A number of crypto investors have received letters from the IRS that stated:
"We have information that you have or 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."
Mainly three types of letters were sent out by the Internal Revenue Service, namely the Letter 6173 IRS, the IRS letter 6174, and 6174-A. Let us understand what each of these letters means, and what steps you must take after you’ve received them.
Why Did You Receive It?
The Internal Revenue Service (IRS) is constantly trying to come up with better ways to keep the records clean of anyone dealing with cryptocurrency. Sending out these letters is a warning that one should take seriously. But why did you receive it?
Firstly, it might not always be true that there’s something wrong with your tax returns. The IRS can also be sending out these letters to a mass audience who have crypto assets.
Secondly, you also shouldn’t take the form lightly as these warning letters could also be the signal of audits and investigations. This is why it is essential to understand what each of these letters means.
What Do Those Letters Mean?
Primarily, the IRS sends out three kinds of letters, namely:
- Letter 6173 (IRS)
- IRS Letter 6174
- IRS Letter 6174-A (IRS)
IRS Letter 6173
The letter 6173 (IRS) has been delivered to you when the IRS suspects that you have not reported crypto income or haven't filed returns for one or more years from 2013 to 2017. But there’s a chance that you receive this letter even after filing your tax return.
But why? In this case, you might have overlooked an important form or schedule while filing your taxes.
The letter 6173 (IRS) also comes with a strict deadline of 30 days within which you have to respond. In case the time frame is short for you, you can also file for an extension.
IRS Letter 6174
Letter 6174 is an indication the IRS is aware of your crypto holdings. It describes the taxation policy for crypto transactions and advises that if you have not yet filed returns or have made an error, you should do so as soon as possible.
IRS Letter 6174-A
When the IRS accuses you of failing to disclose crypto income but isn't certain enough to issue you Letter 6173, it sends you Letter 6174-A. It suspects you may have failed to report certain transactions and provides you with specific instructions for submitting taxes and reporting revenue. It also requests that you take immediate action if required.
What To Do When You Receive These Letters?
If you’ve received Letter 6173 (IRS), here’s what you need to do on your part:
In case you have missed out on any tax returns between 2013 to 2017, you must pay them immediately.
In case you have submitted your taxes but missed out on a certain transaction or underreported your taxes, you can file Form 1040 to amend your tax returns.
Stating The Facts
In case you have checked your taxes and consulted a tax expert as well, and see that there’s nothing wrong with your reports, you can just send an email or an eFax statement of facts to the email ID or the eFax number mentioned at the top of the letter. This should include the following information:
- Your contact information
- A comprehensive history of previously reported income
- Applicable papers
- Declaration stating that all information in the document is genuine, complete, and confirmed.
If you fail to respond to this letter, your tax account will be audited by the IRS.
Unlike Letter 6173 (IRS), IRS Letter 6174 and IRS Letter 6174-A (IRS) do not have a 30-days deadline. However, you must ensure that everything is in order and make payments or amendments as required.
The Bottom Line
The data of all your crypto transactions can often be scattered as your transactions take place in exchanges, wallets as well as other crypto platforms. This leads to underreported tax return documents like Form 8949. To add to the challenges, not many exchanges provide you with accurate reports of your transactions. How can you accurately calculate your taxes?
This is where crypto tax software, like ZenLedger, comes in. ZenLedger can easily automate the entire process of tax filing. You can get accurate reports of your crypto transactions and hand them over to a tax professional who can make necessary adjustments to your reports.
In case you are still facing any confusion around crypto taxes, it is best recommended to go through our comprehensive crypto tax guide that deals with the very basics of crypto taxes and tax reporting.
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.