One of the main reasons that I started blogging was to help people. I wanted to motivate “self-help” style legal solutions by taking the knowledge that I have as an attorney and making it available on the web.
We have talked about how tax liens are handled by the Franchise Tax Board and the California Department of Tax and Fee Administration in past blog posts. Now we would like to take up the final taxing authority you deal with as a business owner in the state of California: the Employment Development Department, or EDD.
To lead into this article, let’s start with the definition of what this agency is responsible for.
The IRS will ask for your wallet ID and blockchain addresses to gather detailed information about any virtual currency transactions.
If you fail to adequately respond to the IRS’ letters or fail to amend improperly filed virtual currency earnings, it is likely that the IRS will initiate an audit.
Although audits may be conducted both via mail and in-person, it is likely that the IRS will conduct your virtual currency audit via mail. The audit process “officially” begins when the IRS issues you an audit request.
While audit requests can vary in content, there are several preliminary questions the IRS will ask about your virtual currency income. You can expect that they will ask you to disclose all accounts, including:
In addition, the IRS will most likely require detailed information about any virtual currency transactions, including:
If you are unable to provide the IRS with specifics of when your cryptocurrency or NFTs were purchased or sold, the IRS will assume that you disposed of your virtual currency in chronological order, beginning with the earliest unit of cryptocurrency or NFTs purchased or acquired.
This default method is known as the first in, first out (“FIFO”) basis. See Internal Revenue Service Notice 2014-21. The FIFO method has several drawbacks, especially if you’re a high-volume cryptocurrency user.
The FIFO method isn’t recommended during times of inflation or fluctuation, as it does not accurately reflect production costs.
While the IRS will assume you sold your cryptocurrency or NFTs at an inflated rate, it will not take the same consideration into account when calculating your production costs.
The result? FIFO makes it appear as though you earned more than you actually did. For this reason, you will most likely incur larger tax liabilities- which is why the IRS prefers to utilize this particular method.
It is imperative that you maintain organized transaction records at all times. Organized records are the key to ensuring that you’re accurately reporting your virtual currency earnings.
It is also important that you respond by the date stated on your audit notification letter. Failure to do so may result in the IRS issuing you a tax penalty by default.
Generally, the IRS can include returns filed within the last three years in an audit.
However, it is highly unlikely that the IRS will review three years of records, especially since the IRS has only recently begun sending letters and issuing virtual currency tax directives.
WHAT HAPPENS WHEN I SEND MY RESPONSE TO THE IRS?
Individuals earning more than $600 in staking or rewards are required by the IRS to report the earnings and send in Form 1099-MISC.
What Are the Risks an IRS Audit? Well there’s plenty of risk when the IRS audits you return it let’s start with the presumption that the IRS didn’t audit your return by accident. The auditors there because they’re clearly looking for something that the IRS has questions on and they believe we yield additional tax the auditor is not just going through the exercise of doing the audit just because the auditor is looking for mistakes and looking for errors anytime the government examines a return that you signed under penalty of perjury there is a level of risk if the auditor finds mistakes or if they don’t believe that your documentation is properly substantiated on the return then not only they assess you tax but they’ll assess you additional penalties and interest in addition auditor is often engaged in what we call fishing expeditions which is when they start examining the return line by line in terms of looking for more and more errors an auditor that finds errors on a return is more likely to dig and dig and dig and dig until they’re satisfied that they found all the errors that could possibly exist on the return this process is a nightmare for the taxpayer not only as a taxpayer forced to provide all the documentation connected with any anything related to the return but it also usually yields an a high adjustment for the taxpayer so enter the audit but the following in mind anytime your return is selected by examination for the government whether it’s a routine correspondence on it or a field audit which is much more severe you are at risk there are varying degrees of risk but a government investigation is never a safe bet your best to protect yourself your best to get a thorough analysis the risk and you’re better to appropriately deal with the issue than to get a caught off-guard by the IRS auditor.
Every audit has a scope — and what you produce in response sets the direction of the examination. Whether you’re just opening an audit notice or already in correspondence, a brief review can clarify where you are and what your options are.
Discuss My IRS Audit → Or call: (619) 378-3138
The California sales tax rate you pay is the 7.25% statewide base (6.00% state + 1.25% mandatory local) plus whatever district taxes voters have approved where the sale is delivered — which is why the real rate runs from 7.25% to roughly 10.75% depending on the address. District rates change every quarter somewhere in the state; the latest round took effect April 1, 2026 (CDTFA Special Notice L-1022), including Santa Clara County’s jump to 9.750%. Always confirm a specific address with the CDTFA rate lookup.
And when a rate question has turned into an audit or an assessment, our California sales tax attorney page explains how those disputes get defended.
If a rate dispute has already turned into an audit or assessment, the question becomes representation — here is when hiring a California sales tax attorney actually pays for itself.
You may be wondering how sales tax rates are set and why they seem to vary across the state. Here is a brief review of the sales and use tax and then we will break down how California sets its sales tax rate and the various elements that impact the rate.
It is time once again for that annual rite of passage for every taxpayer: getting the tax return and payment to the IRS on time.
The only people who like taxes are those who collect them, right? But every year most taxpayers fulfill their civic duty, knowing that their dollars support federal, state and municipal infrastructure, healthcare, social security, schools and universities, our veterans, national defense and more.
Even so, most people still dislike paying taxes, but some of us are outright afraid of the tax agencies, both federal and state, and not without reason.
The questions that weigh heavy on the minds of those who are dealing with tax problems usually include whether to hire a tax attorney or a CPA, when to hire a tax attorney, and how to find a good one.
When Led Zeppelin sang about “Going to California,” they were probably blissfully unaware of the potential tax consequences on this side of the pond.