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Use Caution When Answering IRS Cryptocurrency Letter, Lawyers Warn

Posted on Jul. 30, 2019

Recipients of one of the IRS’s new cryptocurrency tax compliance letters would be well advised to consult a tax attorney before answering it, several practitioners told Tax Notes.

A July 26 notice (IR-2019-132) included three sample educational letters titled “Reporting Virtual Currency Transactions” that the IRS hopes will persuade taxpayers with unreported or unpaid taxes on cryptocurrency transactions to comply with the law.

The IRS plans to send more than 10,000 of these letters to taxpayers it suspects may have unreported, and untaxed, cryptocurrency transactions, an agency release said.

Guinevere M. Moore of Johnson Moore LLC said two of the letters, 6174 and 6174-A, appear to be informational and don’t require a taxpayer response. But “if you get [Letter] 6173, it looks like you’re going to have an issue that needs more attention,” she said.

Letter 6173 references criminal investigations three times and requires the taxpayer to affirm in a timed response under penalty of perjury that their replies are “true, correct, and complete,” noted Betty J. Williams of Williams & Associates PC.

The IRS said in the release that its Criminal Investigation division has made virtual currency tax compliance one of its priorities.

“Once the taxpayer starts talking to the IRS, statements can be misconstrued, and if the taxpayer says something to an IRS special agent that is interpreted as false, the taxpayer could unwittingly be handing the agent the hardest element to prove in a tax crime,” which is intent, Williams said.

“So yes, I [think] that a person receiving this notice should contact an attorney,” particularly if the taxpayer is out of compliance or has transactions that could make the IRS suspicious, Williams said.

Cory Johnson of Colvin + Hallett said the IRS could be sending the letters based on information gleaned from a John Doe summons filed against cryptocurrency exchange Coinbase. While the court narrowed the information requested by the IRS, it still swept up more than 14,000 account holders and 8.9 million transactions, she said.

“It is possible that the IRS also may be using these letters for non-Coinbase taxpayers who have been identified in some other fashion as having potential cryptocurrency issues,” Johnson said. “It is reasonable to assume that recipients of Letter 6173 are likely under audit or in an audit queue.”

Additional Guidance Needed

Notice 2014-21, 2014-16 IRB 938, remains the IRS’s primary guidance on the tax treatment of cryptocurrencies as property.

“The need for additional guidance on virtual currencies has been acknowledged for years,” Moore said. The IRS launched a virtual currency compliance campaign of outreach and examinations in 2018. In May of that year, the American Institute of CPAs called for another notice and FAQ, covering valuations of cryptocurrency donations and fair market valuations. Twenty-one lawmakers wrote to IRS Commissioner Charles Rettig in April of this year, asking for more guidance on virtual currencies.

The IRS said July 26 that it plans to issue more guidance on cryptocurrency taxation “in the near future.”

Part of the reason for the agency’s full-court press could be a narrowing window for prosecuting some of these crimes.

“I understand that the IRS faces a statute of limitations issue and that they need to get people into compliance or under exam before the statute expires,” Moore said. But “it’s disappointing that compliance letters are being issued before additional guidance,” she added.

Williams noted that the statute of limitations is usually six years, but it can be extended if the allegation concerns a tax crime supposedly committed in the past decade.

Williams cautioned taxpayers to take all three letters seriously. “Since the announcement says more than 10,000 taxpayers will receive these letters, I would bet the IRS has information that more than 10,000 taxpayers are in violation of reporting requirements, and that is likely just the tip of the iceberg,” she said.

“Taxpayers are getting a chance now to clean up errors,” Williams said. “If they wait, history has taught us that the IRS will be less generous with its next round of letters or enforcement action.”

Subject Areas / Tax Topics
Institutional Authors
Tax Analysts
Tax Analysts Document Number
DOC 2019-29212
Tax Analysts Electronic Citation
2019 TNTF 146-4
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