IRS Crypto Letters Explained:
CP2000, Letter 6173, and What to Do If the IRS Says You Didn't Report Crypto
Quick Answer
If you receive an IRS crypto letter, identify its type immediately: CP2000 (automated mismatch notice from Form 1099-DA discrepancies) requires a response within 30 days; Letter 6173 demands signed certification under penalty of perjury. Many notices overstate tax due because brokers report gross proceeds without cost basis—professional reconciliation often eliminates proposed amounts. Do not call the IRS without representation—statements made during that call can be used against you.
Key Points
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CP2000 notices are automated underreporter notices from the IRS Automated Underreporter (AUR) program—not audits—but carry strict deadlines and require a response.
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Letter 6173 is a pre-audit enforcement action requiring mandatory response under penalty of perjury within the stated deadline.
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Letters 6174 and 6174-A are informational only and do not require a response, but signal IRS awareness of your crypto activity.
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Crypto notices often overstate tax due because brokers report gross proceeds on Form 1099-DA without cost basis.
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Early, accurate responses with documented cost basis can materially reduce or eliminate proposed tax.
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Filing an amended return too late may disqualify you from "Qualified Amended Return" (QAR) penalty protection.
Why the IRS Sends Crypto Letters
The IRS has made cryptocurrency compliance a long-term enforcement priority, shifting from a posture of "education" to "enforcement." Key drivers include:
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Expanded third-party reporting through Form 1099-DA
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Blockchain analytics partnerships with firms like Chainalysis
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Data matching between exchanges and tax returns
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John Doe summonses issued to major exchanges (Coinbase, Kraken, Circle/Poloniex) compelling customer transaction data
The IRS integrates data from 1099-DA filings and existing 1099-K reports to identify discrepancies with high precision. The IRS is no longer "fishing" for information—in many cases, they already possess your transaction logs and are testing your willingness to voluntarily comply before initiating a formal examination.
IRS Enforcement Background
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IR-2019-132: IRS press release launching the crypto letter campaign, targeting over 10,000 taxpayers with virtual currency activity
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Operation Hidden Treasure: Joint initiative between the IRS Office of Fraud Enforcement and Criminal Investigation using blockchain analytics to identify unreported crypto income
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John Doe summonses: Court-ordered disclosure of customer records from major exchanges
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Form 1099-DA implementation: Custodial brokers report gross proceeds, increasing automated data matching capabilities
Receiving a letter does not mean guilt—but it does mean the IRS has your activity on its radar and expects a response.
The Crypto Letter Severity Spectrum
Understanding which letter you received is critical. The IRS uses different letter types based on the strength of evidence and urgency of response required.
Informational Letters (Lower Risk)
Letter 6174 and Letter 6174-A are educational notices. They:
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Do not require a formal response
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Warn about potential reporting obligations
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Encourage voluntary compliance and return review
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Signal that the IRS has information about your crypto accounts
While no response is required, these letters should prompt a review of your prior filings for accuracy. Ignoring even an "educational" letter is strategically unsound—it implies a known link, and if you fail to file an amended return to correct prior omissions, the willful nature of the violation may be established for future penalties.
Letter 6173: Mandatory Response Required
Letter 6173 is the most serious crypto letter short of a formal audit. It explicitly states, "We believe you may not have met your U.S. tax filing and reporting requirements." It requires a response by a specific deadline and demands that you either:
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File delinquent returns
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File amended returns
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Take corrective action
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Certify under penalty of perjury that you are compliant
Warning: If you do not respond by the "Respond Date" listed on the letter, your file will likely be sent to the examination division for a full tax audit.
CP2000 Notices: Common for Crypto
A CP2000 notice is an Automated Underreporter (AUR) notice:
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It is not an audit—it is an automated matching notice
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It proposes additional tax based on third-party data (including Form 1099-DA)
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The IRS calculation is often wrong for crypto because exchanges report gross proceeds without cost basis, causing the IRS to assume 100% taxable gain
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The CP2000 is a notice of proposed changes, not a bill
CP2000 Response Deadlines
Standard deadline: 30 days from notice date (60 days if you have a foreign address).
Missing the deadline can result in automatic assessment of the proposed tax, loss of appeal rights, and accruing penalties and interest. Even if the IRS calculation is wrong, silence can make it right.
The "Qualified Amended Return" (QAR) Trap
Speed is your only ally when correcting prior omissions. To avoid the 20% accuracy-related penalty under IRC § 6662, you generally must file a "Qualified Amended Return" (QAR) before the IRS contacts you concerning an examination.
The National Taxpayer Advocate has raised concerns that if your data was obtained via a John Doe summons, you might be statutorily ineligible for QAR relief even if you amend voluntarily upon receiving a letter.
Where data matching is prevalent, receiving a Letter 6173 may already place you in a precarious position regarding penalty abatement. The strategy must be swift, accurate disclosure accompanied by a robust reasonable cause statement.
Why IRS Crypto Calculations Are Often Wrong
Common issues causing inflated proposed tax include:
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Missing or incomplete cost basis (especially with multiple wallets)
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Transfers between wallets misclassified as sales
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Duplicate reporting across exchanges
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Incomplete transaction histories from fragmented records
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Software-driven mismatches and automated processing errors
These errors are fixable—but only if addressed properly with documentation.
What to Do If You Receive an IRS Crypto Letter
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Identify the letter type: Check the letter number in the upper right corner (6173, 6174, 6174-A, or CP2000)
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Calendar the response deadline: Mark 30 days from the notice date (60 if foreign address)
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Do not call the IRS directly without representation: Statements made during that call can be used against you
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Do not ignore or delay: Even informational letters warrant a return review
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Gather transaction and basis records: Exchange CSVs, wallet exports, purchase confirmations
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Reconcile third-party reporting: Match your records against any 1099-DA or 1099-K forms
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Prepare Form 8949 and Schedule D: Show your calculated gains with proper cost basis
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Respond accurately and clearly: Include supporting documentation with your response
Do Not Amend Without Proper Review
Filing an amended return without careful analysis can lock in incorrect positions, create inconsistencies between your response and the amendment, and increase audit risk. In many cases, responding directly to the notice with supporting documentation showing your correct cost basis is more appropriate than amending.
When Professional Representation Is Appropriate
Professional assistance is commonly appropriate if:
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You received Letter 6173
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You received a CP2000 proposing significant tax ($5,000+)
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Your crypto history spans multiple years or platforms
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Basis records are incomplete or require reconstruction
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You are unsure how to calculate or document your position
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You need to evaluate QAR eligibility before filing an amended return
Schedule a Consultation
If you received an IRS letter about cryptocurrency, responding correctly—and on time—can prevent escalation and unnecessary tax. Do not contact the IRS without professional guidance. Schedule a consultation to review the notice and determine the appropriate response strategy.
Frequently Asked Questions
Is a CP2000 an audit?
No. A CP2000 is an automated underreporter notice generated when IRS records don't match your filed return. It proposes additional tax but is not a formal examination. However, it still requires a timely response.
Can I ignore Letter 6173?
No. Letter 6173 requires a mandatory written response by the stated deadline. Failure to respond can result in examination referral and potential penalties.
Does receiving a crypto letter mean I did something wrong?
Not necessarily. Many letters result from incomplete broker data—especially missing cost basis on Form 1099-DA. The IRS may be calculating your tax incorrectly based on incomplete information.
Will responding trigger an audit?
A correct, timely response with proper documentation typically reduces risk rather than increasing it. The IRS prioritizes cases where taxpayers are unresponsive or cannot substantiate their positions.
What is the difference between IRS Letter 6173 and Letter 6174?
Letter 6173 is a serious compliance inquiry requiring a mandatory response—the IRS believes you failed to report crypto activity. Letter 6174 and 6174-A are educational notices alerting you that the IRS knows about your digital asset accounts but do not require a formal response unless you need to correct an error.
What if the IRS proposed amount is clearly wrong?
Respond with documentation showing your actual cost basis and correct calculation. Include Form 8949, acquisition records, and an explanation of the discrepancy. Many CP2000 amounts are reduced to zero with proper documentation.
The Bigger Picture
Crypto enforcement is data-driven. With Form 1099-DA providing transaction data to the IRS, the era of manual letter campaigns is transitioning to automated matching. The IRS often knows that something happened—but not what happened economically.
Your job is to tell the full story with documentation: your complete transaction history, properly calculated cost basis, and reconciliation to broker-reported proceeds.
Next Steps
IRS crypto letters are not something to panic about—but they are not something to ignore. Handled correctly, many notices can be resolved with little or no additional tax. Handled poorly, they can escalate unnecessarily into examinations and assessments.
If you received an IRS crypto notice and want help determining your next steps, Monaco CPA can assist.
About the Author
Greg Monaco, CPA is a New Jersey-licensed CPA and the founder of Monaco CPA. He focuses on cryptocurrency tax compliance, IRS correspondence, and audit defense for clients nationwide.