IRS Letters 6173, 6174, and CP2000 and Crypto Assets
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If you receive IRS Letter 6173, you must respond and potentially must amend returns and pay back taxes.
If you receive IRS Letter 6174 or 6174-A, the IRS thinks you may have underreported your earnings. You don't need to respond, but you may want to contact your tax adviser.
If you receive a CP2000 notice, you must respond to the IRS with more information about your trading history.
What do IRS Letters 6173, 6174, and 6174-A mean?
The purpose of these letters is to inform taxpayers that the IRS has gathered information about their cryptocurrency holdings and trades. They advise recipients to file amended returns and pay taxes owed in light of the IRS' findings.
These letters first started being sent in the summer of 2019, when they were sent to over 10,000 crypto holders. IRS Commissioner Chuck Rettig stated:
Taxpayers should take these letters very seriously. The IRS is expanding efforts involving virtual currency, including increased use of data analytics. This letter is part of a wider campaign to address crypto tax, ranging from taxpayer education to audits and criminal investigations.
You can view examples of the letters on the IRS's press release.
Letter 6173
IRS letter 6173 is the most serious letter. It requires a response by the date on the letter, whether it’s an amended return to properly include crypto transactions.
Letter 6174 and 6174-A
Letters 6174 and 6174-A do not require a specific response, but request action to be taken if cryptocurrency wasn’t properly reported. Letter 6174 states, “We have information that you have or had one or more accounts containing virtual currency but may not know the requirements for reporting transactions involving virtual currency."
Similarly, letter 6174-A states, “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 currency.”
The letters also contain instructions on accurately filing your tax return.
CP2000 Notices
The IRS has also begun to send out crypto CP2000 letters / notices to taxpayers who they believe owe taxes on crypto. The IRS sends a CP2000 if the information they have about you on file doesn’t match what you reported on your tax return.
The CP2000 requires a response. You can indicate whether you agree with the proposed change in tax amount owed, or if you disagree. If you protest the change, you will need to include supporting documentation.
Because the IRS’s information about your crypto may only include the limited data they've received from exchanges, they may have an incomplete picture of crypto transaction history. For example, the IRS may know that you have a staking rewards from your Coinbase 1099, but they may not know your trading history.
You can respond to the CP2000 with your completed crypto tax documents.
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