By Bri Grierson and Robin Dennis
The IRS has started sending educational letters to taxpayers titled “Reporting Virtual Currency Transactions.” The intent is to increase virtual currency tax reporting compliance and not necessarily to penalize taxpayers. Some taxpayers may receive a letter despite being fully compliant with all their virtual currency tax reporting obligations. More than 10,000 letters are expected to be sent by the end of this month. Names of taxpayers have been obtained through ongoing IRS compliance efforts.
The IRS is sending correspondence to taxpayers who may have improperly reported virtual currency transactions or failed to report them altogether. As a result, taxpayers receiving the correspondence may be required to amend prior tax filings and pay back taxes, interest, and penalties.
History/Focus on virtual currency
Since taking over as IRS Commissioner, Charles Rettig has made crypto currency reporting and taxation a priority. These letters are the latest in Commissioner Rettig’s program to combat crypto currency tax abuses. The IRS announced a Virtual Currency Compliance Campaign in 2018 to address noncompliance related to virtual currency transactions. Their goal is to inform taxpayers of obligations and examine cases where they believe taxpayers may have intentionally failed to report transactions correctly or at all. The IRS has stated that it plans to issue additional legal guidance in this area soon.
3 versions of the communication
There are three versions of correspondence: Letter 6173, Letter 6174, and Letter 6174-A. Each letter strives to help taxpayers understand obligations for reporting and paying tax, and how to correct past errors. Each correspondence will direct taxpayers to information and various resources on irs.gov, such as which forms and schedules to use to meet compliance obligations.
Letter 6173 informs taxpayers the IRS has information indicating they have or had at least one account containing virtual currency and failed to report one or more virtual currency transactions for tax years 2013-2017. Letter 6173 includes a specific response date. If a taxpayer receiving Letter 6173 believes they have followed all reporting requirements, they must mail or eFax a statement of facts explaining their position, documentation of compliance, and their contact information. They must also make a declaration under penalties of perjury regarding the accuracy of their position. Letter 6173 warns the IRS will crosscheck the information received in the response against information they’ve received from various sources.
Letter 6174 is intended to inform taxpayers who may not know the requirements for reporting virtual currency transactions. Letter 6174 states the IRS has information the recipient has or had one or more accounts containing virtual currency. It instructs taxpayers to file or amend filings if they believe they did not accurately report transactions after reviewing the requirements. Letter 6174 informs taxpayers of various schedules that may be applicable for reporting and notes that taxpayers need not respond to the letter.
Letter 6174-A similarly informs taxpayers of requirements and various schedules for reporting, and additionally notes the IRS is aware they have or had at least one account containing virtual currency. It notes that taxpayers need not respond but the IRS may send additional correspondence about enforcement in the future.
Letters 6174 and 6174-A are no action letters unless you have virtual currency transactions you need to report on an amended or delinquent originally filed return. As stated above, Letter 6173 does require a response by the date indicated on the letter received. Letter 6173 requires a response even if you believe you did not incorrectly report any virtual currency transactions. If you do file an amended or delinquent return in response to any one of the three letters, the letter numbers should be included on the top of the first page. For example, a return filed in response to Letter 6174 should include “Letter 6174” on the top of the first return page. Any amended or delinquent returns filed in response to any one of the three letters should be sent to the Internal Revenue Service, 2970 Market Street, Philadelphia, PA 19104. A copy of the letter you received should also be included with the return.
If you receive a letter regarding virtual currency from the IRS, or if you sold Bitcoin or other virtual currency for fiat currency, exchanged one virtual currency for another, or exchanged virtual currency for goods or services, please contact us or your CSH advisor to answer any questions about your reporting requirements.