What to Do If You Receive IRS Letter 6173

IRS Letter 6173 is an educational or “soft” letter to inform you that the IRS has information suggesting you may have accounts or transactions involving virtual currency that were not properly reported on your past tax returns. This letter is not a formal audit notice or a bill demanding immediate payment. The IRS uses Letter 6173 to encourage voluntary compliance with tax laws related to digital assets. It serves as a notification that your tax filings may be incomplete, giving you an opportunity to correct any potential errors before the IRS takes further action.

Understanding Why You Received Letter 6173

The IRS issues Letter 6173 as part of its effort to ensure compliance in the digital asset space. The agency obtains information about taxpayer activities from third-party sources, like virtual currency exchanges, and cross-references it with filed tax returns. When the data indicates a taxpayer has a virtual currency account but no corresponding transactions are reported on their tax return, the IRS may send Letter 6173.

The underlying tax principle is that the IRS treats virtual currency as property. This means that selling it for cash, exchanging it for another cryptocurrency, or using it to buy goods or services can be a taxable event that results in a reportable capital gain or loss. The virtual currency question on Form 1040 also provides the IRS with a direct data point to identify individuals who may have reporting obligations.

Starting with the 2025 tax year, crypto exchanges will be required to report digital asset sales directly to the IRS and taxpayers using a new Form 1099-DA. This change automates the data-matching process and signals increased IRS oversight.

Information and Documents to Gather

Before responding to Letter 6173, review your financial records for the tax year mentioned. You must compile a complete transaction history of all your virtual currency activities. This includes buys, sells, exchanges, payments for goods or services, and income from mining, staking, or airdrops.

For each transaction, gather the date, the type and amount of virtual currency, and its fair market value in U.S. dollars. You will also need to identify your cost basis, which is the original purchase price plus any fees, and the proceeds from the sale. This information is needed to calculate your capital gains or losses.

Finally, locate copies of the tax returns you filed for the years in question. Comparing your detailed transaction history with your original returns will help you identify any discrepancies or errors that need to be addressed.

Evaluating Your Response Options

Your review of your records will lead to one of three potential responses.

If your review shows you failed to report your virtual currency transactions or reported them incorrectly, you will need to correct your past tax return. The necessary action is to file an amended return to report the correct information and pay any additional tax owed.

Another possibility is that you were required to file a tax return for the year in question but did not. Because no original return exists, you must prepare and file the delinquent tax return for that year, ensuring all income is properly reported.

If your investigation confirms your original tax return was accurate, you still must respond to the letter to close the inquiry. In this scenario, you must prepare and submit a signed statement certifying that you have reviewed your return and met all your tax reporting obligations.

How to Submit Your Response to the IRS

If you need to file an amended return, use Form 1040-X, Amended U.S. Individual Income Tax Return. This form can be filed electronically for recent tax years. You will attach a corrected Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets) to show the calculations of your virtual currency gains or losses. The completed package should be mailed to the IRS service center address specified in the Form 1040-X instructions.

For those who need to file a delinquent return, the process involves preparing a standard Form 1040 for the specific past year. You will complete it as if you were filing on time, including all necessary schedules like Schedule D and Form 8949 to report your crypto transactions. This past-due return should be mailed to the IRS address indicated in the instructions for that year’s Form 1040.

If your review confirmed your compliance, your response will be a formal statement. This signed declaration should affirm, under penalty of perjury, that you have complied with all U.S. reporting requirements after reviewing your records. You must mail this statement to the specific address or eFax number provided at the top of the Letter 6173 you received.

Consequences of Not Responding

Ignoring IRS Letter 6173 can lead to more serious consequences. While the letter is not a formal audit, a lack of response increases the probability that the IRS will escalate the matter to a formal examination of your tax return.

Should an audit discover unreported income, the financial repercussions can be significant. The agency will assess the additional tax you owe, along with interest calculated from the original due date of the tax. The IRS can also impose penalties, including failure-to-file or failure-to-pay penalties, and an accuracy-related penalty of 20% of the underpayment for significant errors.