Cryptocurrency Investors: What Do You Do When the IRS Sends you a Tax Compliance Letter?

By Mordecai Lerer  |  August 14, 2019

Back in January, I published an article on the taxation of cryptocurrency in The Journal of Taxation. In it, I wrote that in August of 2017, the IRS had announced its concern over “massive” underreporting of income generated by cryptocurrencies. The report included specific compliance issues and tax guidance for cryptocurrency investors. The IRS had also issued a “John Doe” summons to Coinbase, one of the largest cryptocurrency exchanges, requesting the release of transactions from 2013 to 2015. Coinbase was required to provide the IRS with data on many of its clients who engaged in transactions exceeding $20,000.

In my article, I wrote, “This course of action suggests the IRS will aggressively pursue enforcement of compliance in cryptocurrency transactions.”

Well, it’s happening! On July 26, 2019, the IRS issued a news release stating that they have begun sending letters to taxpayers with cryptocurrency transactions who may have failed to report income and pay taxes on these transactions. The names of these taxpayers were obtained through various other IRS compliance efforts.

There are three types of letters being sent out: Letter 6173, Letter 6174 and Letter 6174-A requesting information for the years 2013-2017.

Two of the letters, 6174 and 6174-A, appear to be informational and do not require a taxpayer response. However, as I mentioned in my article, the taxation of cryptocurrency transactions may not always be so straightforward, so any taxpayers needing to get in compliance with an amended return would be well advised to work with an accountant who understands the intricacies of the regulations. It is also advisable not to wait too long to do so. The IRS will be more lenient if you come to them before they come to you! 

Be aware of Letter 6173, which references criminal investigations three times and requires the taxpayer to affirm in a timely response, under penalty of perjury, that their replies are “true, correct, and complete.”

At Marks Paneth, we are advising clients who receive Letter 6173 not to respond to it without professional advice. Recipients should not take these inquiries lightly and should consider contacting an attorney and their tax advisor if they are out of compliance or have been involved in transactions that may have raised IRS suspicion.   

As IRS Commissioner Chuck Rettig has stated, “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.”

If you have questions about taxation and IRS compliance with regard to virtual currency, contact author Mordecai Lerer, CPA, or a member of our Tax Services Group.

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About Mordecai Lerer

Mordecai Lerer, CPA, is a Tax Partner in the Commercial Business Group at Marks Paneth LLP. He has been providing strategic tax and advisory services to businesses and individuals for over 35 years. Mr. Lerer advises clients in the manufacturing, wholesale and distribution sector, as well as the real estate and educational services industries. He also provides tax planning and compliance solutions to personal service businesses and high-net-worth individuals. In this capacity, he handles state,... READ MORE +

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