Getting a letter from the Internal Revenue Service is certainly one that drives fear down your spine. You should not panic as not all notices completely victimize you. 

If you receive the Letter 6174-A, it just implies that the IRS believes you may have faltered in your taxes because you didn’t report cryptocurrency transactions accurately. That’s certainly all it means. If you are sure you did everything correctly, you don’t even need to reply. 

But then, what is all this about?

The IRS started sending out letters to taxpayers that they confirmed have cryptocurrency accounts, and they are guessing you may not have a clear understanding of the process for reporting and paying taxes on any transactions you may have made. 

The IRS has become very, very interested and focused in virtual currency of late, and it is working diligently on enforcing tax law and helping you understand and meet your obligations as a taxpayer.

How Is Virtual Currency Taxed?

Virtual currency is more popularly known as cryptocurrency. A lot of people think of it using the name of a particular brand of cryptocurrency such as BitCoin. However, there are other brands with more coming out all the time. There are even services to kind of “bank” your cryptocurrency, such as Coinbase.

However, the IRS does not classify virtual currency to be actual currency. The agency says cryptocurrency is property. 

That’s absolute correct. Cryptocurrency like Bitcoins are taxed just as your houses and your stocks. Any transaction you make using virtual currency needs you to know how much you paid for that currency and the value of the goods or services you traded it for. You owe capital gains taxes if the value of your cryptocurrency was higher when you “spent” it than it was when you “bought” it.

So, What about This Warning Letter?

The IRS says these letters are actually educational and they are sending them to assist taxpayers in understanding their tax and filing obligations and how to make corrections on past mistakes. The IRS has begun sending letters to virtual currency owners advising them to pay back taxes file amended returns part of agency’s larger efforts.

• Letter 6173 is usually sent when the IRS thinks you have probably failed to report cryptocurrency transactions, and it noticed that you haven’t sent a return for one or more of the years from 2013-2017. If you did send returns, the IRS is saying you seem to be missing a form or schedule that it thinks should be there.
• Letter 6174 says the IRS is aware you have cryptocurrency accounts. The letter informs you about reporting requirements and taxation of virtual currency. It also says if you believe there is an mistake in your prior returns or if they have not been filed at the appropriate time, well, you should take care of that as quick as possible.

Letter 6174-A says the IRS believes you may have failed to report transactions, but it isn’t sure enough to send Letter 6173, which requires a reply. The IRS knows you have one or more cryptocurrency accounts. It thinks you may not have properly reported any transactions you made with the cryptocurrency. Therefore, here is the information on proper reporting and taxation. Ensure you take corrective action if needed.

As you can see, the letters vary from the IRS thinking you have cryptocurrency and maybe had some transactions, to knowing you have an account and that it’s likely you made taxable transactions that you didn’t report accurately.

However, you may receive Letter 6174-A even if your tax returns are without errors.

So Why Did I Receive This Letter?

It seems the IRS may be multiple mails to any individuals it knows to have a cryptocurrency trading account. So, whether you actually purchased virtual currency or had any other transaction, the simple fact that you have an account somewhere, like Coinbase, is the reason you got a letter.

Some sources have reported that clients have received the letter even as they already reported their cryptocurrency transactions accurately on their tax returns, so these letters are not being sent exclusively to suspected tax cheats.

What Do I Need to Do?

It is important for you to be aware that you mustn’t panic. Ensure you take a deep breath, let it out, and start doing little findings.

If you have already reported your cryptocurrency-related income, just take a careful look at your returns to make sure everything is in order. If all is well, you don’t need to do anything more. The letter even states no response is necessary if you already reported everything on your return.

If you somehow ignored to report the transactions, or you or your business haven’t filed your taxes yet, a good time to call your tax preparer or a tax attorney to help you out would be now. 

• Evaluate your tax returns as it says in the letter.
• Request a wage and income transcript that clearly shows all the data the IRS received about you over the past few years.
• Meet with your tax preparer or tax attorney to scrutinize your options and pick the best one.
• File a return or amendment as soon as you can.

It will interest you to know that with a tax attorney, you enjoy the privilege of attorney-client confidentiality. You don’t often get that with a tax preparer.

And if you owe back taxes, it also means you owe penalties and interest. Ignoring the whole thing won’t make it go away. It may eventually turn into a criminal investigation. So take care of it as soon as you can. Even if you can’t pay the whole thing at once, get in touch with the IRS so you can work out a payment solution.

Staying Compliant

For the purpose of future returns, do not forget how the IRS treats virtual currency, and keep meticulous records of your cryptocurrency purchases and trades. It doesn’t matter whether you traded the virtual currency on an exchange or used it to purchase something else. You need to keep all your numbers straight.

The IRS hasn’t offered a ton of guidance, and many people most likely don’t realize there is an issue. 

Receiving IRS Letter 6174-A is no reason be frightened, although receiving anything from the IRS tends to be a shock to the system. You aren’t the only one; about 10,000 people are receiving these letters.

Read the letter, evaluate your returns, and request a wage and income transcript. If everything is correctly reported, you can go on happily. If you need to file a late return, an amended return, or pay taxes, penalties, and interest, ensure you complete the process as soon as possible.

A tax professional or tax attorney can assist you do all the right things and provide support all through the process.