On-Demand: IRS Letters on Crypto Transactions | Compliance, Controversy, and Enforcement

Since July of 2019, the IRS began mailing letters to approximately 10,000 taxpayers. These taxpayers are suspected of having or had one or more accounts containing virtual currency. And what's also important is not only the suspicion that a taxpayer had an account or has an account, but also that the particular taxpayers who received these letters, and we're going to go into that in more detail in terms of the three letters that you see up there. The taxpayers may not have met their U.S. tax filing and reporting requirements for transactions involving virtual currency, cryptocurrency. And I think that's important because a determination was made by the Internal Revenue Service at the time that these letters a, were considered, b, drafted and then c, sent out where the IRS believed that those individuals that it sent these letters to, these taxpayers had one or more accounts, or have one or more accounts where they did not report their virtual currency transactions.

So that's very important to know from background perspective. The IRS mailed one of three distinct letters to taxpayers. And as you can see on this particular slide, which is number four, that there are three letters, letter 6173, 6174 and 6174-A. What's important is that the IRS did not randomly mail any one of these three letters to taxpayers. There was a fundamental reason why the IRS sent letters to those taxpayers who receive them. And each of these particular letters refers to reporting virtual currency transactions. So this correspondence relates specifically to virtual currency transactions and the obligation, the requirement to report them.

And the reason why I think it's important to mention that these transactions or these letters were not randomly sent to taxpayers, is let's just take a look at what the IRS commissioner Charles Rettig recently said when he was at a particular tax conference where he spoke publicly. He said, "If you get a letter, and your name is on the letter, and the letter happens to contain your home address, or the address that matches your tax return, and it's from the IRS, and it's encouraging you to.", and I like this particular sentence or this phrase, "Maybe take a second look at your tax return, one might assume we," meaning the IRS, "had information."

So you can see that what the commissioner has said in this particular public statement is the IRS is encouraging taxpayers to become compliant before the IRS gets to the taxpayer first, very important because as we know as tax practitioners, it's always better, it's preferable to be ahead of the curve rather than receiving a letter from the IRS where there is a request for information on a tax return or wasn't on a tax return. And that's what the substance really of this particular program is all about.

So the purpose of this webinar, as you can see, is to provide a discussion about the content of each of these letters as they apply to cryptocurrency transactions, including non-crypto as well is what the IRS says in terms of three aspects, federal tax compliance, federal tax controversy and federal tax enforcement.

So let's just have a brief review of the general tax principles that we are aware of that apply to virtual currency transactions. And I think it's important to note, first of all, that we remember that the first and only notice that the IRS published is IRS notice 2014-21, which was published in or about March of 2014. What's important about this particular notice, and it is worthwhile to read it, it's also worthwhile to reread it because there are certain nuances that essentially can become somewhat overlooked when one is basically just scanning this particular notice.

But what is very, very important about this notice is that the IRS states very clearly two things, one, that general tax principles apply to virtual currency transactions. So what does that mean? That means the entire Internal Revenue Code, unless otherwise directed by the Internal Revenue Service, there might be certain code sections within title 26, which of course, is the Internal Revenue Code, that may not apply for technical reasons. But remember that general tax principles apply across the board. And what's fundamentally very important is that the IRS considers virtual currency to be in "property" for federal income tax purposes, just like stocks, bonds, mutual funds, and other forms of investments. Very, very important to understand and remember that property essentially covers so many tax code sections that it's very important to think about this in terms of property, not currency. And I think that's very important.

Also, general tax principles apply to the transactions that we're talking about, the virtual currency transactions, which involve purchases of virtual currency, sales of virtual currency exchanges, or other dispositions of virtual currency. So it's really across the board in terms of what the particular requirements are that title 26, the Internal Revenue Code calls for. So it's important to also to think about this. An exchange of a virtual currency, whether it be Bitcoin, it could be Ether, it includes the use of virtual currency to pay for goods, services, or other property. In other words, an exchange of a virtual currency is not necessarily focused solely on a gain or a loss, the way we think of selling a stock or buying a stock.

It's more important than that. It actually extends to pay for goods and services. And there the implication is, of course, a trade or business, right? So I think it's important to understand that an exchange of virtual currency includes not only sales or dispositions in a Schedule D sense or a capital gain or loss sense, but also includes the use of virtual currency to pay for goods, services or other property. That includes exchanging one particular virtual currency for another, for example, Bitcoin for Ether.

Another important aspect to remember is that the reporting obligation of virtual currency applies regardless of whether the particular account where the virtual currency is actually physically located, it doesn't matter whether the account is held in the United States or abroad. And just as a quick summary, more information of course, if you go to the IRS website, you will be able to see the notice 2014-21 or of course through any of your tax research programs, and there also is additional information regarding crypto, including the notice that came out in July of 2019, toward the very end of July, I think it was in or about July 25, where the IRS set forth in a notice that this is what it was going to do in terms of sending out these letters. And at the very bottom of the notice, there are links to three of the letters that we're going to speak about right now.

So the first letter, which is in my view, I would say very important, because it involves many, many requirements. And there are nuances to this particular letter that really need to pay... we need to pay attention to as tax practitioners in discussing these issues with our clients,

First of all, among the three letters, and we're going to speak about 6173 first. Among the three letters, I believe 6173 warrants the most attention. Why is that? Well, let's look and see exactly what this particular letter, how does it begin? And the other two letters begin in a similar way, but not identical. And I think that's important to note that. So what does the IRS say with respect to a taxpayer who receives a 6173? IRS says in very clear terms, very simple language, "We have information that you have or had one or more accounts containing virtual currency, and you may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which of course includes crypto."

The letter also states that for one or more tax years between 2013 through 2017, the IRS states in the letter, "We have not received either a federal income tax return or an applicable form or schedule recording your virtual currency transactions." So what does this actually mean when we think about it? Let's parse the language a little bit because I think it's important. The first part of the sentence is very clear, simple language. We have information that you have or had one or more accounts containing virtual currency. But here's the point. Here's where the potential controversy comes in. However, you may not have met your tax filing. That's one aspect, tax filing and reporting requirements.

So it's very possible that a person who receives this letter, there may be a two-pronged potential controversy issue. One, have you met your tax filing requirements in the first place? And number two, even though it's in the same sentence, have you met your tax reporting requirements for transactions involving cryptocurrency or virtual currency? And of course, if the IRS states in the letter that it includes for tax years 2013 through 2017, that suggests to me and I think to everyone who's receiving these letters, and who has read these letters, that the IRS clearly has information. So I think it's very important to take this letter very, very seriously.

A couple of aspects about this letter, just to discuss briefly with you, is number one, although the letter covers five years, which it does, at least at this time, there may be a supplemental letter that may expand it to other years, maybe 18 down the road or 19 at some point, but at this point in time, the letter covers five years. And it's possible that for the earlier years, for example, 2013 and 2014. And let's take 2014 for example. 2014, assuming it was timely filed even with extensions sometime in 2015. One would say, "Well, gee, Walter, the three year statute of limitation has expired." That may be in terms of the three year statute. However, this is what's important is that it's very possible that the three year statute may not apply in a case where a, there's an unfiled tax return, because if you have an unfiled tax return, the statute does not begin until the actual return is filed, as you folks know.

So that's when the statute begins. But there's another provision. Hypothetically, suppose the six year statute applies, and the one I'm referring to or thinking about right now as we speak is 6103, which deals with is there an omission of more than 25% of a taxpayer's gross income? So it's important that we understand that even though the IRS is saying, 13, 14 and perhaps even 15 by now, in response, you might say, "Well, gee, hasn't the statute expired?" Well, we don't know. We don't know, because we don't know what the IRS has with respect to the information that it has received from third parties, from other sources that we'll talk about very, very briefly. So it's important to note that the statute of limitation issue is important but it's also important to note that one cannot automatically assume that the statute for a prior year, where ordinarily we would say the three year statute has come and gone, that might not apply in some of these cases, and that's why it's important for practitioners and clients to really drill down to ensure that if they do receive a letter, and it is the 6173 letter, and we'll go into more detail about this letter, you can see why it's so important.

Why? Because the IRS has information that it believes you may not have, you meaning the taxpayer, you may not have met your tax filing and reporting requirements. And I look at those as two aspects, not necessarily one and the same. Also a couple other aspects. It's important to note that within and among the tax practitioner communities, whether they be CPAs, whether they be tax attorneys, or enrolled agents for that matter, practitioners are cautioning and urging clients who have received these three letters, but especially 6173, to be very careful when responding to the letters. Why? Because a response to the letter, and we'll go into what that response actually entails. But the response to a letter, just like a reporting position on a tax return, for example, you want to make sure, the taxpayer wants to make sure and the taxpayer really has an obligation to ensure that the tax return itself, the responses to these letters are not incorrect, inaccurate, incomplete, or untruthful.

Why? Because even if it's inadvertent, where a particular situation a statement has been made, and quite frankly, perhaps it was a mistake, remember that a statement is attributed to the taxpayer. A statement by a power of attorney is attributed to a taxpayer and you want to ensure that whatever statements are made to the Internal Revenue Service, especially with respect to these three letters, since this is a topic of this webinar, we want to make sure that all statements are correct, accurate and complete and truthful.

Why? You don't want to have a situation where a taxpayer makes what I would refer to as a potentially incriminating statement. And I think that's important because we know what could possibly happen, if in fact that were to occur. So now I want to drill down a bit more with 6173 because again, this letter is, I think the most important, well, they're all important, but this one is the most serious because this letter requires a response from the taxpayer. And the response is by a particular date, that is actually or would be included in the letter, and it depends on when the letter was mailed. So the dates are going to vary, but in fact, what's important is this letter, the 6173, does in fact require a response by a specific date.

What are the responses that the IRS is looking for, which I think is important to point these out. So let's just briefly go through them. Number one, the letter itself, the 6173 applies to whether or not a taxpayer must file a delinquent tax return, which means one was never filed in the first place, and therefore, filing a specific delinquent tax return and report virtual currency transactions. That's number one. So there you have essentially, in a situation you don't know until you drill down, whether there's a failure to file in the first place. If there's a failure to file, then we know we have the various penalties that would be associated or could be associated with failure to file barring any reasonable cause or any other relief provisions. So the first issue is whether or not a delinquent return needs to be prepared and filed to report virtual currency transactions.

If in fact a return was previously filed, meaning an original return, the next question is, should the taxpayer file an amended return because there is a mistake on a previously filed tax return? Number three, which I find to be very, very interesting, and this is the one where I think a great deal of thought needs to be provided is you take the first two, number one, file a delinquent tax return. If it applies, then a return is filed or file an amended tax return. Both situations address whether or not a mistake was made on a previously filed return or a return that was not filed at all with respect to virtual currencies.

But let's look at the third option or the third type situation that the IRS is looking for a response. Mail or e-fax a statement of facts explaining a reporting position, including a complete history of previously reported income from virtual currency transactions. And what does the IRS want you to do as a taxpayer and a practitioner advising a taxpayer? IRS wants to know and asks for taxpayers to explain the actions taken to become compliant with U.S. reporting requirements. And on top of that, to provide copies of previously filed documents that confirm compliance. Well, what does this really, really mean here? I mean, the taxpayer has the choice, file a delinquent tax return to report virtual currency transactions when a return was not filed in the first place, or file an amended return due to making a mistake on a previously filed tax return or sending in a statement of facts that must be truthful, correct, and complete and accurate regarding or explaining a reporting position, which means one that was previously reported.

This particular provision number three, I think, really, they will encompass informed judgment. They all encompass attention to detail, due care, due diligence, all the issues that need to be considered. But what's important here is number three, there also is this obligation to provide information and guess what? This information that is provided if a taxpayer opts for number three will be compared to data that the IRS has from its various sources, whether it be its own databases, whether it be information that the IRS received pursuant to the summons enforcement regarding Coinbase that began and I believe it was 2017. And over the last year, maybe year and a half or so, the IRS has received many, many items of information from thousands and thousands of taxpayers regarding names, addresses, account information, values of accounts, you name it, account numbers.

So, any response to the IRS even if it's one, two, meaning delinquent return or amended return, or number three, I believe will be compared to information the IRS has, especially with respect to 6173 as the letter indicates. The IRS is also asking for, please provide your current contact information. And what's also very important about this letter that is not included on 6174 and is not included on 6174-A is the response must be under penalties of perjury. That means that in this letter, when you look at page two of the letter more or less in the middle of the page, the IRS already includes what the declaration is to sign and date under penalties of perjury. So what actually is the IRS asking the taxpayer to declare about? Very simple, it's basically the following. I, and let's assume it's John Doe, I declare under penalties of perjury that I have examined this entire document.

Well, this entire document includes all attachments and accompanying statements and that whatever is included is true, correct and complete. So number one, it's under penalties of perjury, which is very important. 6174 and 6174-A do not include this declaration. Number two, in response to a 6173 letter, the taxpayer is also representing, I also understand with respect to any submission that the IRS reserves the right to make further contacts with me as the taxpayer, and/or my duly authorized representative, to clarify any written explanation or documents.

Statements and documents sent under this option will be checked against an information received from banks, financial advisors, and other sources of accuracy. What I just read is the actual quote that is in the 6173 letter on page two. So let's just think about that for a second. In addition to declaring under penalties of perjury, there also is the understanding that any submission to the IRS, the IRS has the right to make further inquiries. So that means they're going to check against their databases, information from Coinbase and perhaps other sources that taxpayers might have and be aware of that the IRS already has access to. And that statements and documents sent under this option will be checked. That's very, very important to know that.

Some ministerial aspects regarding 6173, it advises taxpayers to send the original or amended returns to the address noted in the letter, the address noted in the 6173 letter as well as in 74 and 74-A, the address is to the Market Street address of IRS in Philadelphia. Many of you are aware of the fact that during the offshore voluntary disclosure program, pre-approval requests and approval requests, whether they be originally faxed or sent by certified mail, went to the Market Street address. That suggests to me that the Market Street address is staffed or will be staffed if it's not already, but I believe it is staffed, with special agents and revenue agents and perhaps tax auditors and others who will be screening and reviewing documents as they are sent to the Internal Revenue Service at the Market Street address.

I think that's very important. I think it's very telling and I just think it's important to note that this address is the address that has been used in the past for well over a number of years with respect to the offshore voluntary disclosure program. This letter also provides that a taxpayer may request an extension of time, basically a 30 day extension to request additional time to respond to the letter. I think that's helpful. I think it's important, but keep in mind that the IRS will probably grant it as it usually does in many cases for an extension, but I think one needs to go beyond that to determine what is going to be your timeline to comply with 6173 based on a taxpayer's unique facts and circumstances.

And also, it's important to note that if you're going to have a representative submit these documents, even though the taxpayer is basically the one who should be signing under penalties of perjury, is that you certainly need the 2848 as the power of attorney to include with this document as well, meaning the response to the 6173. So I think it's important to just think about what 73 requires, and then where the taxpayer's facts and circumstances basically point the taxpayer into what should be the case, meaning one, two or three may not be mutually exclusive. You may have a situation where a taxpayer has a delinquent return, meaning one that was not file but should have reported virtual currencies. There could have been one that was filed that needs to be amended. Or you can have mail or e-fax statements about something that was already reported. So point I'm making is it's not necessarily one of the three. It may include more than one of the three options. And I think that's what's important about this letter and why drilling down is so very, very important.

So some comments about the 6173 letter. The first is without doubt in my mind, if a taxpayer receives a 6173, without question, the IRS has information and documents related to that taxpayer's virtual currency transactions that the taxpayer had or has. Number two, the 6173 letter covers five years, 13, 14, 15, 16, 17. That says a lot about what the IRS may have about a particular taxpayer's facts and circumstances. Next, in terms of providing advice to the client, and for the taxpayer to compile information, it's important to identify and for the taxpayer to really use his or her judgment, how many accounts has the taxpayer engaged in virtual currency transactions? How many exchanges involve virtual currency? So in other words, it may not just be one account. It may very well be more than one account and more than one exchange. And then the question that comes up is how much time is necessary or will be necessary to comply by the response date, whatever that response date is?

What's important to note, and I've said this in the past, speaking to colleagues, whether formally or informally, is that because there is no centralized reporting mechanism for virtual currency transactions or cryptocurrency transactions, the need for taxpayers to contemporaneously record each and every transaction is absolutely necessary. It's imperative because think about a taxpayer who receives a letter and it's a 6173, or any of the other two that we'll briefly talk about is that let's assume there are multiple years involved, because the 6173 says, "Well, we've identified 13 through 17, they may not apply to you, but we want you to take a look anyway."

So the question that really comes up is how much time is necessary to reconstruct, to reconcile and to effectively report from a transaction perspective what these transactions actually amount to, meaning how many are there? How many exchanges? How many accounts? And the reason why I say that is there's no centralized reporting mechanism as we know. There's no centralized institution, there's no centralized agency where one can go to one particular place. There might be some websites now for example, where information is more available, for example, to a particular investor. But ultimately, remember, investors generally exchange Bitcoin and other cryptocurrencies, one for another, one for another, and so on and so forth. Each one of those exchanges may be a taxable event to be reported. Whether it's a taxable event that results in a game or whether it results in a loss, that's to be determined. But each exchange on its own represents a potential taxable transaction that needs to be reported, regardless of whether it's a gain or a loss.

There are some other issues related to reviewing the particular program that we're talking about here, which is the 6173 potential issues and consequences. It's important to assess the status of previous years' recordkeeping and account analysis. We just covered that. I think it's important to really drill down on that. Number two, it's important also to determine whether transactions need to be reconstructed and/or reconcile in order to determine not only capital gain or loss, but again whether there's a trade or business that may require ordinary income or loss reporting that results from what sales, exchanges or other dispositions of virtual currency transactions.

It's important to note that probably, the clearest transaction that an investor engages in is probably the very first transaction where fiat currency, whether it's U.S. dollars or euro currency or some other currency actually is used to purchase cryptocurrency. That is very straightforward. That is very clear. I have $10,000 and I purchased X amount of Bitcoin or any other type of crypto with the $10,000. That's pretty clear that basis is established at that point. But from there on end, depending on what a taxpayer client does or an investor does with respect to exchanges or sales or other dispositions of virtual currency, that's where this tracking is so important, because each transaction, each exchange for example, as I said previously, and it's important to repeat this a few times, is that especially for taxpayers who may say, "Gee, all I'm doing is exchanging A for B." Well that may very well result in a transaction that has a gain or loss. Whether it's ordinary capital is secondary at this particular point.

Another aspect of 6173 is for taxpayers and representatives to avoid making incriminating statements in terms of either omitting a fact that should have been included, misrepresenting a fact, where a fact was included, but it was colored a little bit, whether a statement may be construed as not being correct, not being accurate and perhaps even worse, not being truthful. So it's very, very important to note this, and what I would also say is if a client believes that his or her tax return preparer should and could represent that particular taxpayer, I think it's always important to consider whether a, the current tax return preparer should be engaged for reasons that to prepare may want to discuss with his or her counsel or general counsel, but also whether a new tax return preparer should be engaged by say, counsel, if the client decides to retain counsel, then perhaps another preparer should be engaged for purposes of assisting counsel in this analysis in order for the attorney to provide legal advice to the client.

So this situation, because of I believe the seriousness of potential mistakes, whether they're intentional or otherwise, could come back to cause a response from the IRS that basically says, "Gee, you really omitted certain facts that we know about that you did not include in your e-fax or in your statement. So I think it's important that taxpayers really, really, really are guided by being very cautious. And for the practitioner as well, to be very cautious because the last thing you want to do as a practitioner and/or client taxpayer is to have the IRS suspect, not even believe, but suspect that perhaps there's more to your situation, more to the taxpayer's situation than what the taxpayer actually is acknowledging.

So now, we're going to move to 6174. And what I like to say about 6174 is you will note when you compare the opening sentence to 6173, the first part of it is the same. We have information that you have or had one or more accounts containing virtual currency. But this particular statement is somewhat different compared to 6173 because just to point out, 6173 says the following. We do have information about you engaging in virtual currency transactions and you may not have met your tax filing or reporting requirements, whereas 74 says, we're giving you the benefit of the doubt taxpayer. We have information that you have or had one or more accounts, but you may not know the requirements for reporting transactions involving virtual currency.

So they're giving a taxpayer or acknowledging anyway, a benefit of the doubt that the taxpayer may not know the requirements for reporting. Why this particular taxpayer receives or why a particular taxpayer receives this letter? IRS still has information. It may not be as detailed as the information that it has to send to a taxpayer who has a 6173 or receives a 6173 letter, but what's important here is that you may not know the requirements. So what is a taxpayer to do in this particular situation? And how should a tax advisor or practitioner advise the taxpayer?

Well, let's think about what this particular letter actually means and what it says. I believe that the letter is intended to inform the taxpayer and advises the taxpayer, that if the taxpayer believes that he or she did not accurately report virtual currency transactions on a federal return, that the taxpayer should file an amended return, or quite frankly a delinquent return. The point of this particular letter is the information may not be as detailed as compared to 6173, and that's why the IRS is providing what I consider to be the benefit of the doubt statement that perhaps you may not know.

Let's assume you receive or a client receives a 6174. What does the letter state? The letter states, if you do not accurately report your virtual currency transactions, you may be subject to future civil and criminal enforcement. So clearly, the IRS has information, it just may be a question of the degree, of the detail of the information and they may not know, the IRS may not know whether or not there was a sale or exchange or any other disposition of the property. But in fact, when I say property, meaning of course virtual currency, but in fact, the IRS is basically saying if you do not accurately report, you may be subject to some type of enforcement activity.
Walter Pagano: That of course would be in the future, whenever in the future is but here's the interesting thought about this particular letter, a taxpayer does not have to respond. The letter states, you do not need to respond to this letter. It does not state that you should ignore it or that you should not consider reviewing your tax returns, because although you may not know what the requirements are, the letter further states if you did not accurately report your virtual currency transactions, but what does that mean? That means you didn't report any perhaps, because you didn't know. And if you didn't know, that's where 6174 comes into play. And what's important also is that letter basically, although some practitioners have referred to it as a letter that informs the taxpayer or somewhat educational, which is true, but it actually includes for example, what are some of the common schedules to report virtual currency transactions? Well, the letter identifies Schedule C, which of course is for trader business for a sole proprietor, Schedule D, which of course, we know what that is, capital gains or losses. And even a Schedule E, a taxpayer could have rental property, for example, and rent is paid in virtual currency.

So again, I think it's important for this letter to be taken just as seriously as 6173. But here, there's a bit of whether or not you really knew your requirements and your filing obligations.

So now let's look at 6174. 6174-A is the third letter. It begins the same way, right? We have information that you have or had one or more accounts containing virtual currency. But now let's see what this particular letter says. This letter says, but you may not have properly reported your transactions involving virtual currency, whereas 6174 extends the benefit of the doubt to the taxpayer by saying what? You may not know, for example, what the reporting requirements are, and we want to give you the benefit of the doubt, but let's look at the language here. 6174-A states very clearly, you may not have properly reported your transactions involving virtual currency. So this is another degree of inquiry is how I view it. So what does this letter basically mean? What does it say? Again, looking at it in terms of the plain language, the letter advises the taxpayer that if the taxpayer believes he or she did not accurately report virtual currency transactions on a federal income tax return, the taxpayer again thinking about what action would be necessary to comply or to respond to this letter.

What basically is the IRS saying? The taxpayer should file amended returns or delinquent returns if the taxpayer did not file for one or more taxable years that pertains obviously to a delinquent return. So here's a situation where IRS believes you may, the taxpayer may not have properly recorded transactions as compared to maybe you're really not familiar. And we want to give you an opportunity to basically become familiar. What does that mean? That means go back, review and determine whether or not delinquent and/or amended tax returns must be considered to be filed. And what's important about this particular letter? If you do not accurately report your virtual currency transactions, and this of course is a quote, you may, "You, the taxpayer may be subject to future civil and criminal enforcement activity."

Well, if we go back to 6174, if you did not actually report your virtual currency transactions, you may be subject to future civil and criminal enforcement activity. And with this 174-A, you may be subject to future civil and criminal enforcement action. But this letter has an additional statement, which again is important because it's another letter, it bears on different facts and circumstances. It begins with the same statement as 6174. You do not need to respond to this letter. You can see that here black and white, you do not need to respond to this letter. But now look at the admonition. However, we, meaning IRS may send other correspondence about potential enforcement activity in the future. What does that mean?

It could mean an exam, meaning a regular tax audit, a civil audit. It could be a collection activity where the IRS believes that there are transactions that were not reported and there actually is a tax liability due and owing. How could that occur, you may say. Well, one way that it can occur is let's not forget, and again, I think about these different tools and enforcement mechanism that the IRS has, is what if a taxpayer's information eventually is reported to the IRS through its various third party sources, its own databases, Coinbase whatever it might be. Suppose the IRS had enough information that it decided to prepare a substitute for return under Section 6024-B, where the IRS can actually make an assessment based on a substitute for return.

So, it's possible there can be future enforcement activity, which could include an audit. It could include collection. It, of course, could include a referral to criminal investigation. So again, although a taxpayer is not required or that you do not need to respond, and you know, you do not need is not the same as you're not required. So you have to really read here that you do not need to respond, but we may send you other correspondence about, without saying it, information that we have.

So again, each of these letters, although the degree of seriousness sort of becomes a little bit of a nuance between 73, 74 and 74-A, I really believe that each one needs to be seriously addressed. Remember what we said at the very beginning of the webinar, and that is at least, or approximately 10,000 or more taxpayers received or are still receiving these letters because the letters began, I think sometime in very late July or during July, of course into August, and maybe they're still being sent, even as we speak now in September.

So I just want to emphasize the distinction, again, between 74 and 74-A. The taxpayer may not know the requirements for reporting transactions. So there is presumably the benefit of the doubt. But of course, remember, the IRS is saying that the taxpayer may not know the requirements but suppose during an investigation or an audit, the taxpayer... the IRS learns that the taxpayer knew about the requirements. Doesn't that change everything in terms of 6174? You can revert back to potentially a 6173 issue. And I say that in terms of although you didn't receive the letter, but the point I'm making here is it's important to know whether or not the taxpayer knew about the requirements, because if information is submitted to the IRS, and the IRS then has information that basically confirms or suggests in very, very clear terms that the taxpayer knew about the requirements, then perhaps the benefit of the doubt may not be extended. And then of course, we look at 6174-A. I think there's a higher degree of concern. The taxpayer may not have properly reported transactions.

So succinctly stated, the way I view 6174-A is that A suggests the taxpayer has knowledge about the requirements for reporting transactions involving virtual currency, but may have improperly reported them, which includes the sentence as to why the IRS may send other correspondence. This letter 74-A is important because it does suggest a certain degree of knowledge. Whatever that knowledge is at this time, we may not know if we were in the situation where a taxpayer receives 74-A. And that's why it's important to understand the distinction between 74-A and 74. But remember, with 6174, IRS may learn that the taxpayer actually does know about the requirements to report virtual currency transactions.

So I really believe ultimately it's a matter of degree as to where a taxpayer's facts and circumstances fall, and I think in either situation, meaning between 74 and 74-A, 74 suggests the taxpayer may lack knowledge. That may be true, or 74-A raises the question whether the taxpayer knows or has reason to know that he or she has a known legal duty to report virtual currency transaction. Remember that in either situation, it's absolutely, in my view, important and necessary to err on the side of caution by reviewing previously filed tax returns. So also important to point out that in the purely criminal tax context, that whether it's a false return or tax evasion, that the standard, the case law standard, that goes back many, many years under the Pomponio case, is whether or not the taxpayer voluntarily knew or should have known that he or she had a filing requirement and a reporting obligation.

So in other words, whether or not the taxpayer voluntarily, intentionally violated a known legal duty, and these letters when you read them and you parse the language, I can see situations where a taxpayer's situation may flip to another letter, even though that letter was not initially sent to the taxpayer. So I think that's very important to note that, and what I like to do now is sort of summarize and provide for all intents and purposes, what I would consider to be the takeaways, and there are I think, many, many takeaways in this particular presentation.

Number one, IRS did not randomly mail letters to taxpayers. I think we can go to the bank on that particular statement that these letters are specifically identified and sent to taxpayers for information that the taxpayer, or I'm sorry, that the IRS has about the taxpayer. Each of these letters addresses compliance, potential controversy and certainly enforcement. So when we thought about this particular webinar, just in terms of what would be a topic or how would we define this webinar, we believe that it includes compliance, that it includes controversy, and that includes enforcement depending on the degree of information that the IRS has, and obviously the letter that the taxpayer received.

Also, it's important to point out that the IRS has information. In my view, the information that the IRS has is probably from the success that it received with respect to the Coinbase summons enforcement litigation, and of course, other sources of data, including IRS databases, as well as access to and from third parties. Also, the IRS is definitely encouraging taxpayers to become compliant and avoid controversy and enforcement. I mean, that's really why when you go back to the initial statement that the commissioner made publicly, basically he's saying, we have information, you should really think about taking a second look at your tax returns as they pertain to cryptocurrency but let's keep this in mind also. If a taxpayer is going to amend a tax return with respect to reporting cryptocurrency transactions that were not reported or partially reported, it's very important to remember that any other item on the original tax return that needs to be corrected must be corrected, because the amended return, if it's lacking information about a prior issue that's on the original return that was not corrected and should have been, that is not a good fact.

So I think it's important that when you review your history of prior tax returns, that the taxpayer actually looks at what was already reported. Next item, the lack of additional guidance since notice 2014-21 came out. In my view, and I think based on the publicity that we know about, is not an excuse or reason to argue ignorance about these reporting requirements. And I really believe that with the widespread publicity that we have been reading about, and hearing about, whether it's issues that come up just in newspapers that we read about or we see situations where some companies are thinking about having their own cryptocurrency, for example, the publicity is out there. And practitioners are very much aware of these letters, and I also think practitioners might want to consider including in their organizers or in their letters that they send to clients, not only to consider the offshore voluntary disclosure issues that have been percolating, or have percolated in the past, but also to inquire about virtual currency.

I'm sure it's nothing new to most of the practitioners who are listening to this webinar. But I honestly believe that that's another area for practitioners to let the taxpayers know or inform the taxpayers that there are these other transactions. By the way, did you engage in any of these transactions?

Next, let's think about contemporaneous recordkeeping. I believe contemporaneous recordkeeping is essential. Why is it essential? Because of the decentralized reporting of virtual currency transactions, whether they be purchases, sales, dispositions or other exchanges of virtual currency transactions. It's also important to note that depending on the taxpayer's facts, situation, facts and circumstances, reconstructing and reconciling numerous virtual currency transactions after the fact will be tedious, time consuming and expensive.

And you know, it may not be sufficient. But then again, that's going to depend on a practitioner's engagement with the client. It's how much time is necessary to actually review what a client has already reconstructed and reconciled, because I think that's just as important. So reconstruction and reconciling numerous virtual currency transactions I believe will be tedious, time consuming and expensive, not necessarily only in terms of dollars, but certainly in terms of time devoted not only by the practitioner, but of course also by the client.

I really believe rolling the dice is not an option. I think that is something that based on our experience collectively in these type matters, especially on the controversy side, I think it's important to err on the side of caution for clients to become compliant and to avoid controversy and potential civil and/or criminal enforcement situations. You know, we can only do so much as practitioners. But what we can do is continue to remind clients about becoming compliant and to avoid controversy and to avoid enforcement. And I really believe that zeroing in on cryptocurrency tax reporting and collection compliance including criminal fraud referrals, they are basically zeroing in, these are priorities of not only the Internal Revenue Service, but also the Department of Justice.

And as recently as this past Tuesday, a member of the Department of Justice, which is not included in the material, because I just read it yesterday actually or became involved or aware of it yesterday is the following. I just want to briefly read it to you before we close since we're almost at the end of our time commitment.

The Justice Department's top money laundering enforcer is keeping a close watch on currency providers, meaning cryptocurrency providers and transactions as it, meaning the Department of Justice, grapples with challenges presented by the technology, meaning the cryptocurrency technology, the blockchain technology. Virtual assets such as Bitcoin have become, and this is in quotes, "Very, very important as a subject for the money laundering and asset recovery section of the Department of Justice. This section leads the department's efforts to prosecute money launderers, a task that continues to include cases tied to the use of illicit cryptocurrency." What is difficult about this technology is that even if we, meaning the government, that even if we see no one can trace on the blockchain the movement of virtual currencies, sometimes it's hard to seize. That's often because the correct amount or the correct account identification information may not be known because of wallets and exchanges.

So the point here is, not only is this a tax issue, but it's also a potential money laundering issue. And I think we all know that money laundering as an offense generally will have as a consequence a tax issue, whether it's a false return, whether it's tax evasion, whether it potentially is a failure to file or whether there is basically information that should have been reported that never was. So I think at this point, we don't have time for any additional questions or any questions at all but we certainly will respond to your questions when we do have that information. So on behalf of EisnerAmper and the firm itself and of course, our tax department and our colleagues here in the office, we really appreciate your time and effort in listening to this webinar. And we're happy to have provided this information to you. Thank you very much.
Moderator: We hope you enjoyed today's webinar, please look out for a follow up email with a link to the survey and presentation. If you have additional questions about today's topic that you would like addressed, please feel free to email our speaker directly. Thank you again and have a great day.