Last Updated: August 25, 2020
In our previous blog post, we spoke about Tax Warning letters 6173, 6174, and 6174-A. The IRS started sending out more than 10,000 of these letters to taxpayers a few weeks ago and is continuing to do so through the end of August. This is the first time the IRS sent out such letters.
CP2000 notices on the other hand have been in the tax compliance world for a while. These are not limited to cryptocurrency related matters and are often generated when there is a matching issue between what is reported to the IRS by an exchange/broker and a taxpayer. CP2000 notices are also known as “30-day letters” because you have 30 days to respond to them.
Earlier this month we started hearing from CoinTracker users that they were receiving CP2000 letters, sometimes even in cases where they never received any notice from the exchange(s) they used. We will highlight the important sections of the notice and what you need to know.
How to respond to an IRS CP2000 letter
The first step in dealing with any IRS correspondence is to do a quick sanity check. There are a lot of scams impersonating the IRS, so it is important to ensure that any letter sent by the IRS is legitimate. Make sure the IRS address and the logo appear correctly and that they are addressed correctly to you. If the font or the alignment of content seem out of place, that is a red flag
Once you know the letter is real, there are three key factors you need to pay attention to in the letter:
- Tax Year: typically a calendar year. In this case, 2017 year (01/01/2017 to 12/31/2017)
- Notice Date: the date the notice was issued by the IRS. Your 30-day response period starts from this date
- Proposed amount due by date: the day by which you must pay proposed amount unless you take action. The key word here is “proposed” as opposed to “imposed”. So, don’t panic. Even the IRS is reminding you that this is not a bill and they have not yet charged the proposed amount due.
CoinTracker can help you calculate the correct capital gains/losses and potentially eliminate or reduce this proposed tax amount.
Page 2 of a CP2000 has a very important condition with a timeline. If you do not respond to the letter before the respond by date, the IRS will send you a Notice of Deficiency followed by a final bill.
A Statutory Notice Of Deficiency is a legal determination that the tax amount proposed is presumptively correct. (remember that before the 30 days are up, the tax amount shown on page 1 is only “proposed” and not final). You as a taxpayer should respond in a timely manner to avoid a Deficiency notice. If you are contesting the Proposed amount due, CoinTracker’s tax documents can help provide the supporting documentation you need for your response to the IRS.
Page 3 shows what you actually reported to the IRS (“Shown on return” column), what IRS thinks you should have reported (“As corrected by IRS” column) and the impact on taxes due to those changes. Note that the IRS sometimes make mistakes so it is good practice to look at the tax return you filed and compare the amounts reported on line items to “Shown on return” column.
“Explanation of changes to you 2017 Form 1040” section shows what caused this notice. In this case, it was generated because the taxpayer did not report their cryptocurrency transactions on their tax return, while Coinbase reported to the IRS that the taxpayer had transactions worth over $12,000.
Page 4 explains how the IRS calculated “As corrected by IRS” column on page 3. In this particular case, page 4 information is not really relevant to the taxpayer but it is good practice to read through and/or ask your tax advisor whether they are applicable to you.
Pages 5 & 6 inform you about next steps including how the interest has been calculated on the proposed amount due, and 1099-K reporting.
Response Form (Page 7) asks you to to either agree or disagree with the proposed amount indicated on page 1. If you agree, check “I agree with all changes” box on section 1, sign & date and send to the IRS with the payment voucher (page 9) . Note that by signing you are agreeing to these following conditions and paying the full amount due.
Note: before agreeing, you should consider connecting your cryptocurrency wallets & exchanges to CoinTracker to check whether the proposed amount is correct. The IRS may not have complete information about your cryptocurrency transaction history, especially because most exchanges and all wallets do not report anything to the IRS. Additionally even those exchanges that do report transactions to the IRS on a 1099-K form are providing gross transactions (does not include the basis or capital gains of these transactions which is almost always smaller than the gross transaction amount).
If you disagree with the amount proposed, you have to provide proof showing why you disagree. This is where CoinTracker can help you.
For a step-by-step guide on exactly what you need to do, check out this IRS crypto letter guide.
To recap, unfortunately, the amount reported on the 1099-K does not show the actual sale price of cryptocurrency, nor the associated cost basis; it merely shows the value of transactions processed through the exchange and this amount has absolutely nothing to do with the taxable income.
Since crypto exchanges & wallets do not provide a Form 1099-B for taxpayers indicating annual capital gains/losses, the only way to find your annual capital gains/losses arising from cryptocurrency trading is by using a service like CoinTracker (or calculating it with a tax professional or by hand).
Once you have the capital gain/loss reports from CoinTracker (Schedule D and Form 8949), a CPA can help you draft a response letter and send the necessary documents to the IRS within the timeline provided.
Finally, if you receive a CP2000 notice, don’t panic. Know that CoinTracker can help you calculate crypto tax gains/losses for the year in question, potentially reduce or eliminate the proposed amount due by the IRS, and get into tax compliance.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.