Uh oh. You have a letter from the Internal Revenue Service. Why, oh, why? What did you do, or not do (as the case may be)?

In the case of Letter 6174-A, it just means that the IRS believes you may have messed up your taxes because you didn't correctly report cryptocurrency transactions. That's all it means. If you did everything correctly, you don't even need to respond. 

Still, what is all this about?

This summer, the IRS started sending out letters to taxpayers that they know have cryptocurrency accounts, and they are guessing you may not have understood the process for reporting and paying taxes on any transactions you may have made. 

The IRS has become very, very interested in virtual currency of late, and it is focused on enforcing tax law and helping you understand and meet your obligations.

How Is Virtual Currency Taxed?

Virtual currency is more commonly known as cryptocurrency. Many people think of it using the name of a particular brand of cryptocurrency such as BitCoin. However, there are other brands with more coming out all the time. There are even services to sort of "bank" your cryptocurrency, like Coinbase.

However, the IRS does not consider virtual currency to be actual currency. The agency says cryptocurrency is property. 

That's right, your BitCoins are taxed like your house and your stocks. Any transaction you make using virtual currency requires you to know how much you paid for that currency and the value of the goods or services you traded it for. You owe capital gains taxes if the value of your cryptocurrency was higher when you "spent" it than when you "bought" it.

So, What About This Warning Letter?

The IRS says these are actually educational letters they are sending to "help taxpayers understand their tax and filing obligations and how to correct past errors." https://www.irs.gov/newsroom/irs-has-begun-sending-letters-to-virtual-currency-owners-advising-them-to-pay-back-taxes-file-amended-returns-part-of-agencys-larger-efforts

• Letter 6173 is sent when the IRS thinks it likely you have failed to report cryptocurrency transactions, and it noticed that you haven't sent a return for one or more of the years from 2013-2017. If you did send returns, the IRS is saying you appear to be missing a form or schedule that it thinks should be there.
• Letter 6174 says the IRS knows you have cryptocurrency accounts. The letter tells you about reporting requirements and taxation of virtual currency. It also says if you believe there is an error in your prior returns or if they have not been filed when they should, well, you should take care of that right quick.
• Letter 6174-A says the IRS believes you may have failed to report transactions, but it isn't sure enough to send Letter 6173, which requires a response. It knows you have one or more cryptocurrency accounts. It thinks you may not have appropriately reported any transactions you made with the cryptocurrency. Therefore, here is the information on proper reporting and taxation. Please take corrective action if needed. Thanks.

As you can see, the letters range from the IRS thinking you have cryptocurrency and maybe had some transactions, to knowing you have an account and that it's likely you made taxable transactions that you didn't report correctly.

However, you may receive Letter 6174-A even if your tax returns are perfect.

So Why Am I Getting This Letter?

It appears the IRS may be blanket mailing to any individual it knows to have a cryptocurrency trading account. So, whether you actually purchased virtual currency or had any other transaction, the mere fact you have an account somewhere, like Coinbase, is the reason you got a letter.

Some sources have reported that clients have received the letter even though they already reported their cryptocurrency transactions correctly on their tax returns, so these letters are not being sent exclusively to suspected tax cheats.

What Do I Need to Do?

First and foremost, you mustn't panic. No panicking. Take a deep breath, let it out, and start doing a little homework.

If you have already reported your cryptocurrency-related income, just take a good look at your returns to make sure everything is accurate. If all is well, you don't need to do anything more. The letter even says no response is necessary if you already reported everything on your return.

If you somehow neglected to report the transactions, or you or your business haven't filed your taxes yet, now would be a good time to call your tax preparer and/or a tax attorney to help you out. 

• Review your tax returns as it says in the letter.
• Request a wage and income transcript that shows all the data the IRS received about you over the past few years.
• Meet with your tax preparer or tax attorney to evaluate your options and pick the best one.
• File a return or amendment ASAP.

Something to consider: with a tax attorney, you enjoy the privilege of attorney-client confidentiality. You don't have that with a tax preparer. Just saying.

And if you owe back taxes, you owe penalties and interest also. If you just ignore the whole thing, it won't go away. It may turn into a criminal investigation. So take care of it pronto. Even if you can't pay the whole thing at once, get with the IRS so you can work out a payment solution.

Staying Compliant

For future returns, remember how the IRS treats virtual currency, and keep scrupulous records of your cryptocurrency purchases and trades. It doesn't matter whether you traded the virtual currency on an exchange or used it to buy coffee. You need to keep all your numbers straight.

The IRS hasn't provided a ton of guidance, and many people probably don't realize there is an issue. 

Receiving IRS Letter 6174-A is no reason to worry, although receiving anything from the IRS tends to be a shock to the system. You aren't the only one; about 10,000 people are receiving these letters this summer.

Read the letter, review your returns, and request a wage and income transcript. If everything is accurately reported, you can go on your merry way. If you need to file a late return, an amended return, or pay taxes, penalties, and interest, take care of it as soon as possible.

A tax professional or tax attorney can help you do all the right things and provide support throughout the process.