CRYPTO TAX ALERT: IRS Starts Sending New Virtual Currency Education Letters

Crypto Tax Expert writes about crypto client experience and perspective on the new round of Virtual Currency Education Letters from the IRS.

virtual currency education letters

The IRS has officially resumed mailing out virtual currency education letters to taxpayers suspected of inaccurately reporting all their crypto income.  

The IRS first mailed the Virtual Currency Education Letters in July and August of 2019 to about 10,000 taxpayers. 

Dozens of crypto owners contacted me having received the first round of virtual currency education letters, and all of them had crypto holdings in 2017 above $900,000.

The first round of virtual currency education letters showed that the IRS knew who the crypto whale traders were.

IRS Sends a New Round of Virtual Currency Education Letters

This week (August 24, 2020), a crypto owner contacted me, having just received a virtual currency education letter.

virtual currency education letters

However, his 2017 maximum crypto holdings were less than $150,000.

“The recent virtual currency education letter suggests that the IRS now uses much looser criteria for determining whom to send letters.”

What is the significance of this development with the new round of virtual currency education letters?

crypto tax lessons

The federal income tax is a voluntary system in that taxpayers voluntarily report their income to the IRS. The IRS uses audits to find and punish tax evaders. The IRS cultivates a healthy fear in the public to encourage broad voluntary compliance. It is easier for the IRS to send out these education letters to motivate taxpayers to fix their mistakes, then to commit valuable IRS time and resources doing actual audits.

Restarting the education letter campaign again shows the IRS is increasing their focus on non-reporters of crypto income.

“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.”

What are these virtual currency education letters?

IRS letter

There are three different virtual currency educational letters: 6173, 6174, and 6174-A.

Directly receiving any of these virtual currency education letters identifies you as a person of interest to the IRS.

Letter 6173 is sent to those whom the IRS suspects of having possibly engaged in tax misreporting of a criminal level. 

I strongly encourage you to amend your tax returns quickly to avoid legal complications if you have received Letter 6173. Also, engage a criminal tax lawyer.

Letter 6174 and 6174-A are similar and sent to taxpayers suspected of misreporting their crypto income at a non-criminal level. 

Letter 6174-A is a little more verbose than in 6174. I’ve not identified any difference between the situations of those receiving either letter. These are the most common letters.

What do the virtual currency education letters say?

crypto traders

The letters state, “We have information that you have or have had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.” 

The taxpayer is encouraged to amend or file tax returns accurately, reporting crypto income. 

The warning is added, “If you do not accurately report your virtual currency transactions, you may be subject to future civil and criminal enforcement activity.”

Trust me, that’s not a good thing for anyone.

Specific instructions are given to mark a crypto return and provide a particular mailing address for sending the returns. 

These instructions are important because it allows the IRS to track that you acted on the letter.

Recipients who don’t act when receiving a virtual currency education letter will be more likely to get audited.

If you prepared your return, I recommend engaging a professional to assist in the review and amendment of returns, to be safe.

Should you call the IRS telephone hotline information?

enrolled agent crypto

The letters offer a telephone hotline number. The IRS will only provide general advice. 

Be aware, the IRS records all phone calls and keeps a log of the phone numbers of who calls the IRS. 

These call logs and recordings can be used by an auditor or revenue officer if you disclose any clues about your situation.

What can be done about the virtual currency education letters?

crypto tax advice

For most people, the odds of getting audited are low. But if you have received a letter, your odds are high of an audit. 

Getting a professional recalculation of your crypto income and amending 1-3 years of returns is not inexpensive, but getting audited will be several times more expensive. 

Undergoing an IRS audit can also significantly impact a person’s emotional, marital, and financial strain.

At Donnelly Tax Law, we recommend:

– Amending your crypto tax returns using our bulletproof crypto return methodology

– Consulting with an experienced crypto tax return preparation professional about your risks.

How can Donnelly Tax Law help?

US crypto tax services

We believe every crypto taxpayer can have a “Bulletproof Crypto Tax Return.”  

Our website offers powerful do-it-yourself resources and full-service crypto tax preparation services. 

We’ve helped taxpayers owning cryptocurrencies:

  • Avoid over $40 million in gains by using Like-Kind Exchange calculations.

  • We have prepared over 850 anti-money laundering reports required for many crypto traders. 

  • We have prepared over 1025 tax amnesty returns needed by crypto traders correcting back filings. Our acceptance rate is 100% success.

  • Moreover, we’re one of the few firms with experience defending crypto returns at an IRS audit. 

We are experts at filing returns for expats and foreign corporations.

  • We have clients in 48 countries.

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