In a statement issued on July 26, the IRS has announced that it will send letters to more than 10,000 taxpayers who participated in virtual currency transactions. These letters are not the long-awaited guidance the IRS Commissioner promised on May 16, 2019; it is an apparent ramp-up in the Service’s efforts to encourage taxpayers to report virtual currency transactions and pay the resulting tax, interest, and penalties.
As you may recall, the IRS in Notice 2014-21 stated that virtual currency is property for federal tax purposes and provided guidance on how general federal tax principles apply to virtual currency transactions. These educational letters follow these general tax principles.
According to the statement, the recipients should expect to receive one of three letters titled “Reporting Virtual Currency Transactions.” Depending on the form (6173, 6147, 6147-A), the letters have all the markings of a generic mailing campaign, but some are personally targeted and do promise enforcement action.
Each letter will begin with a statement to the effect that the IRS has information that the recipient has “or had one more accounts containing virtual currency.” Additionally, the letters will provide information on what the recipient needs to do to report, the common schedules available for reporting, and guides taxpayers to additional resources on the matter.
Although letter 6147 and letter 6147-A do not require action, letter 6147-A does state that the Service may send other correspondence about potential enforcement activity in the future. On the other hand, letter 6173 makes the recipient aware that if they do not respond by the date of the letter; their tax account will be referred for examination.
“Taxpayers should take these letters very seriously,” IRS Commissioner Charles Rettig said in the statement, which also notes that taxpayer names were collected through data analytics and information from the Service’s ongoing compliance efforts.
In issuing the letters, the IRS believes that taxpayers are more likely to comply and report transactions if they clearly understand that virtual currency transactions are subject to taxation.
No one should assume that the Service does not know that taxpayers hold or have been involved in virtual currency transactions. Anyone in receipt of such a letter should contact a tax professional to understand the gravity of the situation.
Should you have any questions regarding cryptocurrency, or any other complex tax issue please contact Steven Miller, National Director of Tax.