The Internal Revenue Service (IRS), which is a bureau of the U.S. Department of the Treasury responsible for making sure U.S. persons comply with tax law, has started sending our "educational letters" to "virtual currency" owners.
According to a new release published to the IRS website on Friday (July 26), the IRS started sending "educational letters" to taxpayers last week. These letters are being sent to taxpayers with crypto transactions who either "potentially failed to report income and pay the resulting tax" or who "did not report their transactions properly."
By the end of next month, over 10,000 taxpayers will have received these letters.
IRS Commissioner Chuck Rettig had this to say:
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. 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.
These education letters come in three varieties.
- Letter 6174
- This is a "soft notice" that tells the taxpayer that they did not report their crypto transactions. The notice says they should check their tax return, and if necessary, file an amended return.
- Letter 6174-A
- This is similar to Letter 6174, except that this time the notice says the IRS may follow-up with future enforcement action.
- Letter 6173
- This notice definitely needs a response from the taxpayer regarding the alleged noncompliance, and the IRS will follow up on these responses. The IRS says the purpose of all three variants is to "help taxpayers understand their tax and filing obligations and how to correct past errors."
The IRS goes on to say that last year it "announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers," and that it "will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations."
The news release points out that cryptocurrency (or virtual currency as it likes to call it) is "an ongoing focus area for IRS Criminal Investigation."
Although the general guidelines for crypto accounting were described in an FAQ guide known as IRS Notice 2014-21 (which pointed out that, for federal tax purposes, "virtual currency is treated as property"), the IRS says that it plans to issue further guidance in the near future.
Finally, the news release ends up with the following scary warning:
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.
It makes sense that the IRS is sending out these notices: volunary compliance is good for both the taxyer (since it can help them avoid facing penalties and interest) and the IRS (since it uses fewer of their limited resources).
Furthermore, as mainstream awareness of crypto increases, the IRS probbaly will need to have a much bigger education program (i.e. not just notices posted on its website or sent out to a small subset of taxpayers) that informs the public about the full tax implications of crypto, such as the fact that a taxable event may be triggered when you for a cup of coffee with a crypto debit card.
Featured Image Credit: Photo via Pixabay.com