The IRS Just Sent a Round of Collection Letters to Crypto Holders

After a round of warning letters first went out last month, it's becoming clear that the agency isn't messing around.

Cryptocurrency holders have earned a reputation for being notoriously bad at reporting taxes. In 2018, a slew of reports revealed that only a tiny percentage of cryptocurrency investors were properly reporting their gains and losses that year.

However, the dismal reporting may not have been entirely the hodlers’ faults–after all, the IRS had provided a rather unclear set of guidelines when it came to reporting crypto, and its enforcement of the rules had been somewhat wishy-washy. But not anymore.

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Indeed, the IRS has now reportedly sent out yet another round of letters to crypto holders: this time, to point the finger at taxpayers whom it believes have misreported their crypto-related income–and to collect what they are owed.

CoinDesk reported that one such letter, dated July 29th, 2019, said that a taxpayer owed a total of $3900 for 2017–$3600 in tax and the rest in accrued interest.

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This particular kind of letter (known in the tax world as a CP2000 letter) has been used outside of the cryptocurrency industry in the past. However, Chandan Lodha, co-founder of crypto tax software provider CoinTracker, told CoinDesk that the use of this letter in the crypto space “[is] definitely a new phenomenon.”

However, the letters are not necessarily collection notices. If taxpayers can produce documentation showing that they do not owe, they’re off the hook.

Specifically, Lodha said that recipients have 30 days to respond to the letter. “First they send you the CP2000, they send the proposed amount due and you say ‘yes, I’ll pay that’ or ‘no, and here’s the supporting documentation,” he explained.

“The IRS is expanding our efforts involving virtual currency”

The original round of letters came in July when the IRS sent out a series of warnings (or “educational letters,” as the IRS called them) to individuals who were suspected of having incorrectly reported their crypto-related taxes.

The warning letters came in three different varieties, each with a variation on the following statement: “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, which include cryptocurrency and non-crypto virtual currencies.”

IRS Commissioner Chuck Rettig said in a statement around the time that the first round of letters was sent that “taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.”

“The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The two rounds of letters appear to be a part of the IRS’ renewed effort to crack down on cryptocurrency-related tax collection. The tax agency announced in May of this year that it had begun working on a new set of guidelines for the cryptocurrency space.

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