We have previously discussed the IRS using John Doe warrants to obtain information about U.S. taxpayers, as well as data analytics to target those with potential tax and criminal liabilities. In addition to targeting traditional tax cheats, the IRS is also looking at those holding cryptocurrencies in their financial portfolios. The IRS treats cryptocurrencies, also known as virtual currencies, as property for federal tax purposes. On July 26, 2019, the IRS admitted mailing letters to people the government believes held, or currently holds, cryptocurrencies in their financial portfolios. Recipients will receive one of three letters, a Form 6173, 6174, or 6174-A.
The IRS Sends Cryptocurrency Warnings
IRS Letters 6174 and 6174-A notify the recipient that federal law treats cryptocurrency gains as taxable events, but the letters require no additional action from the recipient so long as tax obligations have been satisfied. Even those compliant with U.S. tax law may receive one of these letters.
However, Form Letter 6173 alleges the recipient has not complied with U.S. tax law, demands information, and even asks the recipient to sign and return an attestation. As we have explained in the past, the attestation alone can subject you to being prosecuted for a process crime (such as obstruction of justice), which the Justice Department continues to rely upon with alarming frequency. Form Letter 6173 warns the recipient that if no response is returned to the IRS, the recipient will be audited. In other words, you should not ignore this letter.
The Virtual Currency Compliance Campaign
These letters are part of the IRS virtual currency compliance campaign, which was announced in 2018.
The campaign notified U.S. taxpayers:
“U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations. The compliance activities will follow the general tax principles applicable to all transactions in property, as outlines in Notice 2014-21. The IRS continues to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.”
In 2019, the IRS Criminal Investigators Cyber Crimes program manager provided training to IRS criminal agents on some of the more than 2,000 cryptocurrencies currently in use, smart contracts, initial coin offerings, mining, blockchain, exchanges, digital wallets, the dark web, and how to use legal tools to identify those involved in transactions. It is clear from the training that the IRS is not solely relying on voluntary disclosures made after sending letters but will be conducting criminal investigations in addition to the civil audits. As cryptocurrencies gain wider acceptance, the government will increase investigations targeting those holding cryptocurrencies.
Retain Experienced Legal Counsel Today
As we have advised in the past, you should not speak to a government agent without having a lawyer present. This policy applies equally to criminal and civil government authorities conducting an IRS audit. It is imperative to retain counsel experienced in criminal and civil investigations to navigate the perils you face when you learn the IRS is investigating you for hiding money overseas or not reporting gains from cryptocurrency. If you believe you are under investigation, or if you are an attorney or accountant with a client under investigation, contact the Law Offices of Horwitz & Citro, P.A. immediately.