The IRS recently announced a letter campaign, issuing one of three letters to taxpayers regarding virtual currency. Two of the letters are informational, sent to taxpayers who may have had a requirement to report virtual currency transactions but did not do so (Letter 6174), or taxpayers who reported transactions with virtual currency but may have made a mistake (Letter 6174-A). Neither of these letters require a response to the IRS. It is the third letter that gives tax professionals pause for concern.
IRS Letter 6173 also provides information regarding reporting virtual currency transactions, however this brief letter references a possible criminal investigation three times. The letter also requires the recipient to respond and include in that response a signed a statement under penalties of perjury that their response to Letter 6173 is "true, correct, and complete."
A person receiving Letter 6173 should contact an attorney before responding, particularly if that person knows they have committed a crime (tax evasion, money laundering, etc.), or if the person did not act with the intention of committing a crime, such as tax evasion, but had significant transactions in cryptocurrency that could make the IRS suspicious. Once a taxpayer starts talking to the IRS, statements can be misconstrued, and if a taxpayer says something to an IRS Special Agent that is interpreted as false, the taxpayer could unwittingly be handing the agent the hardest element to prove in a tax crime, the requisite intent to commit the crime.
The IRS press release about this development, IR-2019-132, is available here.
The IRS' recent announcement is consistent with its comments over the past year that it is actively pursuing enforcement for transactions involving cryptocurrency, such as Bitcoin. Our most recent blog post on this topic is available here.
If you have questions about your tax compliance related to digital assets, contact one of our attorneys today.