IRS soft notices: Earned income tax credits to crypto currencies

The IRS has limited resources, so it can’t officially challenge all the returns that look questionable. Instead, the IRS sends “soft notices” that tell you about potential issues but aren’t subject to any official deficiency procedures.

Soft notices originate from IRS accounts management, the IRS division that processes and accepts tax returns. This is different from the IRS units that handle audits or CP2000 inquiries.

Soft notices only ask you to review your return for accuracy and voluntarily file an amended return if you find an error. You may want to consult a tax pro to determine what to do if you get one of these soft notices.

Here are some examples of IRS soft notices.

Underreporter soft notices

Notice CP2057, You may need to file an amended return, is a common example of a soft notice. This notice explains that your tax return doesn’t match the information that third parties (such as your employer or bank) filed with the IRS. If you don’t respond, the IRS doesn’t automatically follow up or start a CP2000 underreporter inquiry or issue a CP2501 notice.

What to do:

• If the information stated in the CP2057 is incorrect, contact the third party that filed the incorrect information and have them correct it.
• File an amended return if you discover that the information cited by the IRS is correct.

Earned Income Tax Credit (EITC) soft notices

Letters CP85 and CP87A ask you to file an amended return to correct a potential error on your earned income tax credit.

Cryptocurrency soft notices

The IRS considers virtual currencies, such as cryptocurrency, as property that may be subject to federal income taxes if you sell, exchange, or use the cryptocurrency to pay for items or services.

In 2019, the IRS started a notice program aimed at virtual currency transactions that the IRS thinks are underreported or aren’t reported at all. Since then, many thousands of taxpayers have received soft notices regarding virtual currencies.

What to do:

• If you receive a soft notice (Letter 6174 or 6174-A):
  • You’re not required to respond, but the IRS may follow up with you if received a Letter 6174-A.
  • Consider filing an amended return if you did not report all of your virtual currency transactions on your return.
• If you receive Letter 6173, you are required to respond (I.e., the 6173 is NOT a soft notice). Take one or more of the following actions by the deadline, depending on your situation:
• If you failed to file one or more income tax returns, file your missing return(s) reporting virtual currency transactions.
• If you made a mistake on your tax return, amend your return(s) to correct reporting/underreporting of virtual currency transactions.
• If you properly reported transactions related to virtual currency, supply a statement, under penalties of perjury, explaining that your return(s) were complete and correct as filed. The statement needs to explain your position, including a complete history of your previously reported virtual currency transactions and copies of previously filed documents proving that you followed the rules.

If you Receive an IRS Notice

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About the Author

Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.

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