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What Are IRS Soft Letters?

Nothing can quicken your heart rate like getting an IRS letter in the mail. In many cases, however, there’s no need to panic. Not all letters from the IRS result in collection actions. Some may be seeking additional information about a recent tax return or inquiring about a position you took. These are known as soft letters. Although they may seem intimidating, they are generally intended for cases that may be resolved without further IRS involvement. Keep reading to learn more about the most common soft letters sent by the IRS and what you should do if you receive one.

Why Did I Get a Soft Letter?

Soft letters are pre-audit tools used by the IRS. They are meant to educate you about your tax responsibilities and encourage you to voluntarily comply with tax codes. It’s essentially a warning that the IRS is paying close attention to your tax returns, but they are giving you a chance to make the necessary adjustments to avoid a potential audit or examination.

Common IRS Soft Letters

Over the last few years, the IRS has increasingly used soft letters as the first step in compliance for those who underreport their cryptocurrency earnings or foreign income.

Cryptocurrency

In 2019, the IRS sent soft letters to more than 10,000 taxpayers who failed to report some or all of their cryptocurrency income. There were three letters sent, including:

  • IRS Letter 6174 – Initial letter alerting the taxpayer that they have a virtual currency account but may not know the reporting requirements. It also includes information and resources on how to properly report transactions. No response to the letter, however, is required.
  • IRS Letter 6174-A – Similar to Letter 6174, except that it includes a warning that there may be enforcement activity in the future.
  • IRS Letter 6173 – This soft letter is a little less subtle than the other two. It includes a response deadline date and action steps. There is also a warning that the account may be referred for examination (audit) if the taxpayer does not comply before the “respond by” date.

Starting with the 2021 tax season, however, the IRS now includes a cryptocurrency question on your tax return. If you fail to disclose your virtual currency, it’s possible that the IRS may skip the soft letters and hit you with tax evasion or fraud charges since you lied on a government document.

Foreign Income

If you have foreign accounts, investments, or assets abroad, you may be required to file Formulario 8938, Declaración de Activos Financieros Extranjeros Especificados. Failure to do so could result in the IRS sending you Letter 6291. The most common reasons for receiving this type of soft letter include:

  • Foreign accounts not included on the FBAR
  • You’re included on a relative’s foreign account without your knowledge
  • You have inactive or old accounts that are being reported to the IRS as open

Although Letter 6291 is not a notice of examination or tax audit, it could lead to one if ignored.

How to Respond to an IRS Soft letter

La Taxpayer Advocate warns that “the information requested is akin to an IRS examination but without providing the taxpayer rights and protections afforded by an examination.” This is particularly relevant for those receiving IRS Letter 6173.

If you receive an IRS soft letter, the best thing to do is contact an experienced tax professional. They can evaluate the situation and recommend the best course of action. A tax professional can also assist with filing an amended return or completing any missing forms. Should your case progress to an examination or audit, they can also represent you throughout the process. To schedule a free consultation with Tax Defense Network, call 833-803-4222 hoy mismo.