How Tax Shield Monitors the IRS Before They Audit You

By Clinton Donnelly, CEO, Founder | CryptoTaxAudit

John had been trading crypto since 2017. High volume. Multiple exchanges. Wallets everywhere.

In March 2023, he got the letter.

IRS Notice CP2000. They wanted $47,000 in back taxes on transactions he'd already reported. But their numbers were wrong. They'd counted every transfer between his wallets as a taxable sale.

Mark called us six weeks after the notice arrived. By then, the IRS had already assigned an agent and started building their case.

"I wish I'd known this was coming," he said. "I would've been ready."

That's why we built Tax Shield in 2019. We can see IRS audits coming six months before the notice hits your mailbox.

Key Takeaways

• Tax Shield monitors your IRS account transcripts weekly and detects audit flags up to six months before you receive a notice
• The IRS uses specific triggers to target crypto traders, including unreported exchange transfers, basis calculation errors, and high-frequency trading patterns
• 40% of CryptoTaxAudit's audit cases end in refunds to clients, not just settlements or reduced penalties
• Tax Shield Full Defense covers full representation from the first IRS contact through audit if necessary, with no hourly billing or surprise fees
• Early detection changes everything because you can organize records and build your defense before the IRS agent even knows your name

Why the IRS Watches Crypto Traders

They know who you are.

Every exchange reports your transactions. Under the Infrastructure Investment and Jobs Act, brokers must file Form 1099-B for any transaction over $600.

Coinbase, Kraken, and Gemini all send your data to the IRS. Even if you never reported a gain, the IRS has records showing you traded.

High-volume traders stand out most. You're moving between exchanges. Managing multiple wallets. 

The IRS sees patterns that look suspicious even when they're completely legal.

And they've been ramping up enforcement since IRS Notice 2014-21 declared crypto as property. 

That means every trade, every transfer, every conversion creates a taxable event.

The IRS doesn't understand blockchain. But they know how to spot discrepancies. 

And that's what gets you audited.

What Triggers a Crypto Audit

The IRS uses four primary markers to flag crypto accounts for examination:

Unreported exchange transfers. When you move Bitcoin from Coinbase to Kraken, the IRS sees two reports. Coinbase reports a "sale." Kraken reports a "purchase." 

If you don't explain that it's the same Bitcoin, the IRS assumes you sold and never reported the gain. This is the most common trigger we see under Form 1099-B reporting rules.

Impossible basis calculations. You bought 1 BTC for $30,000. You sold 0.5 BTC for $20,000. Your reported loss was $15,000. But the math doesn't work. 

The IRS computer catches these errors automatically. If your cost basis exceeds your total purchase history, you'll get flagged.

High-frequency trading with round numbers. Trading 50 times per day with gains that always end in perfect hundreds? 

The IRS audit algorithms flag this as potential wash sales or artificial losses designed to offset other income.

Missing reports from exchanges under IRC Section 6050I. If an exchange filed a cash transaction report for you but you didn't include that income, the IRS knows. 

They match your return against every broker report they receive. Mismatches trigger audits.

We see these triggers every week in client accounts. When we catch them early, we can fix them before the IRS sends a notice.

How Tax Shield Sees Audits Coming

Most people find out they're being audited when the letter arrives. By then, the IRS has already:

• Flagged your account for examination
• Pulled your last three years of tax returns
• Collected all broker reports from exchanges
• Assigned an agent to your case
• Drafted their preliminary assessment

You're starting from behind.

Tax Shield monitors your IRS account transcripts every week. We use IRS Form 2848 to authorize access to your account the same way the IRS does.

When the IRS flags your account for audit, a transaction code appears on your transcript. Sometimes, six months before they send a notice.

We see that code. We will tell you immediately.

That six-month head start changes everything.

You can organize your transaction records. We can review your exchanges and wallets. We build your defense before the IRS agent opens your file.

Instead of scrambling to respond to a notice, you walk into the audit prepared. The IRS doesn't expect that.

CryptoTaxAudit has been defending crypto traders since 2018. 

We've represented high-volume traders, high-dollar traders, people with dozens of exchanges and wallets. 

We know how the IRS builds crypto cases because we've fought them.

Nobody has done as many crypto audits as we have. And Tax Shield puts that entire experience behind you before the audit even starts.

What Tax Shield Actually Protects You From

Audit penalties you can avoid: 

Most crypto penalties come from a lack of documentation. You made the trade in 2021. It's now 2024. The exchange deleted your records. 

You can't prove your cost basis. The IRS assesses taxes on the full sale price with zero basis. That's when a $20,000 sale becomes a $6,000 tax bill. 

Tax Shield catches these gaps while you can still request records from exchanges.

Surprise assessments from old tax years:

The IRS can audit three years back. Sometimes six if they suspect substantial underreporting under IRC Section 6501. 

You filed your 2021 return in 2022. It's now 2025. They send you a notice for taxes on 2021 trades. Most of your exchange records are gone. 

With Tax Shield monitoring, we see these cases developing and preserve your records before the IRS requests them.

International exchange problems:

You used Binance, Bitfinex, or KuCoin before they stopped serving US customers. The IRS doesn't get automatic reports from foreign exchanges. 

But they send John Doe summons demanding customer lists. When your name appears and you didn't report those trades, you're facing criminal referral territory. 

Tax Shield monitoring catches these cases early so we can file amended returns before the IRS escalates.

DeFi and NFT gray areas: 

You provided liquidity on Uniswap. You earned yield farming rewards. You sold NFTs on OpenSea. The IRS is still figuring out how to tax these under IRC Section 61 gross income rules. 

Their agents often apply incorrect tax treatment. 

When we catch an audit early, we can submit technical memorandums explaining the correct law before the agent makes their determination.

We've gotten refunds for 40% of our audit clients. Not reduced penalties. Actual refunds. Because the IRS makes mistakes, and we know how to prove it.

What Happens When You Have Tax Shield

You get weekly monitoring. Every Monday, we review your IRS account transcripts. If we see an audit code, we call you the same day.

You get risk assessment. We look at your actual transactions and identify IRS triggers before they become problems. 

Missing basis documentation? We tell you to request it from exchanges now. 

Unreported airdrops? We calculate the tax and file an amended return before the IRS finds it.

Not tax preparers who've never faced the IRS. Not bookkeepers guessing at tax law. 

Federally authorized tax professionals who've been through U.S. Tax Court and won cases about cryptocurrency taxation.

You get full representation. From the first IRS notice through appeals and into tax court if necessary. No hourly billing. No surprise fees. One annual subscription covers everything.

You sleep better. Because you know someone is watching while the IRS watches you.

Why CryptoTaxAudit Built This

I'm Clinton Donnelly. I started CryptoTaxAudit in 2018 because crypto traders had nowhere to turn when the IRS came after them.

Back then, most tax attorneys wouldn't touch crypto cases. The ones who did had never been through a crypto audit. They'd read IRS Notice 2014-21 and thought they understood the rules.

They didn't.

The IRS doesn't audit crypto the way they audit stock traders. They treat every wallet transfer as a taxable sale. 

They assume zero basis on transactions where you can't provide detailed records. They don't understand DeFi protocols or liquidity pools, or yield farming.

Our clients kept asking the same question: "Can you tell me if the IRS is coming after me?"

Most firms say no. Attorney-client privilege doesn't give you psychic powers.

But we realized we could monitor IRS transcripts. 

The same transcripts IRS agents use to track taxpayers. If we watched those transcripts, we could see audit flags the moment they appeared.

So we built Tax Shield in 2019. 

We've been monitoring client accounts for six years. We've detected audits months before notices arrived. 

We've prepared defenses that turned IRS assessments into refunds in 35% of audits. It is also our success in five tax court cases

The proof is in our Trustpilot ratings. 

When you get Tax Shield, you get the entire force of CryptoTaxAudit behind you. You're not facing the IRS alone

 Frequently Asked Questions

Q: How does Tax Shield monitoring actually work?

A: We access your IRS account using Form 2848 Representation Authorization, which gives us access to your transcripts. Every week, we pull your account transcripts and review them for audit codes, examination flags, and assessment notices. When we see something, we contact you immediately with a risk assessment and action plan. This is the same monitoring system the IRS uses internally, but we're using it to protect you instead of building a case against you.

Q: What if I'm already under audit when I sign up for Tax Shield?

A: Tax Shield covers existing audits. We take over your case immediately, review everything the IRS has requested, and build a defense for you. Most of our clients come to CryptoTaxAudit after they've already received an IRS notice. We know how to take over mid-audit and turn cases around. The earlier you bring us in, the more options we have, but even late-stage audits can be defended successfully.

Q: Do you handle audits for DeFi transactions and NFT sales?

A: Yes. We've defended audits involving yield farming, liquidity pool rewards, NFT sales, airdrops, and staking income. The IRS is still developing guidance on these transactions, which means their agents often apply incorrect tax treatment. We've successfully argued for favorable treatment in multiple cases by citing existing tax law under IRC Section 61 and demonstrating why DeFi protocols don't fit traditional securities rules. Our attorneys understand blockchain technology and can explain it to IRS agents and tax court judges.

Q: How much does Tax Shield Full Defense cost compared to handling an audit on my own?

A: Tax Shield Full Defense is an annual subscription that covers unlimited monitoring, consultation, audit defense, and tax court representation if needed. Compare that to standard audit defense, which typically costs $5,000-$15,000 minimum for IRS representation and $50,000+ if your case goes to tax court. With Tax Shield Full Defense, you pay one fee that covers everything. No hourly billing. No surprise costs if the IRS pushes your case to appeals or litigation. Contact CryptoTaxAudit for current pricing based on your transaction volume.

Q: What makes CryptoTaxAudit different from other tax attorneys who say they handle crypto?

A: We've been defending crypto traders since 2018. We've handled more crypto audits than any other firm in the country. We've won tax court cases specifically about cryptocurrency taxation. Most tax attorneys have read IRS Notice 2014-21 but have never defended an actual crypto audit. They don't understand how the IRS builds these cases. They don't know the common mistakes agents make. They've never argued basis calculations for high-frequency trading or explained liquidity pool mechanics to a tax court judge. We have. Numerous times.

Q: Can Tax Shield help if I used international exchanges that don't report to the IRS?

A: Yes. International exchange audits are some of the most dangerous because the IRS often discovers these accounts through John Doe summons campaigns years after you stopped using the exchange. By then, the exchange may have deleted your records, leaving you unable to prove your transactions. If we see the IRS developing a case around unreported foreign accounts, we can file amended returns with reasonable basis calculations before they escalate to criminal referral territory. Many of our clients have used Binance, Bitfinex, KuCoin, and other international platforms. We know how to defend these cases.

Q: Does Tax Shield cover state tax audits or just federal IRS audits?

A: Tax Shield focuses on federal IRS audits because that's where crypto enforcement is concentrated. However, many state audits follow federal audits. If your state initiates an examination based on your federal tax return, we can provide guidance and referrals to state tax specialists. Most of our clients' audit risk comes from federal enforcement, so that's where we focus our monitoring and defense resources.