IRS, Ignoring Its Own Watchdog, Sends Letters About Crypto Taxes Once Again

Undeterred by its own watchdog's warnings, the Internal Revenue Service has once again begun sending crypto "soft letters" of disputed legality to American taxpayers.

• The letters, which broadly inquire about unpaid or incorrectly filed crypto taxes, appear to have been sent out en masse to an unknown number of taxpayers on Aug. 14, according to multiple copies of the letter reviewed by CoinDesk.
• They're part of what the IRS calls a "soft letter" campaign, a call-to-action meant to spur taxpayers to fix alleged discrepancies in their tax filings before the IRS escalates the situation to a full inquiry - an audit.
• Crypto holders in particular face reams of sometimes still developing tax guidance over how to treat hard forks, report capital gains, account for crypto transactions and other more commonplace issues, like neglecting to file.
• But when the IRS first rolled out crypto soft letters last September, it may have gone too hard, too fast, according to the Taxpayer Advocate Service.
• The internal watchdog recently alleged that one particular letter variant (6173) "undermines" taxpayer rights by demanding a statement of facts and a detailed trading history accounting for years outside the statute of limitations. Letter 6173's "disturbing" tone also elicited criticism from the Advocate.
• Taxpayer Advocate Erin Collins alleged in a report to Congress that letter 6173 violated laws governing IRS conduct and called upon the agency to make changes. The IRS refused.
• It now appears that 6173 is back in nearly identical fashion. A copy of the letter shared with CoinDesk parrots its predecessor's tone and demands. The IRS did not immediately respond to a request for comment.
• The taxpayer who shared his letter with CoinDesk indicated he received the letter because he had not yet filed his 2019 returns.

Read more: IRS Violated ‘Taxpayer Bill of Rights’ With 2019 Crypto Letters: Watchdog