The rise of virtual currency has brought dramatic changes to the U.S. economy, and the IRS has begun to take notice. In 2018 the agency introduced a digital currency tax compliance campaign, and last summer over 10,000 taxpayers across the country received letters regarding potential issues regarding the report of virtual currency holdings and transactions.

Receipt of a notice may not mean that an individual or organization has misfiled. However, those who have received such a letter should be sure to review their tax reporting for virtual currency carefully and make any needed amendments as soon as possible. Ensuring payment of any back taxes, penalties or interest before an audit or investigation may help to minimize tax liability.

IRS notices related to digital currency

The IRS issued three versions of the notice regarding potential errors or oversights in reporting virtual currency:

  • Letter 6173: indicates that the IRS has evidence that there is or was one or more accounts containing digital currency and that the taxpayer did not file a tax return or did not report virtual currency
  • Letter 6174: indicates that the IRS suspects that a taxpayer with digital holdings may not have filed accurately
  • Letter 6174-A: indicates that the IRS received a report of virtual currency, but the taxpayer may not have reported that information correctly

If amendments are necessary, taxpayers should file a corrected or late tax return and mark the return with the corresponding letter type. Those filing should keep in mind that these types of returns will likely receive extra scrutiny from the IRS, making it essential that submitted information is complete and accurate.

It is important that taxpayers realize that responding to an IRS inquiry with incorrect information may have repercussions beyond financial penalties. In some cases, a perjured report could be a felony. With the increased IRS focus on criminal prosecution of those attempting to shield virtual transactions, those who have digital currency accounts should be sure that their reporting is accurate—whether they receive an official notice or not.