Note: We were lucky enough to have Crypto Tax Expert, Clinton Donnelly on our podcast. He added a lot of to our conversation. We truly appreciate Clinton’s advocacy work – that is so robut – it is forcing the IRS to adjust their Crypto Audit techniques.
If you’ve received IRS Letter 6174 from the Large Business and International (LB&I) Division, you might feel a mix of confusion and urgency. The letter suggests you may have unreported cryptocurrency transactions and nudges you to file amended tax returns to come into compliance. But here’s the catch: it omits critical information about other compliance options, like the Report of Foreign Bank and Financial Accounts (FBAR) or Streamlined Filing Compliance Procedures. For crypto investors with unreported overseas accounts, this oversight could lead to costly mistakes—or worse, a trap that escalates IRS scrutiny. At IRSMedic, we’ve seen how mishandling Letter 6174 can jeopardize your financial future. Let’s break down why this letter can be misleading and why you need a tax firm with international crypto experience to navigate it.
What Is IRS Letter 6174?
IRS Letter 6174 is part of the IRS’s intensified campaign to enforce cryptocurrency tax compliance, specifically targeting taxpayers with potential unreported digital asset income or capital gains. Sent by the LB&I Division, which handles complex tax matters including FBAR penalties, the letter informs recipients that the IRS has information—often from crypto exchanges or blockchain analysis—indicating unreported virtual currency transactions. It urges you to review your tax filings and file amended returns (Form 1040-X) if you’ve underreported or omitted crypto income.
On the surface, this seems straightforward: correct your tax returns, pay any owed taxes, and move on. But for investors with cryptocurrency held in overseas accounts, the letter’s silence on FBAR requirements and Streamlined Disclosure options is a glaring red flag.
Why Letter 6174 Can Be Misleading
The IRS’s omission of key compliance pathways in Letter 8174 can mislead crypto investors into incomplete or risky actions. Here’s why:
- No Mention of FBAR Requirements
If you hold cryptocurrency in a foreign financial account (e.g., on an overseas exchange like Binance or KuCoin), you may be required to file an FBAR if the aggregate value of your foreign accounts exceeds $10,000 at any time during the year. FBAR violations carry steep penalties—up to $16,181 per year for non-willful violations or 50% of the account balance for willful ones (adjusted for inflation). Letter 8174’s focus on amended tax returns ignores this obligation, potentially leaving you exposed to significant fines even if you correct your income tax filings. - Silence on Streamlined Disclosure Programs
For taxpayers with unreported foreign accounts, the IRS offers Streamlined Filing Compliance Procedures (Domestic or Foreign Offshore) to correct past non-compliance with reduced penalties. These programs are ideal for non-willful violations, often applying to crypto investors who didn’t understand complex international reporting rules. Letter 6174 doesn’t mention these options, which could lead you to file amended returns without addressing FBAR or other international reporting issues, increasing your risk of audits or penalties. - Risk of Criminal Exposure
Filing amended returns without considering FBAR or Streamlined Disclosure could inadvertently expose you to criminal tax liability, especially if the IRS views your non-compliance as willful. The Voluntary Disclosure Program (VDP) is another option for taxpayers with potential criminal exposure, offering a chance to avoid prosecution by proactively disclosing unreported income or accounts. Letter 6174’s narrow focus on amended returns could mislead you into a “quiet disclosure” (filing amendments without formal IRS programs), which the IRS often scrutinizes harshly. - Misleading Simplicity
The letter’s tone suggests a simple fix—file an amended return and pay back taxes. But crypto taxes are notoriously complex, involving issues like cost basis calculations, staking rewards, and cross-border transactions. Without guidance from a firm experienced in international crypto tax, you might file inaccurate amendments, triggering further IRS action, including audits or penalties like the 20% accuracy-related penalty or 75% civil fraud penalty.
The Trap: Why Letter 6174 Demands Expert Handling
Letter 6174 “breathtaking in how it misleads people to the wrong response,” describing it as a “massive trap” for those with undisclosed overseas crypto accounts. This sentiment reflects a real risk: the letter’s incomplete guidance could lure taxpayers into partial compliance, leaving them vulnerable to escalated enforcement. The LB&I Division’s involvement is particularly concerning, as it specializes in high-stakes cases involving FBAR and international tax issues.
For example, if you file an amended return to report crypto gains but fail to file delinquent FBARs, the IRS could impose penalties far exceeding the tax owed. Similarly, bypassing the Streamlined Disclosure’s or Delinquent FBAR procedure’s opportunities to minimize penalties or avoid criminal charges. The IRS’s access to data from crypto exchanges (via John Doe Summonses) and blockchain analytics means they’re likely already aware of your overseas accounts, making proactive, comprehensive compliance critical.
How to Respond to Letter 6174 Safely
To avoid the pitfalls of Letter 6174, follow these steps with the help of a tax firm experienced in international crypto tax:
- Don’t Rush to File Amended Returns
Before amending your tax returns, review your entire crypto transaction history, including overseas accounts. Use crypto tax software like KoinX or TokenTax to consolidate records from exchanges, wallets, and DeFi platforms. Ensure you account for all taxable events (sales, swaps, staking rewards) and calculate accurate cost bases. - Assess FBAR Obligations
Determine if your overseas crypto accounts (e.g., foreign exchanges or wallets) trigger FBAR filing requirements. If you’ve missed past FBARs, filing delinquent reports with a reasonable cause statement or through a compliance program may reduce penalties. - Explore Streamlined Disclosure
If your non-compliance was non-willful, Streamlined Procedures can correct FBAR and tax issues with minimal penalties (0% for Foreign Offshore, 5% for Domestic). For willful violations or significant unreported income, the VDP offers protection from criminal prosecution but involves higher penalties (e.g., 50% of the highest account balance). A qualified tax attorney can assess which program suits your situation. But also, for certain accoiunt holders, it may be possible to just filing missing FBARs without a program - Consider engage a Specialized Tax Firm
Crypto tax and international reporting are highly technical. A firm like Parent & Parent LLP with heavy experience in FBAR, Streamlined Disclosure, can craft a tailored strategy to minimize penalties and ensure full compliance. - Act Promptly
Proactive compliance demonstrates good faith and can mitigate penalties.
Why International Crypto Experience Matters
Handling Letter 6174 requires more than general tax knowledge. International crypto tax involves:
- Cross-Border Expertise: Understanding how U.S. tax law applies to foreign exchanges, wallets, and DeFi platforms
- FBAR Compliance: Navigating the nuances of reporting crypto held in foreign accounts, including custodial vs. non-custodial wallets.
- Penalty Mitigation: Leveraging IRS programs like Streamlined Disclosure or VDP to reduce or eliminate penalties.
- Criminal Defense: Protecting against tax evasion or fraud charges if non-compliance is deemed willful.
At Parent & Parent, our team has helped thousands of crypto investors resolve IRS issues, from amending returns to managing complex disclosure submissions. We understand the intersection of cryptocurrency and international tax law, ensuring you don’t fall into the trap set by Letter 8174’s incomplete guidance.
Take Action Now
Receiving IRS Letter 6174 is a wake-up call, but it’s also an opportunity to get compliant before the IRS escalates enforcement. Don’t let its misleading simplicity steer you toward incomplete compliance. Book a time to speak to us for a confidential consultation. Our experienced tax attorneys and CPAs will review your crypto transactions, assess your FBAR and international reporting obligations, and guide you through the best path to compliance—whether that’s amended returns, Streamlined Disclosure, or the Voluntary Disclosure Program.