If you have received IRS notice cp2501 or cp2000 for the reason that you have under-reported your cryptocurrency on your tax returns, seems like you are not alone.
IRS seems to be determined to get behind traders involved in cryptocurrency trading and tried to sneak out their gains from tax returns. It is always important to report your gains or losses on your tax returns. There’s no escaping from the taxman as they will have their ways to find out your data from various sources.
A simple way could be just asking Google your emails containing an exchange name or account information. That helps them fetch your exchange wallet addresses and the trading activity happening there. One should understand that within 2 hops, taxation authority can reach any information that they need.
IRS Notice CP2000
According to IRS, CP2000 is a notice that is sent to taxpayers who has not reported certain information, but the IRS got hold of that from other sources.
What is CP2000 and what you need to do?
You need to contact the IRS (directly or via an accountant depending on how you filed your taxes). They’ve received information not reported on your tax return.
- Read your notice carefully. It explains the information IRS received against you. In this case, probably information from a trading platform like Coinbase who were obligated to submit trading activity beyond a threshold.
- Complete and return the notice’s response form.
- If you believe the information is wrong, contact the source who provided your information and ask them to correct it. If this is a clearing institution like Robinhood/Apex clearing or an exchange like Coinbase, you can talk to them and ask them to correct (if they are wrong).
In a rare scenario, if the information is wrong because someone has used your identity or SSN – this is a case of Identity theft and you can find more details about identity theft and call IRS folks and report it immediately.
IRS Notice CP2501
According to IRS, Notice CP2501 is sent if the income or payment information they have on file doesn’t match the information you reported on your tax return. This discrepancy may cause an increase or decrease in your tax, or may not change it at all.
Why did I receive this notice CP2501?
IRS has received information from a third party that doesn’t match the information you reported on your tax return.
The third-party could be employers or financial institutions – in this case, it could probably be employers who paid in cryptocurrency of the exchanges like Coinbase, Kraken, Bittrex etc.,
What is CP2501 and what you need to do?
- Read your notice carefully. It explains the information IRS received and how it affects your tax return.
- Complete the notice Response form whether you agree or disagree with the notice. The response form explains what actions to take. (Your specific notice may not have a Response form. In that case, the notice will have instructions on what to do).
- If you agree with our notice, follow the instructions to sign the response form and return it to us in the envelope provided. We require both spouses’ signatures if you filed married filing jointly.
- Contact the business or person (employers paying cryptocurrency or the financial institution where you have traded cryptocurrency like Bitcoin, Ethereum and other altcoins) reporting the information, if the information they provided to us is wrong. Ask them to send you a corrected statement, then send us a copy.
IRS recommends you to:
- Make sure your other returns don’t have the same mistake.
- Contact IRS with any unanswered questions you have or if you need time to respond to the notice.
- Keep a copy of the notice for your files.
- Fill out section 3 (Authorization) on the Response form to allow someone, in addition to yourself, to contact us about this notice. Or, send us a Form 2848, Power of Attorney and Declaration of Representative to allow someone (such as your tax return preparer) to contact us on your behalf.
- Correct the copy of your tax return that you kept for your records.
- Order a transcript of your return.
- Know more about your payment options if you owe additional taxes.
- Read about payment plans and installment agreements if you cannot pay the full amount of taxes owed.
- Learn & understand more about Offers in Compromise if you cannot pay the full amount of taxes owed.
Avoid future problems
- Keep accurate and full records using software like BearTax
- Wait until you get all of your income statements to file your tax return
- Check the documents you get from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they’re correct
- Include all your income on your tax return
- Follow the instructions on how to report income, expenses, and deductions (Read our blog)
- File an amended tax return for any information you receive after you’ve filed your return
Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about how to file electronically.
Automating for accuracy
BearTax can help you automate a lot of this stuff and does it accurately.
- imports your trades from 50+ exchanges
- processes them and removes any unwanted taxable events like withdrawals from exchange to wallet or transfer between exchanges.
- allows you to review unaccounted deposits to get the right purchase price
- does FIFO matching with your trades across exchanges and provide your auto-generated documents
- exports directly to TurboTax, TurboTax Online and TaxAct.
- finally provides a detailed CSV to submit in situations when you receive such notices. This CSV is the one required by your accountant if you are filing your taxes via them.