Over the past few years, the IRS has increased its efforts to enforce tax compliance among cryptocurrency investors. As part of this initiative, the agency has issued a series of letters, most notably IRS Letters 6173, 6174, and 6174-A, to taxpayers believed to have engaged in crypto transactions. These letters serve as a warning, a reminder, or a formal notice, depending on the specific version received.
Receiving one of these letters does not necessarily mean you are in trouble, but it does mean the IRS is aware of your digital asset activity. Failing to address the notice can lead to serious outcomes such as audits, penalties, or further legal action. This post will explore why these letters are being sent, what each version means, and how crypto investors can navigate this process with confidence and clarity.
Why Is the IRS Sending Such Crypto Letters?
The IRS has significantly expanded its visibility into cryptocurrency transactions, making it easier to identify unreported income. IRS Crypto Tax Letters are part of a broader effort to close compliance gaps before they escalate into enforcement cases.
Data From Exchanges and Third Parties
The IRS obtains user data directly from exchanges thanks to Know Your Customer (KYC) rules, subpoenas, and partnerships with crypto platforms. This allows them to flag potential underreporting even when the investor believes their activity went unnoticed.
Letters as a Compliance Tool
These letters are not always accusatory. In many cases, they are issued to encourage voluntary corrections. Each version, 6173, 6174, and 6174-A, signals a different level of concern and required action. A detailed breakdown of these letter types and what each means has helped investors understand the best way to respond when contacted by the IRS.
Understanding Each Letter Type
Each IRS crypto letter serves a specific purpose and carries a different level of urgency. Understanding the distinction between them is crucial to responding appropriately and avoiding unnecessary penalties or scrutiny.
IRS Letter 6173
This is the most serious of the three letters. It is sent when the IRS has strong reason to believe you failed to report cryptocurrency income or did not file tax returns for specific years, typically between 2013 and 2017. The letter requires a written response within 30 days. Depending on your situation, you may need to:
- File previously unsubmitted tax returns
- Amend past filings using Form 1040-X
- Submit a signed statement explaining why you believe your filings are accurate, along with supporting documents
Failure to respond could result in a full IRS audit or additional enforcement action.
IRS Letter 6174
Letter 6174 is less severe and is primarily informational. It indicates that the IRS knows you hold or trade digital assets and reminds you to report all related income. No immediate response is required, but recipients are encouraged to review past returns and correct any inaccuracies voluntarily.
IRS Letter 6174-A
This version is more targeted than 6174 but still not as urgent as 6173. This implies that the IRS suspects crypto income is underreported but lacks enough evidence to demand an immediate response. While not mandatory, timely self-correction can prevent the situation from escalating further.
How to Respond To IRS Letters the Right Way?
Receiving an IRS letter about your crypto activity can feel overwhelming, but a calm, structured approach can make the process manageable. The key is to act quickly, accurately, and with full documentation.
Gather Your Complete Transaction History
Collect your full crypto transaction history from all exchanges, wallets, and platforms, including DeFi protocols. Ensure the records include dates, values, and asset types for every trade, swap, or transfer.
Compare With IRS Records
Match your data with any forms the IRS may have received, such as Form 1099-MISC or other third-party reports from exchanges. Look for any discrepancies in income or gains that may not have been accounted for in your tax return.
File Missing or Amended Returns
If errors or omissions are found, use Form 1040-X to amend prior tax returns. Include Form 8949 for capital gains reporting and Schedule D if necessary. This ensures proper classification of each crypto transaction.
Maintain a Paper Trail
Remember all supporting documentation, even if you believe your original filings were accurate. This will be important in case of follow-ups or audits. Consult a tax professional experienced in crypto reporting to guide you on your next steps when in doubt.
Common Mistakes To Avoid When Replying To IRS Letters
While responding to an IRS crypto letter, many taxpayers make avoidable errors that can complicate their situation. Knowing what to avoid can be as important as knowing what to do.
Ignoring the Letter
One of the most common and costly mistakes is ignoring the notice altogether. Even informational letters like 6174 and 6174-A signal that the IRS monitors your activity. Failing to act, especially if you receive Letter 6173, can lead to audits or legal proceedings.
Assuming the Letter Is a Scam
Although phishing scams exist, many legitimate IRS letters are dismissed because recipients assume they are fraudulent. Always verify the source through the IRS website or contacting the agency before discarding any official correspondence.
Responding Without Reviewing Records
Another misstep is responding too quickly without verifying your tax filings or transaction data. Filing a premature or incorrect response could raise questions and trigger a deeper investigation.
Filing Without Documentation
If you’re submitting an amended return, ensure you include detailed records and supporting forms. Filing without sufficient documentation weakens your position and may delay the review process.
Tips for Staying IRS-Compliant Going Forward
Staying compliant with IRS expectations isn’t just about reacting to notices; it’s about building habits that prevent issues from arising in the first place. These practical steps can help crypto investors remain on the right side of tax laws.
Maintain Accurate Transaction Records
Keep a detailed log of all crypto-related activity, including buys, sells, swaps, staking rewards, and airdrops. Capture transaction dates, token values in USD, and associated fees to calculate gains or losses correctly.
Know the Tax Treatment of Each Activity
Different crypto activities are taxed differently. Trading may trigger capital gains, while staking or earning crypto through rewards could be classified as income. Understanding the category each falls into is essential for accurate reporting.
Don’t Rely on Exchanges Alone
Exchanges may not track your history, especially if you use multiple platforms or wallets. Use third-party tools or consult professionals to ensure your tax reporting reflects the full picture.
Conclusion
Receiving an IRS letter about your crypto activity is not an accusation, but a serious prompt to review your tax filings. Whether the notice requires action, it signals that the IRS is watching digital asset activity more closely than ever. Taking the right steps, like amending returns or verifying records, can help you avoid costly penalties or audits. Staying proactive, informed, and transparent is the best way to navigate these changes and maintain long-term compliance with federal tax laws.