In today’s rapidly evolving digital economy, cryptocurrency transactions have become a primary focus of IRS civil and criminal tax enforcement efforts. If you’ve received an IRS letter regarding your cryptocurrency holdings or transactions, it is critical to act swiftly and strategically. Such a letter is not a death sentence—it is an invitation to review your compliance, clarify your reporting, and engage professional legal assistance before the matter escalates.
In a landmark enforcement action, the Internal Revenue Service (IRS) and the U.S. Department of Justice (DOJ) recently secured what is essentially the first criminal tax evasion conviction exclusively centered on cryptocurrency. The defendant, Frank Richard Ahlgren III of Austin, Texas, was sentenced to two years in federal prison and ordered to pay over one million dollars in restitution for willfully underreporting gains from selling approximately four million dollars worth of Bitcoin. Ahlgren—who began purchasing Bitcoin in 2011—allegedly inflated his cost basis to fraudulently reduce his taxable income, withheld substantial portions of his Bitcoin proceeds from his 2017 tax return, and then failed to report an additional six hundred and fifty thousand dollars in Bitcoin sales over the following two years. Acting Special Agent in Charge Lucy Tan of IRS Criminal Investigation’s Houston Field Office underscored that this is the first purely tax-focused crypto prosecution, sending a clear signal that digital-asset tax infractions—absent other criminal factors like money laundering—can still trigger life-altering civil and criminal tax ramifications and incarceration.
At the Tax Law Office of David W. Klasing, we are a boutique California tax firm specializing in complex, niche tax issues, including the evolving regulatory and compliance challenges associated with virtual currencies such as Bitcoin. If you have questions regarding your cryptocurrency reporting responsibilities, we are here to provide dedicated and zealous support. To arrange a reduced-rate initial consultation with our dual-licensed cryptocurrency tax lawyers & CPAs, please contact us online immediately or call the Tax Law Office of David W. Klasing at (888) 640-3408 for assistance.
Understanding the IRS Letter
IRS letters concerning cryptocurrency can take various forms—from notices of deficiency to CP-2000 notices triggered by discrepancies between what you reported and what third-party data shows. Often, these letters detail concerns about unreported gains, understated income, or other irregularities in your digital asset transactions. The IRS is increasingly leveraging advanced data analytics and digital forensics to cross-reference information received from cryptocurrency exchanges with your tax returns. Hence, even minor reporting errors can attract intense scrutiny and escalate a routine civil tax audit into an exponentially worse IRS-CID criminal tax investigation.
In recent years, the IRS has focused more resources on identifying cryptocurrency users who fail to declare their activities properly. In 2020 alone, the agency sent over 10,000 warning letters to virtual currency users regarding the filing of their cryptocurrency taxes. If the IRS has information suggesting that you have or had one or more accounts containing virtual currency but may not have reported your transactions correctly, you might receive one of three types of letters: Letter 6173, 6174, or 6174-A.
As noted in the IRS public notice, all three versions of the circulating letter guide resolving cryptocurrency tax compliance issues. However, due to the complexity of the applicable regulations—and the substantial civil and criminal tax penalties that may be at stake—it is advisable to discuss potential strategies with a knowledgeable tax compliance attorney before communicating with the IRS. Generally, it is never in your best interest to contact the IRS until you have first consulted with an experienced dual-licensed tax attorney & CPA.
Types of IRS Letters Relating Cryptocurrency
There are three versions of the IRS letter you might receive—Letter 6173, Letter 6174, or Letter 6174-A. Each letter begins by explaining that the IRS is contacting you to resolve an apparent tax compliance issue regarding unreported income or capital gains from your cryptocurrency transactions. For example, Letter 6174-A typically states:
“We have information that you have or had one or more accounts containing virtual currency [such as a Bitcoin wallet] but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.”
After this introduction, the IRS outlines the steps you need to take to resolve the issue and reestablish compliance.
Letter 6173
This letter indicates that the IRS believes you failed to meet your U.S. tax filing and reporting requirements for your virtual currency transactions. If you receive a 6173 letter, you should take immediate action by:
- Filing any delinquent income tax returns if you have not submitted them.
- Filing an amended return if errors are identified, such as not reporting your cryptocurrency transactions or miscalculating your gains or losses.
- Submitting evidence of compliance: If you believe you have fulfilled all reporting requirements, follow the instructions provided to send a statement of facts, your contact information, and a signed certification under penalties of perjury, using the address and eFax number specified in the letter.
Letters 6174 and 6174-A
These letters are issued when the IRS suspects that you may not fully understand the reporting requirements for your cryptocurrency transactions. They instruct you to review your Form 1040 filing and, if necessary, file an amended or delinquent return. Key points include:
- Review and Amend: If you did not accurately report your virtual currency transactions, you should file an amended or late return.
- No Immediate Response Required: Although you do not need to respond right away to a 6174 or 6174-A letter, failure to address the issues may lead to further IRS correspondence and additional scrutiny.
- Consequences of Inaction: Not responding by the deadline—especially with a 6173 letter—could result in your tax account being referred for examination, with any underpayments or nonpayments accruing penalties and interest. Failure to file tax returns can expose you to substantial penalties and interest, and willful noncompliance may even trigger criminal tax charges.
Receiving any of these letters does not automatically mean you will be criminally investigated for Bitcoin tax evasion. However, it does signal that the IRS is aware of your cryptocurrency activities, which could spell trouble for taxpayers who have incorrectly reported virtual currency transactions in the past. Hence, before contacting the IRS, it would be wise to consult with a knowledgeable dual-licensed tax evasion defense attorney & CPA to successfully guide you through the process.
What To Do If You an IRS Letter Relating Cryptocurrency
If you have received Letter 6173, 6174, or 6174-A from the IRS regarding your cryptocurrency account(s), try not to panic. Receiving a letter from the IRS does not necessarily mean that you will be criminally investigated for Bitcoin tax evasion; but it does mean that the IRS is aware of your financial activities, which could spell trouble for taxpayers who have incorrectly reported virtual currency transactions in the past.
If you receive an IRS letter regarding your cryptocurrency, take the following actions without delay:
- Review the Letter Carefully: Read every detail, noting deadlines, specific issues raised, and the documentation requested.
- Act Promptly: Time is critical. Delays can escalate the investigation and increase potential penalties.
- Preserve All Documentation: Gather comprehensive records of your cryptocurrency transactions. This includes transaction histories, exchange statements, wallet records, and any related communications from digital currency platforms.
- Understand Your Filing Requirements: Whether you need to file delinquent returns, amend your existing returns, or prove that you have met your reporting obligations, it is essential to know what is required under current tax law.
Due to the technical complexities and severe potential consequences associated with cryptocurrency taxation, addressing IRS letters on your own is not advisable. At the Tax Law Offices of David W. Klasing, we will help you interpret the IRS correspondence, thoroughly review your transaction records, and develop a robust defense strategy—whether the discrepancies are due to genuine errors, misunderstandings of tax law, or intentional noncompliance.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced criminal tax defense tax attorneys, Kovel CPAs, and EAs, our firm provides a one-stop-shop for efficiently achieving optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
Contact The Tax Law Offices of David W. Klasing Today If You Have Received an IRS Letter about Your Cryptocurrency
At the Tax Law Offices of David W. Klasing, we specialize in high-risk civil and criminal federal tax controversies. Our firm is renowned for its aggressive, strategic defense and is staffed by dual-licensed criminal tax defense attorneys and CPAs. With an A+ rating from the Better Business Bureau and a flawless 10.0 from AVVO, our long track record in handling complex tax disputes speaks for itself. When faced with an IRS letter about your cryptocurrency, our experienced team will:
- Rigorously Review Your Case: We meticulously examine the IRS correspondence and cross-reference your digital asset records to pinpoint any discrepancies.
- Challenge Overbroad or Erroneous Claims: We ensure that the IRS’s assertions are based on accurate data and supported by sound legal reasoning.
- Negotiate Penalty Mitigation: Through aggressive negotiation and strategic litigation, we work to reduce or eliminate potential civil and criminal penalties.
- Guide You Through Voluntary Disclosures: If discrepancies are identified, we manage the process of voluntary disclosure to bring you into compliance while protecting your rights under attorney-client and work product privileges.
Call the tax law offices of David W. Klasing today at (800) 681-1295 or schedule a reduced-rate initial consultation here.
