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Virtual Currency Owners Are Hearing From the IRS

The IRS is stepping up its cryptocurrency enforcement after determining that few taxpayers report gains on these assets. The agency recently sent over 10,000 letters to virtual currency owners urging them to pay back taxes and file amended returns to correct possible past errors in reporting their currency transactions.

Although the letters are characterized as “educational”, they contain tight deadlines for taxpayers to respond to the IRS or face audit. Taxpayers receiving the letters were identified by the IRS through “ongoing IRS compliance efforts” presumably relating to the Coinbase summons case. In early 2018, the IRS won court approval of a summons forcing Coinbase to turn over information on its users who conducted annual transactions of more than $20,000 on its platform between 2013 and 2015.

“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 in announcing the letter campaign. “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.”

Virtual currency owners could receive three different variations of the IRS letter, as described below.

Letter 6173  tells the taxpayer that the IRS has not received either a federal income tax return or an applicable form or schedule reporting the taxpayer’s virtual currency transactions for certain years. The taxpayer is then instructed to file a return reporting the transactions or send in an explanation of why the IRS’s information is incorrect. If the taxpayer fails to respond, the IRS indicates it will refer the taxpayer’s returns for examination.

Letter 6174 explains the rules for reporting virtual currency transactions, but does not require a response. This letter is sent to taxpayers who have virtual currency accounts but may not be aware of reporting requirements. The IRS urges the taxpayer to file amended returns or delinquent returns if no return reporting the transactions has been filed.

Letter 6174-A also explains the rules for reporting virtual currency transactions but is sent to taxpayers who may not have reported the transactions correctly. This letter does not require a response, but states that the IRS may be contacting the taxpayer in the future in conjunction with enforcement activity.

These letters are part of the IRS’s Virtual Currency Compliance campaign announced last year to address tax noncompliance through outreach and examinations of taxpayers.

The IRS anticipates issuing additional legal guidance on virtual currency in the near future. For now, it is important for taxpayers to understand that the IRS means business. Tax enforcement for virtual currency is finally catching up with the technology, so taxpayers need to take notice.

 

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