janet Yellen pushes laws designed to combat precisely that behavior.
Tax agents are humans and they can be sweet-talked within limits. There is some discretion in an agent’s job. At least the ones I’ve encountered. They can make choices as to whether to have you fill out that form for the 9th time or not. They can decide that a bank statement from 32 days ago (not 30) is recent enough. Be nice to them. Treat them the way you’d treat a post office clerk or a flight attendant. They’re just doing a job and are in a position to help you out if you don’t treat them like the enemy.
Always file the paperwork. So remember how I said I’d do things 90% the same way if I had it to do over? The 10% I would change is that I would have taken the forms and the paperwork much more seriously, much sooner. Even if you aren’t going to pay any money, still go ahead and file whatever paperwork they ask from you. Just put $0 in the blank for payment. They HATE it when they don’t get their paperwork. They hate that more than not getting their money. I can’t overstate how much the hassling was reduced after I filed all the overdue paperwork, even without paying them a nickel.
NB: Obviously, this is about the IRS and therefore is about the US. I’m not trying to be exclusionary here, but I can’t say how things work in Germany or Lebanon or Australia because I don’t pay taxes in those countries. I pay taxes in the US.
EDIT TO ADD TL;DR: The IRS is not a super spy agency determined to throw you in jail. It’s a big bureaucracy full of working schlubs who seem more interested in annoying you with paperwork than in wringing money out of you.