With Form 1099-DA reporting starting in 2025, the IRS now has comprehensive data on your crypto transactions. Past mistakes that slipped through are about to become obvious.
Here's how to fix them — before the IRS fixes them for you.
Why 2025 Changes Everything
The IRS can now cross-reference:
1099-DA data from exchanges (starting 2025)
John Doe summons data from Coinbase, Kraken, and others (going back years)
Blockchain analytics linking wallets to identities
If what you reported doesn't match what they have, expect a letter — or worse.
The Three IRS Crypto Letters
Letter | Severity | Required Response |
|---|---|---|
6174-A | Soft notice | No response required (but take it seriously) |
6174 | Warning | Review and amend if needed |
6173 | Serious | Response required — potential audit |
If you've received any of these, the IRS already knows you have crypto. The question is whether your returns match their records.
Option 1: Amended Returns (Form 1040-X)
Best for: Honest mistakes, calculation errors, forgotten transactions
When to Use
You underreported gains
You miscalculated cost basis
You forgot to report some transactions
You didn't know crypto was taxable (yes, still your responsibility)
How It Works
File Form 1040-X for each year that needs correction
Include corrected Form 8949 and Schedule D
Pay additional tax owed plus interest
Penalties may apply (but can often be reduced)
Time Limits
Situation | Deadline |
|---|---|
Claim a refund | 3 years from original filing or 2 years from payment |
IRS assessment | Generally 3 years, but 6 years if >25% income omitted |
Fraud | No time limit |
Pro Tip
If you received Letter 6173 or 6174, write "Letter 6173" or "Letter 6174" at the top of your amended return.
Option 2: Voluntary Disclosure Program (VDP)
Best for: Willful non-compliance you want to fix before criminal prosecution
What It Is
The IRS Voluntary Disclosure Program lets taxpayers who willfully evaded taxes come forward, pay back taxes and penalties, and avoid criminal prosecution.
Key Requirements
Requirement | Details |
|---|---|
Timing | Must disclose BEFORE IRS contacts you |
Willfulness | You must admit the non-compliance was willful |
Full cooperation | Provide 6 years of amended returns + documentation |
Full payment | Pay all taxes, interest, and penalties |
The VDP Penalty Structure
Item | Penalty |
|---|---|
Civil fraud penalty | 75% of tax owed (highest deficiency year) |
FBAR willful penalty | 50% of highest account balance |
Interest | Accrues on all amounts |
Who Should Consider VDP
Large unreported crypto gains over multiple years
Intentionally hid transactions or income
Used foreign exchanges specifically to avoid reporting
Concerned about potential criminal liability
Who Should NOT Use VDP
Made honest mistakes (use amended returns instead)
Already contacted by IRS (you're too late)
Income from illegal sources (not eligible)
Critical: VDP requires admitting willfulness. Don't use it for non-willful errors — you'll create liability that didn't exist.
Option 3: Streamlined Filing Compliance
Best for: Non-willful failures involving foreign accounts/assets
If you had crypto on foreign exchanges (Binance global, KuCoin, etc.) and failed to file FBAR or FATCA forms, the Streamlined program offers reduced penalties.
Program | Penalty | Who Qualifies |
|---|---|---|
Streamlined Domestic | 5% of highest foreign account balance | US residents, non-willful |
Streamlined Foreign | 0% penalty | US taxpayers abroad, non-willful |
Warning: If you're willful and submit as non-willful, you risk severe penalties if the IRS discovers the truth.
Penalty Abatement: Reducing What You Owe
Even if you owe back taxes, you may be able to reduce or eliminate penalties.
First-Time Penalty Abatement (FTA)
The IRS's most generous relief program — and most people don't know it exists.
You qualify if:
No penalties in the prior 3 tax years
All required returns filed (or valid extensions)
Current on payments or on a payment plan
Penalties covered:
Failure to file
Failure to pay
Failure to deposit (businesses)
How to request:
Call the IRS at the number on your notice
Simply ask for "First-Time Penalty Abatement"
No documentation required if you qualify
Reasonable Cause Relief
If you don't qualify for FTA, you can request penalty relief based on "reasonable cause."
Acceptable reasons:
Serious illness or death in family
Natural disaster
Unable to obtain records
Relied on incorrect IRS advice (in writing)
System issues preventing electronic filing
Generally NOT acceptable:
"I didn't know crypto was taxable"
"My accountant made a mistake"
"I couldn't afford to pay"
How to request:
Submit Form 843 with written explanation
Include supporting documentation
Be specific about dates and circumstances
What NOT to Do
1. Quiet Disclosure
Filing amended returns without going through proper channels when you have willful non-compliance. The IRS specifically watches for this — it's illegal.
2. Ignore It
The blockchain is permanent. The IRS has years of data. Hoping they won't notice is not a strategy.
3. Destroy Records
This turns a civil matter into potential criminal obstruction.
4. File VDP for Non-Willful Mistakes
You'll admit to crimes you didn't commit and pay penalties you don't owe.
Decision Framework
Your Situation | Best Option |
|---|---|
Forgot some transactions, honest mistake | Amended return + request FTA |
Miscalculated cost basis | Amended return |
Intentionally didn't report for years | Consult attorney → likely VDP |
Foreign exchange, didn't file FBAR/FATCA | Streamlined program |
Received IRS letter | Respond immediately, consider professional help |
Already under audit | Too late for voluntary programs — get representation |
Cost of Fixing vs. Cost of Getting Caught
Scenario | Typical Outcome |
|---|---|
Voluntary fix | Back taxes + interest + reduced penalties |
IRS finds you | Back taxes + interest + full penalties + potential audit |
Criminal prosecution | Up to 5 years prison + $100,000+ fines |
Coming forward voluntarily almost always costs less than getting caught.
When to Get Professional Help
Consider a crypto tax attorney or CPA if:
Unreported amounts exceed $50,000
Multiple years involved
You used foreign exchanges extensively
You've received an IRS letter
You're unsure if mistakes were "willful"
Potential criminal exposure concerns you
The Bottom Line
The window for voluntary compliance is closing. With 1099-DA reporting now active, the IRS will have comprehensive records of your crypto activity.
If you have past mistakes:
Gather your records
Calculate what you actually owe
Choose the right correction path
Fix it now — before the IRS does it for you
The cost of coming forward is almost always less than the cost of getting caught.
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional or attorney for advice specific to your situation.
By Ran Chen, EA, CFP®