Earlier this month, the IRS offshore compliance unit in Austin, Texas started sending letters to taxpayers it apparently suspects of underreporting their cryptocurrency income.
The letter is clearly intended to scare the recipients into action and threatens “future civil and criminal enforcement activity” if the recipients don’t amend their tax returns to accurately report their cryptocurrency related income.
Here’s an excerpt from the letter:
The rest of letter provides instructions to the recipients on how to report cryptocurrency related income and amend their tax returns, if necessary.
Letter 6174-A is probably being sent to most Coinbase customers, not just suspected tax cheats
IRS Letter 6174-A has all the markings of a generic mailing campaign, and not a personally targeted enforcement action. Although it’s possible the IRS used its document matching program to identify suspected tax cheats and send them this letter, that doesn’t seem to be the case. It’s much more likely that the IRS is sending this letter to all 14,000 taxpayers identified by the 2017 Coinbase summons as part of a broader effort to encourage voluntary compliance. In fact, such an effort would be right on time as it’s now been one year this month since the IRS first announced its cryptocurrency compliance campaign.
Anecdotally, more than a dozen of my own clients have received this letter, all of whom accurately reported their cryptocurrency related income on their tax return. I’ve also heard from several other tax professionals who say their clients also received the letter despite having accurately reported all of their crypto income.
This would seem to indicate the IRS is sending these letters to taxpayers as a fishing attempt without any real belief that each recipient has under-reported.
If you accurately reported your crypto income, don’t panic.
You might receive IRS Letter 6174-A even if you accurately reported all of your cryptocurrency related income. In that case, don’t panic. You likely received the letter just by nature of having a Coinbase account and not because you’re a suspected tax cheat. It would still be a good idea, though, to review your tax return closely and make sure your cryptocurrency income is accurately reported. After all, receiving IRS Letter 6174-A unfortunately means you’re on the IRS’s radar one way or the other.
And remember, IRS Letter 6174-A specifically says that no response is necessary if you already reported your cryptocurrency income. So, don’t stress about calling the IRS or replying to the letter to tell them your tax return is already correct.
What to do if your tax return isn’t accurate
If you failed to accurately report your cryptocurrency income, you should strongly consider following the instructions in the letter and amending your tax return as soon as possible.
Remember, the IRS rarely prosecutes taxpayers who come clean before getting caught. So, don’t skip on amending your tax return just because you’re afraid it will get you into more trouble.
Either way, you should consult with a lawyer to evaluate your options and make a decision on the best course of action. Keep in mind that accountants and CPAs do not have the benefit of attorney-client privilege, so you should not discuss this issue with your regular tax return preparer if there’s a possibility your failure to report was criminal in nature.