IRS sets a target on cryptocurrency holders
As a follow up to our previous post regarding federal taxation of cryptocurrency, the Internal Revenue Service (“IRS”) announced on July 26th that it is taking firm steps to bring to cryptocurrency holders into compliance. The IRS expects to deliver over 10,000 letters before August ends to taxpayers that have either failed to report income produced from cryptocurrency transactions or to taxpayers that did not report such transactions adequately.
The IRS informed that it has identified delinquent taxpayers through “various ongoing IRS compliance efforts.” Commissioner Chuck mentioned that "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."
As a remainder, the IRS has been successful collecting taxpayer’s information in the past with “John Doe” summons, in 2017 the IRS gathered information of over 13,000 Coinbase users. See United States v. Coinbase Inc., No. 3:17-cv-1431 (N.D. Cal.). Various online blogs and twitter feeds indicates that most taxpayers receiving IRS’s letters are Coinbase users.
Generally, the IRS informs taxpayers of their failure to tax reporting obligations with different type of letters, the letters depending on the seriousness of the issue can go from an educational tone to a demand to respond under audit threats.
The IRS will be sending cryptocurrency holders three type of letters, i.e., Letter 6173, Letter 6174 or Letter 6174-A. Letter 6173 informs the taxpayer that the IRS believes that the taxpayer has failed to report cryptocurrency transactions and that taxpayer’s response is required; Letter 6174 informs that the IRS has information regarding one or more cryptocurrency accounts owned by the taxpayer, that there might be an error in previous returns or that a return should be filed to correct the error; and Letter 6174-A informs that there is probably a misreporting of virtual currency transactions in taxpayer’s tax return, but that there is not enough reason to demand a response using Letter 6173.
It is important to point out that taxpayers who do not properly report the income tax consequences of cryptocurrency transactions are liable for tax, and potentially liable for penalties and interest for failure to report and pay taxes due. Serious cases could be even subject to criminal prosecution.
We will follow up with relevant guidance once the IRS issues much expected regulation in the near future.
Barbosa Legal can help. Contact at jbarbosa@barbosalegal.com; eberd@barbosalegal.com; or ahernandez@barbosalegal.com to schedule an assessment if you have received a letter from the IRS or to understand the tax treatment of crypto currency as it applies to you.