IRS Sends Out 10,000 Letters to Virtual Currency Investors, Some of Which Demand a Response

The IRS has announced a program to send letters to taxpayers it believes had virtual currency transactions which the taxpayers have failed to report on their tax returns.[1]  The news release contains the following comments from the Commissioner:

“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 IRS Commissioner Chuck Rettig. “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 news release indicates the IRS began sending these letters out the week before the news release came out (July 26, 2019) and more than 10,000 taxpayers will receive these letters.  The release indicates the names were obtained via “various compliance efforts.”

The release notes that affected individuals will receive one of three letters from the IRS.

Kay Bell on her blog “Don’t Mess with Taxes” (https://www.dontmesswithtaxes.com/more-of-kays-copy.html) posted copies of the each of the three letters.  The letters are:

  • Letter 6173[2] – This letter indicates that the IRS believes it’s likely that the taxpayer has failed to report cryptocurrency transaction, noting the agency hasn’t received a federal tax return for one or more years from 2013-2017, or the returns they have appear to be missing a form or schedule the agency believes should be there.  This letter tells the taxpayers they need to respond to the letter even if the taxpayer believes everything has been properly reported.

  • Letter 6174[3] – This letter indicates only that the IRS knows the taxpayer has one or more accounts containing cryptocurrency.  It contains information about the reporting requirements and taxation of cryptocurrency and indicates if the taxpayer believes there is an error in prior returns or if returns should have been filed that have not yet been filed, the taxpayer should take corrective action.

  • Letter 6174-A[4] – This is appears to be a letter sent to taxpayers where the IRS has some reason to believe there might be a failure to report transactions, but not enough reason to send the taxpayer the “required response” Letter 6173.  This letter states the IRS states the IRS is aware the taxpayer has one or more cryptocurrency accounts (the same language as Letter 6174) but then goes to state the individual “may not have properly reported your transactions involving virtual currency” rather than just saying the taxpayer may not be aware of the reporting.  But, like Letter 6174, Letter 6174-A provides information on proper reporting and taxation and then requests the taxpayer take corrective action if there are any issues.

The release continues with the following information about prior IRS guidance and activities underway at the IRS regarding virtual currencies:

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 IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

Virtual currency is an ongoing focus area for IRS Criminal Investigation.

IRS Notice 2014-21[5] states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.

The IRS anticipates issuing additional legal guidance in this area in the near future.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.