IRS Crypto Disclosure Letters Violated US Taxpayer Rights in 2019

The IRS shook up the US crypto sector last year when it issued Letter 6137 to American taxpayer’s which demanded that all citizens declare any unreported crypto gains within 30 days. One year on and an IRS watchdog has slammed the letter as a violation of the Taxpayer Bill of Rights.

On July 26, 2019, the Internal Revenue Service (IRS) came at the cryptocurrency community with a not so “soft letter”—demanding that all United States taxpayers reveal any unreported crypto gains within 30 days. A year later, and the IRS’s own watchdog has suggested that the letter violated the taxpayers’ right to privacy and their right to information.

Soft Letter 6173

The core message of the IRS’s letter was that the tax agency was already aware of the information on all US taxpayer’s digital assets and crypto accounts and demanded that they report their gains.

Letter 6137 did not explain how the IRS had gained this information or exactly what they had uncovered. The agency was clear, however, that unless these taxpayers refiled their tax returns addressing potential discrepancies in crypto gains, or provided a sworn response that they were in compliance—they would be subjected to an audit.

The letter was vague regarding whether or not these crypto tax dodgers were already under IRS examination and demanded answers with little explanation beyond the consequences of not replying within 30 days.

Almost one year later, the Taxpayer Advocate Service, an independent department of the IRS and its official watchdog, has alleged that Letter 6137 has violated the congressionally enforced Taxpayer Bill of Rights.

Taxpayer Advocate Services Allegations

According to the Erin M.Collins of Taxpayer Advocate Services, Letter 6137 ignored the rights of taxpayers as declared in the Taxpayer Bill of Rights—which the IRS adopted in 2014.

In her report on June 29 entitled “2021 Objectives Report to Congress”, Collins wrote:

“The Code, Congress and the IRS have repeatedly acknowledged taxpayers’ rights and protections, and this letter not only does not provide them—it undermines them.”

Letter 6137 overreached with their demands that taxpayers submit their entire virtual asset trading history, nearly 5 years of tax document copies, and a sworn explanation of their compliance under “penalty of perjury.”

Collins asserts that by demanding that taxpayers who were not under audit submit information under such conditions, the IRS 2019 letter specifically violated two of the tenets within the Taxpayer Bill of Rights—specifically the right to privacy and the right to be informed.

Disclosure of Crypto Tax Info not IRS Strong Suit

The lack of clarification on crypto taxes appears to be a running theme with the Internal Revenue Service and it was reported by a US congressional watchdog in February—that the agency will not clarify how taxes work with cryptocurrencies and digital asset transactions.

Following Rep. Ken Brady’s (R-TX) request for clarity on how taxes are levied against cryptocurrency, the Government Accountability Office (GAO) published a report evaluating the IRS’ current approach and public guidelines on cryptocurrency.

Following the report, GAO made recommendations to the IRS, as well as an additional recommendation to the Financial Crimes Enforcement Network (FinCEn).

The recommendations were, “GAO is recommending that IRS clarify that part of the 2019 guidance is not authoritative and take steps to increase information reporting; and that FinCEN and IRS address how foreign asset reporting laws apply to virtual currency.”

In response to the recommendations, GAO reported that the IRS, “Agreed with the recommendation on information reporting and disagreed with the other two, stating that a disclaimer statement is unnecessary and that it is premature to address virtual currency foreign reporting.”

Despite the IRS’ refusal to disclaim the guidelines as non-authoritative, GAO believes a disclaimer would increase transparency and that IRS can clarify foreign reporting without waiting for future developments in the industry.

FinCEN agreed at the time with GAO's recommendation.