The IRS is Sending out Letters About Cryptocurrencies. What Should I Do if I Get One?

By Brian Bernhardt and Adam Goldblatt

Last month, the IRS began sending letters to taxpayers with cryptocurrency transactions who did not properly report a transaction or entirely failed to report the income or pay the tax from one or more transactions. By the end of August, more than 10,000 taxpayers will receive these letters.

In recent years, the IRS has consistently engaged in compliance efforts to locate taxpayers with potential tax liabilities as a result of not properly reporting cryptocurrency transactions. Most recently, the IRS received the names, taxpayer identification numbers, birthdates, addresses, account activity, and account statements from approximately 8.9 million individual transactions involving almost 15,000 customers of Coinbase, a digital currency platform that trades with cryptocurrency such as Bitcoin, Ether, and Litecoin.

The IRS is sending three types of letters to taxpayers: a Letter 6173, a Letter 6174, or a Letter 6174-A.

Two of the letters – Letter 6174 and Letter 6174-A – appear more informational in nature, advising the taxpayer that the IRS believes the taxpayer had one or more cryptocurrency accounts, noting that the taxpayer may not have reported cryptocurrency transactions properly, and suggesting that the taxpayer voluntarily file amended or unfiled tax returns as necessary to comply with the Internal Revenue Code.

The Letter 6173, however, is more ominous and, while most tax investigations are resolved through civil audits (resulting in additional tax, penalties, and interest), the Letter 6173 appears to suggest that recipients may be caught up in new cryptocurrency-based criminal tax cases, a current priority of the IRS Criminal Investigation Division. The Letter 6173 not only requires that taxpayers take specific actions, but also requires taxpayers to declare under penalties of perjury that their responses, including attachments and statements are true, correct,and complete.

According to IRS Commissioner Charles Rettig, 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.”

Indeed, according to Darren Guillot, director (field collection),IRS Small Business/Self-Employed Division “no one should assume we don’t know you hold virtual currency,”At the same time, taxpayers need to understand that their responses to these letters, if not done properly, might land them in more trouble.

Taxpayers may be able to defend their actions by arguing they lack willfulness, they may be able to use certain privileges to keep incriminating information confidential, or they may have the ability to use voluntary disclosure options or other programs to limit civil and/or criminal liability. But responding to these letters improperly might not only result in a waiver of these defenses, but, if stated inartfully, incorrectly, or improperly might provide the IRS exactly what it needs to prove a crime took place.

If you receive a Letter 6173, Letter 6174, or 6174-A, then it is extremely likely that the IRS knows you engaged in one or more cryptocurrency transactions and the IRS has you on its radar for an investigation, either civil or criminal. Run, do not walk, to a lawyer with experience dealing with the IRS, especially if you have received the Letter 6173. Lack of action or improper action will only create a bigger problem. Address the situation head-on, with the right type of advice, and move forward to get, and keep, the IRS out of your life.

Finally, the laws governing cryptocurrency continue to evolve. Aside from the Internal Revenue Services, there are three other federal agencies that are monitoring the cryptocurrency scene: the U.S. Commodity Futures Trading Commission (CFTC), the U.S. Securities and Exchange Commission (SEC), and the Financial Crimes Enforcement Network (FinCEN). Cryptocurrency continues to be a growing method of investment and, to the Federal government,a growing industry for regulation, oversight, and financial crime prevention. Compliance with the laws, rules, and regulations of these agencies will only become more complicated, and Forrest Firm is here to provide the advice and guidance you need to navigate these relatively unchartered waters.