The IRS recently began sending letters to virtual currency owners, notifying them of potential failures to include, or correctly report, virtual currency transactions on their income tax returns.
Several years ago, the IRS issued a summons to Coinbase, a U.S.-based virtual currency exchange, requesting names of U.S. customers who participated in virtual currency transactions over a specified time period. After Coinbase refused, the IRS filed a lawsuit to have the summons enforced, and won (at least in part). Coinbase was ordered to partially comply with the summons. The result is that Coinbase produced a large amount of information to the IRS, which it’s using to track down taxpayers to determine if they complied with their tax reporting obligations.
The IRS recently began issuing three different notices—Letter 6173, Letter 6174 and 6174-A—explaining the U.S. tax reporting obligations to virtual currency owners. Letter 6173 is by far the most concerning of the three. It is the only one that requires the taxpayer to provide a response and explains that the recipient either: (1) did not file a tax return at all; (2) may have filed a tax return, but failed to report cryptocurrency transactions; or (3) reported the cryptocurrency transactions incorrectly. This letter indicates the IRS believes the taxpayer may have unreported income. In addition, Letter 6173 requires the taxpayer to sign the response under penalties of perjury.
If you are a taxpayer who received IRS Letter 6173, you should contact an attorney experienced in tax controversy right away. There are devastating consequences that can flow from signing the required statement on Letter 6173—if there is any mistake in the taxpayer’s response, whatsoever, a taxpayer will have potentially made a false statement to the IRS and runs the risk of the IRS developing a fraud case against him.
Letters 6174 and 6174-A are less alarming in that neither requires a response, but both suggest the taxpayer might not be in compliance with his filing obligations. These two letters appear almost identical, but are very different.
Letter 6174 provides that the recipient “may not know the requirements for reporting transactions involving virtual currency,” whereas Letter 6174-A states the recipient “may not have properly reported your transactions involving virtual currency.” Letter 6174-A seems to indicate the taxpayer at least reported his transactions on a tax return, albeit incorrectly. For that reason, Letter 6174 states at the end that no response is required but “we may send other correspondence about potential enforcement activity in the future.”
If you received any of these IRS letters, you should speak with a professional before making a decision on whether and how to respond. If you have questions, contact Anderson & Jahde for competent, professional tax help.