In August 2020, a number of crypto investors received a letter from the IRS about unpaid crypto taxes - specifically IRS letters 6174, 6174-A and 6173. While these letters are of varying degrees of seriousness, they are an initial step by the IRS that could lead to more serious ramifications like investigations and audits. In this article, we’ll break down everything you need to know about the letters, and what the next steps are.
Why did you receive an IRS crypto letter?
If you have received a letter from the IRS, there are two things to remember. First, the letter doesn’t necessarily mean something is definitely wrong, especially if you’ve received 6174 or 6174-A. Over 10,000 people have received these letters and there is a chance that the IRS is blanket mailing people they know have cryptocurrency accounts.
At the same time, a letter from the IRS could become a precursor to an audit or investigation so don’t take it lightly. Use this opportunity to review your returns thoroughly, do the revisions you need to and report your crypto gains accurately with a crypto tax software tool like Koinly.
What do the letters mean?
There are three main kinds of letters that the IRS is sending out right now and here’s what they mean:
IRS Letter 6173
This is the most serious one. It’s sent when the IRS thinks you’ve probably failed to report crypto income, or you haven’t filed returns for one or more years between 2013-2017. Even if you have sent returns, there’s a chance you’ve missed out on some important form or schedule.
This letter requires a response within 30 days. If it’s too short a time period for you, request an extension. Here are some of the different scenarios that require an action from your end.
- Delinquent returns If you haven’t filed income tax returns for any of the years from 2013-17, you need to do this immediately.
- Amended returns If you filed your returns but made a mistake by failing to report your crypto income or underreporting the income, you can file an amended return using Form 1040.
- Statement of facts After cross-checking your returns and going through them with an expert, if you believe that you have filed them correctly, you just need to email/eFax a statement of facts to the ID/eFax number stated on top of the letter. This should include your contact information, a complete history of previously reported income along with relevant documents, and a statement saying that all the information in the document is true, complete and verified.
IRS Letter 6174
Letter 6174 is less serious. It means that the IRS knows you have cryptocurrency accounts. It explains the taxation policy for crypto transactions and also says that if you haven’t filed returns previously or have made an error, you should rectify it quickly.
IRS Letter 6174-A
Letter 6174-A is sent when the IRS suspects you may have failed to report crypto income, but it isn’t so sure as to send you Letter 6173. It thinks you may not have reported certain transactions and gives you detailed instructions regarding the proper filing of returns and reporting on income. It also asks you to take immediate corrective action if required.
Both these letters also have next steps mentioned in them, the only difference is that these letters don’t come with a 30-day deadline, unlike 6173. Once again, you need to review your returns, make sure everything is in order and file an amendment if required.
Use crypto tax software to get on track
If you don’t have adequate information about crypto taxes and don’t know where to begin, start by reading our comprehensive crypto tax guide on the subject. It’s also a good idea to reach out to a tax accountant who can advise on your unique circumstances. If you are ready to calculate your capital gains you can use cryptocurrency tax software such as Koinly to generate a Form 8949 & Schedule D.