Decoding the IRS Crypto Letter: A Step-by-Step Guide

Receiving a letter from the IRS about your cryptocurrency activities can be unsettling. Recent reports indicate a significant increase in these communications, highlighting the IRS's growing focus on crypto tax compliance. Don't panic! This guide breaks down what these letters mean and how to respond.

Understanding the Letters

The IRS typically sends out three main types of letters related to cryptocurrency:

• Letter 6173: This is the most serious. It indicates the IRS believes you haven't met your tax filing and reporting requirements for virtual currency transactions.
• Letters 6174 and 6174-A: These letters suggest the IRS is aware you have (or had) cryptocurrency accounts but may not be fully aware of the reporting rules.

Important: While you don't have to respond to 6174 or 6174-A, it is extremely wise to review your past filings. Ignoring them could lead to more serious issues later.

Key Actions to Take (Especially for Letter 6173)

If you receive a Letter 6173, you must take action. Here's a breakdown of potential next steps:

1. File a Delinquent Return

Did you forget to file a tax return altogether? The first step is to get that sorted. File delinquent returns immediately, accurately reporting all crypto transactions.

2. File an Amended Return

Made a mistake on your original filing, like underreporting gains, incorrectly calculating basis, or simply failing to report crypto activity? Amend your return ASAP. Accuracy is key.

3. Contest the Letter (If You Believe It's an Error)

If you believe you've met all reporting requirements and the letter is incorrect, you'll need to gather documentation and respond. Here's what to include:

• Contact Information: Ensure the IRS has your current contact details.
• Statement of Facts: A detailed explanation of your position. Include a complete history of reported crypto income and actions you've taken to ensure compliance. Crucially, include copies of previously filed documents that back up your compliance.
• Signed Letter 6173 Section: Sign and date the section of the letter stating you're sending documents to prove compliance under penalty of perjury.

Where to send it: Check the top of the letter for the correct address and eFax number.

Key Takeaways

• Don't ignore the letter: Even if you think it's a mistake, respond appropriately.
• Gather documentation: Meticulous records are crucial for proving your compliance.
• Seek professional advice: If you're unsure about how to proceed, consult with a qualified tax professional specializing in cryptocurrency.