The IRS Wants Your Money Back: 10,000 Tax Compliance Letters Sent

The IRS has released a notification (IR-2019-132) on July 26th, stating that it will start sending letters to taxpayers with virtual currency transactions. Per today’s announcement there are three different letters: Letter 6173, Letter 6174 or Letter 6174-A. “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said the IRS Commissioner Chuck Rettig. According to the notification, by the end of August, more than 10,000 taxpayers will receive these letters. 

Letters 6173,6174 & 6174-A

What you should do vary by the type of letter received. Letter 6174 & 6174-A are no action letters. This means you don’t have to respond to these letters if you have met all the crypto tax filing obligations outlined in the letter. These letters recommend you file amended or delinquent returns if you think you did not appropriately file crypto taxes in past years. In contrast, Letter 6173 requires your action. If you do not respond to this letter on time, your tax account will be examined by the IRS. You should read through ‘What you need to do by the “respond by” date above’ section and provide necessary documents to the IRS. 

Why the letters

Last year, the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The current campaign is an extension of the campaign. The IRS has stated that the list of recipient taxpayers were obtained through various ongoing IRS compliance efforts, such as increased use of data analytics. But many have raised suspicion over the letters. According to Tyson Cross of the Financial Times, “more than a dozen of my own clients have received this letter, all of whom accurately reported their cryptocurrency related income on their tax return”. He suspects that the mailing is a blanket campaign, because according to Tyson, “The IRS isn’t in the business of giving courtesy warnings to suspected tax cheats”.

Many suspect that the recipients of the letter are those names which were received by IRS through Coinbase. In July 2017, the IRS requested the exchange to handover the names of all its users. Coinbase, through a court order, reduced the number to 14,000 names, and hence these letters were not targeted. But it is better to include crypto in one’s tax return if an individual is involved with crypto. This is because the IRS rarely prosecutes taxpayers who come clean before getting caught. 
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