Information Release 2019-132, issued on July 26, 2019, advises virtual currency owners to expect a letter providing information on how to pay back taxes through filing amended returns. Virtual currency investors were identified through ongoing enforcement actions, including the summons on the popular virtual currency exchange Coinbase.
"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," said IRS Commissioner Charles Rettig in the Release. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."
From now through the end of August 2019, the IRS intends to send 10,000 education letters to virtual currency investors they’ve identified. Currently, three variations of this education letter are in circulation. They target taxpayers who the IRS believes have or may have had one or more accounts containing virtual currency but may not have properly reported their transactions. Specifically:
1. Letter 6173
This letter is sent if the IRS hasn’t received either a federal income tax return or an applicable form or schedule reporting the virtual currency transactions for one or more of tax years 2013 through 2017.
2. Letter 6174
This letter is when the IRS believes the taxpayer may not know the requirements for reporting transactions involved in cryptocurrency.
3. Letter 6174-A
This letter seems to be the “catch-all” for those taxpayers who reported some virtual currency activities.
Each version provides information to the taxpayer on understanding income tax filing obligations for virtual currency and how to correct potential past errors, including which forms and schedules to use and where to file. The IRS anticipates issuing additional legal guidance in the “near future” and continuing to focus on virtual currency compliance through its Criminal Investigation unit.
Taxpayers not properly reporting their virtual currency transactions (as outlined in the only guidance currently, Notice 2014-21) may be liable for additional tax, penalties and interest and, depending on the nature of the underreporting, potentially criminal prosecution. Taxpayers and practitioners alike are still awaiting additional guidance referenced by Mr. Rettig on May 30th regarding the treatment of hard forks and basis calculations through an impending Revenue Procedure.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.