The IRS has confirmed that it has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. In the announcement, IRS Commissioner Chuck Rettig says that “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
The IRS identified the taxpayers receiving these letters through various ongoing IRS compliance efforts, likely including customer information that the IRS received last year after successfully enforcing a John Doe summons against Coinbase. The IRS has said that it expects more than 10,000 taxpayers will receive these letters by the end of August.
Taxpayers will receive one of three variations of the letter: Letter 6174, Letter 6174-A, or Letter 6173. Letter 6174 is a “soft notice” that notifies the taxpayer that the IRS is aware that they have or had one or more accounts containing virtual currency, and says that taxpayers should file amended or delinquent returns if they believe they have not accurately reported virtual currency transactions on their tax returns. Letter 6174-A is similar to Letter 6174 but also states that the IRS has information that the taxpayer “may not have properly reported your transactions involving virtual currencies.” Letter 6173 goes another step further, directing taxpayers to respond to the letter either by filing amended or delinquent returns or by providing a written explanation of the actions they have taken to become compliant with their US tax obligations. All three letter variations provide general educational information about taxpayers’ obligations to report virtual currency transactions.
At the same time, the IRS also appears to be stepping up criminal enforcement efforts. On July 19, Don Fort, Chief of the IRS’s Criminal Investigation Division, spoke about the IRS’s criminal enforcement efforts regarding cryptocurrencies, at the RJS Law Tax Controversy Institute in San Diego. Mr. Fort reportedly told the audience that the division is building a number of cryptocurrency-related criminal tax cases, and that details about those cases may soon become public. Earlier this month, Tax Notes published a detailed presentation prepared by the Criminal Investigation Division regarding the use of cryptocurrencies in cyber crimes.
Taxpayers who have received a letter from the IRS may wish to consult a tax advisor to ensure that they have complied with their tax obligations or to determine the best way to respond to the letter or come into compliance.