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The International Revenue Service has sent letters to crypto holders in the US. The letters are about accounts suspected to have broken the federal tax laws. Most of the accounts are likely to have misreported their transactions. 

The letters follow a trend started by the state tax agency in 2019. The agency had then sent around 10000 letters to potential accounts with defaults. The letters were in 3 variances depending on the degree of non-compliance. The letters are 6173, 6174, and 6174-A.

Letter 6173 is the most serious. It requires the taxpayer to report to the agency. It also comes with the risk of a possible taxpayer audit. The agency provides a date past which they scrutinize the taxpayer's accounts. The 6174 and 6174-A are reminders on when the taxpayer should honor their obligations. 

The tax agency has become prominent on the tax evasion menace. It held a "crypto tax summit" to deliberate on the matters arising on the subject. After which it has expanded its reach for tax compliance.

Cointracker, one of the bitcoin tax software providers, shared one of the letters. The 6174-A partly read, "we have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currencies, which include cryptocurrency and virtual currencies."

What to Do When Your Receive the IRS Letters

Receiving the IRS letter is not a great experience. It comes with several risks. They put you at risk of scrutinization by the federal tax agency. Failure to follow the letter also sets you up for possible tax issues. You might gain liability over unpaid taxes. There is also the possibility of interest, fines, or criminal prosecution. 

You have to clear all your records with the agency when you receive the letter. Establish the type of letter you have received. Only 6173 requires a direct response. Still, for the others, you need to establish the wrongdoing. Know what the agency requires of you. Also, understand if there are any deadlines. 

The laws on crypto are still not so clear. Take time to understand the different provisions. Reach out to the agency in case of any concerns. The other option is to seek an attorney.
Look for an experienced tax attorney near you to help you through. The attorney helps with legal advice and compliance. 

Understanding Bitcoin Taxation 

Bitcoin is a new asset which most traders don't understand how to handle. The assets operated anonymously for some time. It only changed last year when the courts declared them assets. For that, all the crypto holders must declare and file taxes for the assets. 

Most traders are still not aware of the changes. Others also don't understand the proper taxation process. The agency sent out different letters. They detailed the cases, depending on the letter. 

The traders are still unaware of the source of the agency's information. Most believe that they gain knowledge from the exchanges. 

Coinbase informed the traders of the intention to supply the IRS with account details. This was after a court order. 

The tax rates also vary depending on the account type. The tax agency treats most accounts as short-term gains accounts. They attract taxes like any income gain. 

The agency subjects the short term accounts to up to 39% taxation. The long-term accounts are long-term capital gains. They attract lower taxes of around 15 – 23%.

These rates are not settled with most traders. They seem to be quite excessive. There are already lobbies in the house of representatives for a reduction. Ohio's Rep. Warren David leads the lobbies. He seeks to have the cryptocurrencies exempted from the traditional equities' taxation laws. 

The crypto assets will still change as they become mainstream. 

Does the IRS Letter Violate Taxpayer Rights? 

Given they are still new, the seriousness of the letters is not established. Bitcoin Magazine, in 2019 urged the Bitcoiners not to fret about the letters. They advised the users that the letters are how the IRS is testing waters for reactions. The magazine urged users who filed the taxes incorrectly not to worry. It also pointed out the ones who file correctly but still got the letters.

The primary concern coming up, though, is how the letters infringe on the traders' rights. The IRS Taxpayer Advocate Service (TAS) has called out the agency over the letters. 

TAS is the body within the IRS charged with ensuring fair treatment of all the taxpayers. It claims the letters are like the IRS examination without the taxpayer protection. 

TAS notes the deliberate omission of information by the IRS on the letters. It states the messages are not examinations, yet it still burdens the taxpayers. It seeks the users to follow all examination guidelines with zero protection as it is more of a threat.

There are also cases of more information required, not on the tax filing form. The letter ends up being misleading or confusing. 

Also, the letter does not outline any consequences. They don't show any penalties or interests when the taxpayer doesn't provide information. 

Bottom Line 

Crypto trading has become lucrative in recent times. It, however, comes with challenges as a new asset. The government is yet to establish the exact protocols on handling such income taxes. 

The IRS is becoming strict on the crypto traders. It has continued a trend it started last year to send letters to non-compliant traders. The different letters follow the previous year's first batch. 

Cryptocurrency has become a tax evasion conduit in recent times. It comes with the anonymity that allows transactions without monitoring. The exchanges are making them more regulated. The exchanges are compelled by the law to provide customer transaction details.

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