If you have received a letter from the IRS, then you have to be aware that the agency is potentially judging you as someone who may have misfiled their virtual currency tax returns, or simply not reported them altogether.
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The IRS was able to obtain crypto investor details from exchanges via what it calls an “ongoing” compliance mechanism (U.S.-based crypto exchange Coinbase was ordered to hand over their user data).
As part of a program that began in late July, well over 10,000 people may receive letters 6173, 6174, and 6174-A. The agency describes these letters as “educational” and that they are meant to help crypto taxpayers better understand the modern taxation landscape, as well as for them to fulfill their legal obligations. But – is it that straightforward?
Here is a breakdown of each IRS letter and what you need to do if you have received one. You will also learn how to amend your tax return, as well as better understand the details of which tax forms you need to complete the process. And the big question: Are there consequences if you don’t follow the rules? Let’s find out.
What do all these letters mean? Overview of 6173, 6174, and 6174-A
Letter 6173 – The most critical detail of this letter is that the IRS wants to hear from you by the “respond by” date.
In this letter, the IRS states that it has reason to believe you have failed to report your crypto gains (or) losses. The agency writes that you have failed to submit a federal tax return between 2013 and 2017.
If you have indeed filed your returns but still found this letter in your mail, then the IRS is informing you that the information you provided is lacking certain details. As noted above, you must respond to this letter even when you believe you have done everything right.
Letter 6174 – The IRS is sending this letter to individuals who are known to have one or more crypto accounts. This one is more “educational” in the sense that it provides detailed information regarding tax reporting and crypto taxes.
If you receive(d) this letter, the agency wants you to know that there might be errors in your reporting or you haven’t filed your returns exactly as expected, and so they are reminding you to potentially make some corrections. No follow-up action is explicitly stated, but the polite advice is that you need to make the required amendments (and you should!).
Letter 6174-A – This letter has a similar tone to that of 6174 and is informing you as a taxpayer that the IRS has reason to believe you have failed to report on your crypto gains. However, the agency has yet to take the more dramatic step of sending out a “response required” notice. Letter 6174-A specifically outlines that you may have improperly reported your crypto transactions.
If you receive this letter, the IRS doesn’t need you to respond. However, you have to take action on your own behalf in reporting crypto capital gains.
Note that continuing along the non-compliance path could see the IRS take further enforcement measures, including auditing and possibility penalties, interest or criminal proceedings. So, take even the ‘soft’ notices seriously.
What do I do now?
You may have filed your tax returns, but chances are you just didn’t report on your cryptocurrency returns at all. So, how can you make it all better? We think you already know, and the IRS won’t hesitate to tell you – amend your tax returns and start being compliant ASAP.
How do I avoid trouble?
If you’ve received any of these letters and need to amend your tax returns, you only have to file Form 1040X.
This “Amended Tax Return” form is for registering any errors or new details you did not include in the prior filing.
Here is what you need to do:
Make sure to get all the required documents together and fill them out correctly before filing.
Which tax forms do I need?
For crypto taxation, you will need these forms:
· Form 8949 – this is designated ‘Sales and Other Dispositions of Capital Assets’ and is for listing all of your crypto transactions, i.e. what you sold, traded or sent to others.
· Form 1040 Schedule D for Income Tax Returns. This schedule provides for Capital Gains (and Losses). If you receive any crypto, whether as payment, from an airdrop, fork or mining, then use Schedule 1 (Form 1040) – fill this out under “other income.”
· You can also get Schedule C to report any profit or loss related to your mining business.
The next step is to accurately fill out the 1040X form to amend your crypto tax returns. This form makes it easy for you to amend your filing as it only requires new information. Follow the instructions and explain the need to amend the return.
Once this step is done and dusted, submit the amended tax return by mailing it to the IRS. Ensure you have attached all the required forms first!
So – what if I do nothing?
You probably didn’t take IRS’ Notice 2014-21 seriously. But do not be naive, with the crackdown gaining speed, it’s time you put yourself on the right side of tax law. What happens if you don’t report? The IRS says it is, “focused on enforcing the law,” which definitely means consequences.
If a taxpayer fails to report their cryptocurrency tax returns, then they are liable for penalties as well as interest on all prior years. The IRS can even open up criminal proceedings against you for tax evasion. If you find yourself in such a sticky situation, you should hire a professional crypto accountant to avoid losing all your gains.
I’m not in the US, so it doesn’t matter to me, right?
Wrong! This move by the IRS is already being mirrored in other jurisdictions, as authorities ramp up efforts to regulate the crypto space. Already, the UK’s HMRC has asked three crypto exchanges to provide information on their customers. Now that regulatory oversight is tightening, it’s better to comply than take such a potentially costly risk.